Retirement plan executives this week learned what won't happen, what could happen and, maybe, what should happen in defined contribution plans.
Speakers at the Plan Sponsor Council of America's annual conference in Scottsdale, Ariz., April 30-May 2, said plan executives shouldn't fret about the recent ruling by a panel of the 5th U.S. Circuit Court of Appeals that struck down the fiduciary rule, also known as the conflicts of interest rule, and the Department of Labor's declining to appeal the decision.
"You shouldn't be struggling with this at this point," said David Levine, principal at the Groom Law Group and PSCA's Washington lobbyist. (Comments by Mr. Levine and others were made before the 5th Circuit rejected attempts by AARP and attorneys general of three states to intervene in the case and to seek a hearing by the full appeals court.)
Because some record keepers took on additional fiduciary duties after the fiduciary rule was enacted by the Obama administration, Mr. Levine said sponsors should ask them if they are still fiduciaries. "Check what your contracts say," he said. "Service provider models may change."
Sponsors shouldn't worry about a recently issued proposed rule by the Securities and Exchange Commission covering broker-dealer conduct. "This is in its early stages and it doesn't directly address plan sponsors," Mr. Levine said.
Fred Reish, a Los Angeles-based partner of the law firm Drinker, Biddle & Reath LLP, agreed. Enactment of an SEC rule is at least 18 months away and won't affect sponsors, Mr. Reish said. Although the fiduciary rule has been rejected by a court, plan sponsors still have fiduciary duties governed by 1975 DOL regulations, Mr. Reish said. "You are a discretionary fiduciary" under the terms of those rules, he told conference attendees.
Mr. Reish recommended three goals for sponsors: improve participants' returns; remain in the good graces of regulators; and avoid having to defend a fiduciary-breach lawsuit.
Review expense ratios of investments, obtain the lowest cost available share class for investments and monitor the compensation of record keepers, he said. "These are the three areas that are most subject to lawsuits," said Mr. Reish, adding that investment performance is "not a primary" lawsuit topic, except for company stock-drop complaints.
Sponsors don't have to find the investment with the cheapest expense ratio — just the lowest cost investment that is available to a specific plan, he said. "Everybody has the duty to ask," he said.
Mr. Reish suggested that sponsors calculate record-keeping fees yearly and conduct benchmarking surveys every two or three years. Given the uncertainty of federal regulations and/or legislation defining or redefining the role of a fiduciary, Mr. Reish told conference attendees to ask their advisers: "Are you a fiduciary under ERISA?"
Mr. Reish offered several plan-design recommendations, including "auto everything," a reference to automatic enrollment and auto escalation. Sponsors should provide retirement income projections for participants as well as a "gap analysis" that shows the difference between participants' retirement goals and actions to achieve the goals. Offering financial wellness programs and retirement education for participants 50 and older also were part of his prescription.
Andrew Biggs, a resident scholar at the American Enterprise Institute, Washington, said DC plans could improve by auto enrolling all employees and raising the initial default rate for auto enrollment.
As a member of a conservative think tank, Mr. Biggs offered a contrarian view of the retirement landscape in a keynote address titled "The Real Retirement Crisis." Retirement policy is often based on conflicting and/or inaccurate data, said Mr. Biggs, noting several surveys that identify different retirement savings gaps — the amount participants need vs. what they have.
"The data is not very good to measure retirement income," said Mr. Biggs, maintaining that IRS data are superior to Census Bureau data, even though the latter often are used as the basis for government and private-sector analysis.
Mr. Biggs also said Social Security should be enhanced for the poor but shouldn't be expanded for the middle class and the wealthy.