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Defined Contribution

DC execs told not to worry about fiduciary rule decision

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.

Impact of ESG guidance

Although sponsors won't be directly affected by the death of the fiduciary rule or the proposed SEC rule, they will be affected by new guidance from the DOL that likely will reduce their willingness to offer investment options incorporating environmental, social and governance factors, several PSCA officials said.

The DOL guidance "will make it potentially more difficult" for plan fiduciaries to feel comfortable in offering such options, said Kenneth Raskin, PSCA board chairman and a New York-based partner at King & Spalding LLP. "Fiduciaries will want to play it safe."

The DOL guidance, issued through a field assistance bulletin, said in part that "fiduciaries must not too readily treat ESG factors as economically relevant to the particular investment choices at issue when making a decision."

Groom Law Group's Mr. Levine said the DOL guidance document wasn't completely clear in defining an ESG investment option. He cited one document footnote that said, in part, ESG-themed funds "should be distinguished" from non-ESG funds in which "ESG factors may be incorporated as one of many factors in ordinary portfolio management."

So far, ESG funds haven't played much of a role in ERISA plans, according to the latest survey by PSCA of its members offering 401(k) or profit-sharing plans. Of 684 respondents covering the 2016 plan year, only 2.4% offered ESG funds.

Mr. Raskin added that ERISA plans can overcome concerns by providing access to ESG funds through self-directed brokerage accounts.

A popular addition to benefit plans is the health savings account, especially as to how these programs can combine savings and health coverage — a topic covered at three separate PSCA sessions.

If they offer several health plans, employers should set the premiums of high-deductible health plans — the only type of plan for which HSAs can be offered — 10% to 15% below the other health plans to encourage participation, said Karin Rettger, president and founder of Principal Resource Group, a Glen Ellyn, Ill., benefits and wealth management consulting firm.

Employees might balk at the idea of a high-deductible, so they "need a sense of a financial reward" when choosing the plan, she said.

"Hit hard on the 'S' in HSAs," Ms. Rettger said. "It's a savings account — not a spending account."

Sara Caddy, benefits manager at Dimensional Fund Advisors, Austin, Texas, said her company did extensive research before offering an HSA, examining financial issues as well as medical ones.

Her company made the medical benefits of the high-deductible health plan and the preferred provider organization plan identical, but made the premiums for the former less than those of the latter.

Dimensional also makes payments to cover half of the yearly deductible for the high-deductible plan linked to the HSA — $1,350 for an individual and $2,700 for a family. Dimensional began offering the HSA in 2011; now 87% of employees choose the high-deductible health plan and the HSA. Unlike some employers that require participants to build up a certain balance in their HSAs before using the money for investments, Dimensional doesn't place any restrictions, she said.

Broaden awareness

Sponsors also must be aware of financial issues not traditionally associated with retirement plans, said Carol A. Bogosian, a Society of Actuaries associate and president of CAB Consulting.

A significant number of pre-retirees have mortgage and credit card debt as well as a personal or car loan, said Ms. Bogosian, referring to a 2017 Society of Actuaries survey that looked at approximately 1,000 U.S. pre-retirees and 1,000 retirees between the ages of 45 and 80.

Fifty-five percent of pre-retirees said they owned their primary home and owed money on a mortgage, while 46% reported having credit card debt and 44% reported having a personal or car loan. That compares to 29% of retirees who said they owned their primary home and owed money on a mortgage, 36% who had credit card debt, and 29% who had a personal or car loan. Ms. Bogosian noted that because of their experience living through the Great Depression, older retirees might have been less likely to take on debt.

Among the survey's findings:

  • Few pre-retirees and retirees have bought annuities with guaranteed lifetime income.
  • Current retirees retired earlier than future retirees plan to retire.
  • Inflation, long-term care costs and health-care costs continue to be key concerns for pre-retirees and retirees.
Also at the conference, PSCA presented Cindy Hounsell, president and founder of the Women's Institute for a Secure Retirement, with a lifetime achievement award. The award recognizes individuals' contributions to the growth of the defined contribution industry. Ms. Hounsell founded WISER in 1996.

Ms. Hounsell said the PSCA and WISER have a similar goal — increasing the number of Americans who enjoy successful retirements. She said WISER focuses on women because they tend to live longer, earn less and take on the role of caregivers for children and parents. These factors can make saving for retirement difficult, she said.