Commentary: Plan design matters

We are all currently navigating an unprecedented crisis environment worldwide. Defined contribution plan sponsors, who were only a few months into digesting the implications of the SECURE Act, now have the retirement-related features of the CARES Act to understand, as well.

Dealing with near-term fiduciary, financial and workforce management issues are understandably the top priorities for most employers right now. Even in less challenging environments, plan design often ranks relatively low on the list of areas for plan sponsor focus. Indeed, Callan's 2020 Defined Contribution Trends Survey ranked plan fees as the top priority, followed by participant communication and fund/manager due diligence.

Encouraging plan sponsors to overcome obstacles was one of the motivations behind the creation of the Excellence & Innovation Awards, which are co-sponsored each year by DCIIA and Pensions & Investments. We're still accepting nominations for the 2020 awards and encourage plan sponsors and service providers to nominate worthy programs and initiatives. Shining a spotlight on success stories is a great way we can all learn from each other.

DCIIA continues to believe that plan design matters, and that plan sponsor executives facing the unique challenges of these trying times should still take the opportunity to have strategic conversations about their plans' designs and long-term goals. While many participants have more immediate and pressing concerns, those managing the retirement plan must retain a focus on the long term, consider where they want participants to be in the years ahead and how the plan design can help them get there.

Following best practices in plan design helps to improve retirement outcomes. As one example, DCIIA research in 2017 found that if — through a combination of plan design and communication — plan sponsors successfully prevented all plan leakage, "savings at retirement under optimized automatic enrollment would increase 9%, to a projected multiple of 8.5 times final earnings, over the course of an entire career."

When DCIIA was founded 10 years ago, we were only a few years into the post-Pension Protection Act environment and the 2008 crisis was a very recent memory. One of our primary aims at the time was to promote emerging institutional approaches to DC plan design and management. An early white paper suggested using defined benefit plans as the institutional model for retirement, with practices including:

• Managing toward a financial target (e.g., income replacement percentage)
• Recognizing the role of funding in achieving the financial target
• Using institutional investment vehicles that enable scale pricing
• Improving diversification by offering exposure to alternative asset classes
• Managing risk — specifically, risk to achieve an income target
• Engaging expert consultants and advisers.

These remain worthwhile considerations today. In addition, minimizing leakage from the retirement system (i.e., loan defaults, hardship withdrawals, cash outs) and adding automatic enrollment and escalation to the plan have also been key elements in the evolution of plan design, along with immediate eligibility, stretching employer match contributions, re-enrollment, and encouraging/facilitating the consolidation of a participant's prior retirement accounts.

The following checklists includes some points that can help to support plan sponsor conversations about plan design. As a suggested starting point, addressing plan leakage may be the timeliest area of focus during the current crisis.

• Allow participants to retain money in plan at termination.
• Provide fiduciary advice to participants on withdrawal strategies.
• Offer payroll deductions for goal-oriented and emergency savings accounts to minimize emergency distributions from the plan.
• Work with recordkeepers to make roll-ins and rollovers efficient.
• Provide tools to highlight the negative impact of borrowing from plan accounts.
• Minimize the number of loans allowed and permit terminated employees to continue to repay loans.

• Deliver educational content to employees at critical decision-making junctures.
• Survey employees to determine the most critical financial issues of concern.
• Tailor new features to plan demographics.
• Deliver financial wellness programs based on age and demographics.
• Offer direct deposit into emergency savings accounts.
• Assist employees in consolidating retirement assets.

• Implement auto enrollment, with a default of at least 6% of earnings.
• Implement auto escalation to increase contributions by at least 1% of earnings annually.
• Allow the auto-escalation contribution cap to be at least 10% of earnings.
• Complete an auto-enrollment sweep of all employees periodically.
• Consider implementing a QDIA re-enrollment.

• Find out what your service providers can offer and what the plan document allows.
• Analyze your plan demographics and participant withdrawal behavior.
• Assess whether to offer partial withdrawals, installment payment programs, and/or annuities.
• Consider implementing a "retirement tier" framework.

Even in the best of times, the litigious environment we live in can make it challenging for plan sponsor executives to be as proactive as they would like to be in plan management and design. Other barriers to implementing plan design changes include fiduciary concerns, budgets, philosophies and having other priorities.

As we manage through the current crisis, our hope is that plan sponsors will continue to keep their longer-term goals in mind and, wherever possible, push for incremental improvements within their plans in order to enhance retirement security.

Lew Minsky is the president and CEO of the Defined Contribution Institutional Investment Association and is based in Palm Beach Gardens, Fla. This content represents the views of the author. It was submitted and edited under Pensions & Investments guidelines, but is not a product of P&I's editorial team.