Make time to do what’s right. It’s a message from global work and wealth consulting firm Mercer, who just before the holidays recommended priorities for 401(k) plan sponsors given current market conditions and challenges for the coming year. They’re something every 401(k) advisor should share with plan sponsor clients
“Change is the only constant in today’s market,” Liana Magner, partner at Mercer, said in a statement. “As such, it is crucial to maintain vigilance over managing [401k] plans. Governance should always be a key focus, but it’s not a silver bullet. [401k] plans need to evolve with changes in legislation, regulations, industry trends and the changing needs of individuals. What may have been ideal a few years ago, may not be as ideal today.”
Mercer suggestions include the following areas:
- A retirement focus is no longer enough: employers have historically focused solely on 401(k) plan features targeting retirement: asset allocation, auto-enrollment and other features. Today, companies need to acknowledge that employees may be dealing with other more-pressing financial needs and as a result, retirement may not be their priority. Guidance and tools are necessary to empower individuals to cost effectively manage their broader financial situations.
- The role of employee student loan repayments: employers should decide if student loan repayment plans have a place within 401(k) plan design alongside matching employee retirement contributions. Forty million Americans currently hold $1.3 trillion in student loan debt, which many are struggling to repay. For many, paying back student loans is more of a concern than saving for retirement, yet focusing on student loan repayment may cause individuals to miss out on the employer’s 401k match.
- The ‘signals’ of matching programs: 401(k) plan sponsors should review their participants’ behavior and assess if matching plan design is influencing the choices being made by employees. Are these the correct influences? How could the design be more effectively structured to influence the preferred behavior?
- Managed account program needs review: 401(k) plan sponsors need to check when the last time they reviewed their managed account provider was and review if they could currently defend their choice. In particular, in the wake of the new fiduciary rule, plan sponsors should fully understand exactly what fiduciary role the managed account provider will be accepting. Understanding potential conflicts of interest and what type of advice the managed account provider will provide (particularly related to distributions) is also crucial for plan sponsors.
- Target date funds—still suitable? The Department of Labor issued guidance highlighting how 401(k) plan sponsors need to ensure target date funds remain appropriate for the plan’s participants. Plan sponsors should determine if their participant group has changed. Employers should also take stock of their current TDFs and check if they are still high quality, appropriate investments, as the market has evolved significantly.
- Understand plan participants and non-participants: 401k plan design should be evaluated regularly to ensure it is relevant for the participant base. To do this, employers need to understand their participants’ behavior, needs and priorities. Areas for review include: cluster analysis; assessing participants’ financial courage; reviewing how participants are using existing investment options and relative retirement preparedness. Analyzing non-participants is crucial as well, so employers can better determine how they can get them to participate.
- Delegation of fiduciary responsibilities: Which responsibilities should the 401k plan sponsor keep? Which responsibilities would be better served by delegating to a third party?
- Cyber risks abound: The question is not if a 401k plan sponsor will have a cyber-attack—rather, it is a question of when. Plan sponsors should create a strategy to address and mitigate cybersecurity.
- Consider (reconsider) retirement income options: More is happening in this area with an increasing number of 401k plan sponsors open to the idea of retirees taking partial withdrawals from the 401k plan. In addition, the proposed Retirement Enhancement and Savings Act of 2016 include a number of retirement income relevant provisions that will spark more conversations.
- Monitor the impact of the Department of Labor fiduciary rule: As things stand, key provisions of the DOL Fiduciary Rule will be in place effective April 10, 2017. Fiduciaries need to monitor whether the DOL Fiduciary Rule will roll out as initially anticipated and how a plan’s vendors (including the record-keeper) are changing their services to accommodate the DOL Fiduciary Rule. DC plan sponsors need to confirm if the services they selected will actually be the ones being provided in the future.
- Appropriateness of fee structures: Focusing on fees is important, but the discussion should be focusing on fees relative to the services received and the expected benefits of any additional fees incurred. All things being equal, clearly, lower fees make sense but DC plan sponsors need to make sure to also assess the best fee structure for their specific needs and objectives.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
As a veteran of employee benefits, I was (and still am) riveted by #8, that a cyber attack is a question of when, not if, for a 401(k) sponsor. Here’s an out-of-the-box thought…why not set up an option for employees to participate in a gold savings plan? Not paper gold, but the real thing, in small, transaction-friendly increments that are affordable for most people. Physical gold is not subject to a cyber attack and never loses it’s purchasing power. Twenty-nine states have sales tax concessions for gold and others are pending.