Advisors, sponsors and participants, lookout.
In an era when Americans are responsible for funding their own retirement through the 401k and similar plans, inherent risks are involved.
Willis Towers Watson (WTW) identifies several and offers solutions in its recent report “Nine Actions for Defined Contribution Plans in 2019.”
Risks to Sponsors
- Workforce risk. Employees who are forced to work past typical retirement age for financial reasons “can create the risk of a disengaged workforce and contribute to blocked career paths,” says WTW.
But plan sponsors can utilize targeted analytics to assess which workers are inadequately prepared and develop strategies to improve retirement readiness.
- Litigation risk. Fiduciaries have become frequent litigation targets as investment governance struggles to adapt to a DC-centric world.
Sponsors should review the structure of fiduciary committees and internal governance policies, in addition to monitoring investment lineups and fees. Sponsors should consult ERISA experts and attorneys, as well.
- Talent risk. With low unemployment, it’s increasingly difficult to attract and retain talent.
To remain competitive, plan sponsors should review and refine plan design, investment structure, expenses and administration to meet workers’ evolving needs.
- Distraction risk. “The average committee member can dedicate only about 5 percent of his or her time to plan management issues,” WTW writes. “We believe that is not enough time for even the most basic review of a DC plan, its operations and its results.”
As such, sponsors should either delegate duties to internal subcommittees or an outsourced chief investment officer.
- Compliance risk. Today’s complex regulatory environment is making holistic plan management difficult as sponsors increasingly rely on outsourced experts.
“Operational assessments, compliance reviews, governance evaluations and payroll reviews—led by seasoned experts—can help mitigate risk and increase efficiencies in plan management. Both one-time and ongoing reviews are key drivers of long-term success and can save sponsors from IRS and Department of Labor penalties, unnecessary vendor expenses and negative publicity,” WTW explains.
Risks to Participants
- Investment risk. Individuals are now tasked with making complex investment decisions, yet are severely lacking when it comes to financial literacy.
Committees should strive to simplify investment decisions via professionally managed portfolios, reevaluate QDIAs and consider diversified TDFs.
- Savings risk. Inadequate savings and a lack of understanding about how much to save threaten workers’ retirement security.
Re-enrollment sweeps, auto features and segmented employee communication can help, in addition to financial wellness and other programs like those that help pay down student debt.
- Tax risk. “A more strategic risk for participants involves tax optimization—potentially lost savings from not taking advantage of Roth 401k and IRA accounts, or the triple tax savings of contributing to tax-advantaged health savings accounts (HSAs),” says WTW.
Again, the remedy largely involves educating participants, as well as promoting the use of HSAs and financial wellness tools.
- Longevity risk. Life expectancy continues to rise, yet employees aren’t adjusting their anticipated retirement age and thus risk outliving their savings.
Plan sponsors, committees and participants should review account drawdown tactics, consider annuities and explore Social Security claiming strategies.
Jessa Claeys is a writer, editor and graphic designer.
