Fiduciary Awareness is on the Wane (Wait, What?)

Almost half of plan sponsors do not consider themselves fiduciaries

401k, fiduciary, retirement, ERISAThis makes absolutely no sense.

How is this even remotely possible?

A shocking new report from AllianceBernstein finds that fiduciary awareness among 401k and similar defined contribution plan sponsors has deteriorated significantly in recent years.

Even though all survey participants qualified as plan fiduciaries, almost half of plan sponsors did not consider themselves fiduciaries—a “troubling increase” from the firm’s last survey in 2014.

A sliver of good news, however, is that there is a growing recognition among sponsors of how hard it is to effectively educate participants about retirement investing. As a result, many sponsors are continuously refining their investment offerings and plan design—including conducting re-enrollments with a qualified default investment alternative (QDIA)—to improve workers’ retirement savings and confidence.

“By 2060, nearly 24 percent of the U.S. population, or close to 100 million people, will be over the age of 65, but few Americans are prepared for retirement,” Jennifer DeLong, head of Defined Contribution at AB, said in a statement.

Equally concerning, she adds is that plan sponsors “now face added responsibilities under the DOL’s new fiduciary rule, yet they’re less aware of their fiduciary status today than before—and because of legal ramifications, what you don’t know can hurt you.”

Key findings include:

Fiduciary awareness among DC plan sponsors continues to slip: 49 percent of plan sponsors do not consider themselves a fiduciary, up from 37 percent in 2014 and 30 percent in 2011.

Fiduciary awareness is lowest in two categories of plan sponsors—those on investment (39 percent) or administrative (22 percent) committees. But even among those plan sponsors who say they have primary responsibility for the plan, one-third don’t believe they are fiduciaries.

Fiduciary training programs for plan sponsors could also be improved: about half the respondents who have access to a training program do not think the training is comprehensive. And while 80% of respondents say their plans document the fiduciary process, more than half of them feel the process could be improved.

Reenrollments Work: Nearly 60 percent of sponsors were most concerned that participants lack awareness of how much they need to save for retirement needs, and 54 percent said participants do not understand their investment options.

Many workers who actively choose investments for their accounts don’t make the best choices and some make no choices at all.

Thus, re-enrollments with a QDIA have become an increasingly popular way to remove asset-allocation guesswork, and boost participation rates, deferral rates, diversification and retirement readiness. Forty-percent of sponsors have recently done a re-enrollment and 23 percent are considering it in the next two years—showing improvement since 2013, when only 10 percent of sponsors would consider a re-enrollment in the future.

Quality of asset management greater driver of QDIA selection: Use of target-date funds continues to grow, most notably among micro plans (less than $1 million in AUM), up from 33 percent in 2014 to 40 percent.

Respondents point to performance first (54 percent) when asked about what they think are the most important attributes, followed by cost (41 percent), quality of asset management (40 percent) and appropriate glide path (32 percent).

DC plan sponsors differ in philosophy over retired participants’ balances: By 2060, 100 million Americans—nearly a quarter of the US population—will be aged 65 or older.

This shifts pressure to DC plans and how involved plan sponsors should be in participants’ DC account decisions when they retire.

When plan sponsors are asked about their organization’s philosophy regarding terminated or retired participants’ balances in the plan, the most common response (37 percent) is that participants should roll over their assets into an individual retirement account or another qualified plan. The next most-cited response (28 percent) is that their company has no philosophy one way or another.

Eighteen-percent of respondents feel participants should keep their money in the plan, while only 7 percent see taking a lump-sum distribution (a cash-out) as the answer. Only half of the survey respondents’ organizations even track the percentage of participants who cash out.

But cash-outs at retirement are a growing concern in an America of increasing life expectancy and decreasing retirement readiness. One in five plan sponsors would prefer participants leave their money in the plan.

If they do, the plan could negotiate better fees by virtue of higher balances. And plan sponsors could explore offering a variety of distribution options – such as guaranteed lifetime income solutions – to ensure participants have appropriate options to take them through retirement.

Financial wellness programs viewed as a smart investment: Financial wellness programs, while broadly defined, are gaining popularity as formal programs at companies.

Four in ten plans offer them and cite important benefits: employees are more productive and focused, and one-third say employees are less stressed from having improved their financial knowledge and confidence.

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