Capital Ideas^™ 
Investment insights from Capital Group

Annual plan reviews are an essential part of supporting your plan sponsor clients and their participants. But they don’t have to be an overly onerous task to check off your New Year’s to-do list.

Instead, use a combination of art and science to showcase the value you bring throughout the year. One common pitfall financial professionals often make is to focus the review on the science — plan costs and the funds by the numbers. Anyone can plug numbers into a computer and obtain an output. In many ways you, as the financial professional, bring the “art” by tying the numbers to your clients’ human needs.

Prepare for the meeting by looking through the eyes of the plan sponsor

Successful plan reviews start with thinking about a client’s point of view and the plan’s objectives. That enables you to personalize the review process, so the client feels any challenges have been understood and addressed.

As you plan for the unique challenge of 2022 plan reviews, here are some questions to ask:

• Has your client’s business grown during the pandemic or is it still struggling to get back on track? Thriving businesses may be eager to “bounce forward” and put more attention on retirement plan outcomes as an employee-retention strategy.
• Have older employees retired and been replaced with younger ones in “the year of the great resignation”? If so, consider adding more automatic features to the plan.
• How would your client prefer to meet, in person or virtually? With the success of virtual work over the past few years, don't assume that they want to go back to meeting in person.

Use plan design to demonstrate your value

The answers to the questions above may help inform how you address plan needs by using the levers of thoughtful plan design.

Here are several plan design best practices you should consider discussing with your client if they are not already in place.
 

• Auto enrollment. Start new eligible employees — and maybe some long-standing employees — saving as early as possible.
• Auto escalation. If your clients are auto-enrolling, they should also consider auto-escalating, which systematically raises the default rate over time. This is a great way to address undersaving in retirement plans since the contribution comes before the paycheck and may provide participants often-needed discipline.
• Investment re-enrollment. The more than a decade-long equity bull market has benefitted many participants’ retirement balances. But there may be participants who missed out by not being invested in appropriate investments. An investment re-enrollment, where all participants are swept into a default investment (usually an age-appropriate target date fund) unless they opt out, is a great tool to do just that.

Address the three types of retirement plan investors

Your clients’ employees are not all the same, and neither are their investing styles. That’s why the core investment menu should be evaluated from the standpoint of how it serves the needs of what I consider the three different types of retirement plan investors:

The most common of the three investors is, of course, the “do-it-for-me” variety. That’s a big reason why the selection of a QDIA is arguably the most important investment decision a plan sponsor makes. The ease and simplicity of target date funds (TDFs) makes them good potential solutions for the “do-it-for-me” investors. But the diverse nature of TDFs makes them difficult to compare across different managers’ series. There are tools that can help, such as Target Date ProView℠, which uses Morningstar data to objectively compare series.

About those costs

You don’t want to make the conversation all about costs, but you can focus on areas where you can add value. One example might be some education about the relationship between investment management and recordkeeping costs.

Isolating recordkeeping costs can help reveal hidden expenses that could cost your clients more than they expect. Solutions that provide transparent or upfront pricing can help them understand exactly what they’re paying and what services they’re getting. Emphasize to clients how all types of costs are not created equal.

The above hypothetical scenario considers the total recordkeeping costs of two plans. The total costs of the plans are the same — 100 basis points. But looking at the total number alone doesn’t tell the full story. Plan sponsors should also look at the components of that cost to analyze how it relates to value.

In the example, costs are divided into three types: recordkeeping services, fund expenses and financial professional compensation, with the compensation being equal in both examples.
 

• Plan A charges four times as much for recordkeeping services.
• In contrast, Plan B charges four times as much for fund costs.
• While plan sponsors may initially have concerns over the level of fund costs in Plan B, choosing the cheapest fund isn’t necessarily best, nor is a plan obligated to do so to meet its fiduciary duty. The example highlights the importance of looking at each component of plan costs, not just the total.
  

Here are some cost-related questions you might ask:
 

• Has the plan undergone any changes such as asset growth or sponsor goals?
  
• Can any costs be lowered or negotiated?
  
• Would a different plan solution or cost structure make sense?
  
• Would the plan benefit from a share class change?
  
• And what services could the sponsor add that might improve the “health” of the plan?
  

Strategic resources

There is a lot to cover during annual plan reviews, but we offer the following resources that may make the process as efficient and effective as possible:
 

• 401(k) Value Assessment and Analysis Worksheet: Use this Excel worksheet to help track, consolidate and present all the things you do for the plan.
  
• Retirement Planalyzer^SM: Find, price, compare and present retirement plan options for plan sponsors.
  
• Target Date ProView℠: Use Morningstar data to compare specific target date series based on Department of Labor (DOL) guidance.
  
• RecordkeeperDirect® Plan Review Sample Report: This report compiles plan, participant and investment data to help you assess and improve retirement plans.
  

Reach out to me or your American Funds representative for assistance with any of these resources.