Capital Ideas^™

Plan sponsors are doing less

Many plan sponsors have halted planned upgrades, suspending actions that may have helped their participants be better prepared for retirement, according to Pensions & Investments. Although plan sponsors are still reviewing risk profiles among their current asset managers and considering plan design enhancements, few are executing on the results. 

What can defined contribution committees do?

• Stress test your plan. The last two quarters provide real data about participant behavior and fund results in difficult markets. Understand the impact that subsequent effects may have on your employees’ retirement readiness and reinforce positive actions. 
  
  
• Forestall participants’ emotional decisions. We are heartened by data that shows the vast majority of participants have done nothing with their retirement savings during the current environment.¹ Yet trading in self-directed brokerage accounts was up 100%.² Data also shows that participants who traded their own accounts substantially lagged their plan's Qualified Default Investment Alternative (QDIA).³
  
  
• Focus on retirement readiness, which may be negatively impacted by reduced employee contributions, locking in losses, taking out COVID-Related Distributions (CRDs), loans against retirement savings and other activities detrimental to successful retirement outcomes. These practices could delay retirement, which is not the desired outcome for either participants or the organization/plan sponsor. At its core, the goal of the plan is to get participants ready to retire.
  
  
• Demonstrate and communicate the added value of the professionally managed QDIA for your employees’ portfolios and financial wellness. But don’t leave your QDIA on autopilot. Any time is an ideal time to review expectations and conduct a detailed analysis of the QDIA to optimize risk and return.
  
  
• Manage fiduciary responsibilities. Remember, measures that may ultimately improve outcomes for your participants may also be part of your fiduciary responsibility. So, what can be done as first steps? 
  
  
  • Explore revamping your investment lineup. 
  • Look beyond the individual funds offered and examine how those funds are being used by your participants. 
  • But be thoughtful about how to maintain diversification in doing so.  
    
    
• Start now! The longer you delay adjusting your plan, the less time those adjustments have to work for the benefit of your participants. As with all committee decisions, doing nothing or delaying actions should be documented and justified. What are the benefits and costs of delaying?
  
  
• Employees are stressed by many issues, and there is always a reason to delay plan improvements. But delays hurt both results and productivity. Baby steps don’t help ease the need for change, they just kick success down the road. Lead.

Employers seek to attract and retain talent. Assisting participants in staying on track for positive retirement outcomes may strengthen the firm’s image within your talent pool. During times of uncertainty, your workforce looks for guidance. They may feel uncertain if the company does nothing. Reassure your participants by being proactive.

How to leverage consultants to effectively collaborate with DC committees?

• Consultants may help jump-start committee initiatives. Help your clients prioritize which projects to tackle now. Assist plan sponsors in overcoming their paralysis. Work as a team, continuously driving toward the best possible retirement outcomes for participants.

DC committees and consultants are finding their deliberately planned strategies to augment their retirement plans have been upended by COVID-19. But now could be the best time to take action to adjust plan designs and avoid detrimental participant behavior. For example, consider whether to change the plan's auto-escalation formula to get participants back on track.

Is your plan performing in your participants’ best interest? Are you, the plan sponsor or consultant, exercising your fiduciary responsibility and leveraging recent experience to research and implement changes and improvements that may help your workers stay on the path to financial wellness and meet their retirement savings goals? There are significant steps DC committees can take now to help employees with financial wellness and meeting their retirement goals.

¹Source: Morningstar, April 17, 2020
^2,3Source: Charles Schwab Self-Directed Brokerage Account Indicators, March 31, 2020