From personalized 401(k) options to creative participant engagement initiatives, from a groundbreaking Private Letter Ruling to new legal proceedings affecting fiduciaries, information flows so quickly that it’s hard to stay up to date. In our latest Plan Talk podcast, retirement expert Ben Rizzuto shares his list of the best plan design ideas, most interesting research and most intriguing topics of 2018 – along with a playlist of his favorite music from the past year.
Plan Talk: Best of 2018 - Ben Rizzuto, CRPS®
Ben's Top Ten Songs of 2018
- “An Air Conditioned Man” – Rolling Blackouts Coastal Fever
- “Bubblin” – Anderson .Paak
- “Can’t Fight the Feeling” – Charles Bradley
- “Street Fighter Mas” – Kamasi Washington
- “Autopilot” – Vok
- “When the Night is Over” – Lord Huron
- “Follow Me” – The Shacks
- “Phoenix” – Rhye
- “Wide Awake” – Parquet Courts
- “Lemon Glow” – Beach House
Ben Rizzuto: Welcome to Plan Talk from Janus Henderson Investors, I’m Ben Rizzuto.
If you’re one of my coworkers you know that I am constantly listening to music. I listen during throughout the work day and it’s pretty easy to notice since I have my ear buds in and at my new standing desk I have been known to not quite break out in dance, but I definitely sway around and bob my head a little more freely.
I pride myself on knowing what’s new and different and always try to have a recommendation for someone.
Even though that may be the case I do miss things. I can’t listen to every album that I’d like to and there is so much new music coming out every week that stuff flies under my radar. Because of this I’m always interested as we get towards the end of the year when publications and music blog’s put out their Best of Lists. It allows me to discover even more great music and for those songs and artists I haven’t heard, but if I see a song on a list that I’ve known about and enjoyed over the course of the year it also serves as validation.
The same goes for the news and trends in the retirement plan industry. Ideas and best practices, regulations and legislation, they all come out so quickly these days that it’s hard to stay up to date. That’s why we put our Defined Contribution in Review guide out and feel so strongly about it as a resource. And when it comes to ERISA the stakes are really much more high than not noticing a new album or song.
So as we close out the year I wanted to provide you all with my best of list. In order to do that I’m going to revisit some of the best practices, best plan design ideas, most interesting research and important topics that we’ve covered over the last 12 months and that we’ve highlighted in our Defined Contribution in Review guides. So that’s gonna include our 4th quarter 2017 edition plus the first, second and third quarter editions from 2018.
My hope is that it helps you discover an idea or story that you may have missed. Or, on the other hand, maybe you had heard about some of these items and did make sure your clients knew about them, so hopefully it serves as validation for all the good work that you’ve been doing over the course of the year.
As I go through these ideas I’m going to follow the order in which we present the Defined Contribuiton in Review, along with that I’ll make sure you know which edition it came from so you can go back and find it if you’d like.
So let’s start in the Quarterly Highlights section where we highlight best practices and new ideas that companies are using.
Now at this point I think we can all agree that the principles of automatic features can help plan participants increase savings and fight inertia but can they help participants become more tax-efficient in their retirement savings. Well in the first quarter 2018 edition of the guide we highlighted an idea that may be the next development in automatic enrollment.
With this in mind ThyssenKrupp made a change to the way they were automatically enrolling new employees in the company’s traditional 401(k) plan or its Roth 401(k) option.
A simple but very important question led to this change. The company asked themselves “Why should a 50-year-old executive be auto enrolled the same way as a 22-year-old coming out of college?”
If we really think about it the answer to this question is probably “They shouldn’t.” So the company has started enrolling those earning more than $50,000 into the traditional 401k and those earning less than $50,000 into the Roth 401k.
From a tax standpoint the Roth option should appeal to people in lower tax brackets but participants may not know or even take the time to think about the long term tax consequences related to their 401k account.
The next idea I’d like to cover is one we saw from the 4th quarter 2017 edition of the guide where we highlighted two companies that have taken the idea of retirement readiness and financial wellness to the next level.
First, we know that plan sponsors are considering the retirement readiness of their participants more seriously and making it the main focus area as they review and make changes to benefits.
Most times plan sponsors will simply look at the percent of income a participant will be able to replace in retirement but a company out of Connecticut, Alexion, has built retirement readiness models for their employees that take into account a number of other items. Along with that this company has operations internationally so it has developed country specific retirement readiness models. These models take into account retirement income as a percentage of participants’ pre-retirement earnings, expected retirement age, average life expectancy, average cost-of-living data and an assumed outside savings rate which if you think about it can be different around the world.
Overall the lesson here is that many times we look at general industry benchmarks when it comes to retirement readiness or savings rates. Now that is a starting point but this example shows us how important it is to go deeper in our analysis, since when it comes to investing, saving and planning for retirement, one size does not fit all.
Also in that edition we saw how British Petroleum integrates Financial and Health Care Wellness Programs for their participants. This is, as you’d guess, a huge plan which covers five qualified savings plans, 25,000 employees and their spouses, plus 17,000 pre-Medicare retirees and their spouses.
As with many plans the goal is to increase awareness and participation for both concepts of wellness. You see the company has had financial education programs over the years but getting people engaged had proven difficult and overall engagement was low.
Well in order to change this the company started a rewards program for participants for taking part and achieving certain goals such as taking brief courses on savings or personal finance matters, taking a financial wellness assessment and talking to a financial adviser. The reward was an accumulation of wellness points that could be used for a company health plan. So if participants reached a certain point level they can choose an alternative health plan, such as a PPO versus British Petroleum’s high-deductible health plan.
We’ve seen the idea of “gamification” in many areas in the past and here we see how the simple idea of providing points, checkpoints and rewards can help increase engagement and overall wellness.
Next let’s move to our Participants’ Corner section where we delve into research to try to get a view into the mind of the participant to see how they’re feeling and what they truly need.
Two of the main topics that we cover consistently in this section are financial education programs and automatic features and while there isn’t a magic bullet as far as these two topics go let’s take a look at a couple ways to improve them.
When it comes to auto features specifically auto enrollment default rates the question is always, “Where should we set it?” Many times we feel hesitant to push the envelope when it comes to deferral rates since it may lead to disengagement and employee dissatisfaction, and we do this fully knowing that this is probably the nudge participants need to save more for retirement.
In the 4th quarter 2017 edition of the guide we looked at a piece of research entitled “How Do Consumers Respond When Default Options Push the Envelope?” This study which was conducted by Shlomo Benartzi showed that pushing the envelope may not be that bad.
The research, involved 10,000 employees who visited a workplace retirement plan enrollment website. After entering basic personal information, employees were prompted to select a randomly assigned retirement savings contribution rate of 6%, which was the control group, all the way up to 11%. Researchers then waited 60 days after a person’s website visit before collecting data on how plan participation was affected.
The study’s finding suggested that deferral rates between 7% and 10% DID NOT result in lower enrollment when compared to the 6% control rate, and the highest rate suggested, 11%, resulted in only a slight drop in enrollment.
So that gives us an idea about automatic enrollment deferral rates which gets participants on the right track but as we know we need to make sure we keep them engaged and educated which is where a financial education program comes into play.
Most plan sponsors will agree that some sort of program is a good idea but the question then becomes how often should it be offered.
Well the Pension Research Council showed us that these programs should be offered consistently if not continuously. Their study showed that those programs that follow up with participants or are offered continuously are the most effective as they help employees to better retain knowledge. More specifically and probably more importantly if we are looking at the Return on an Investment of these programs, they found that financial education delivered consistently to employees around the age of 40 will optimally enhance savings at retirement by close to 10%. On the other hand programs that provide one-time education can generate short-term effects but not long term habits.
While they showed specific gains for those 40 and older, the study also found that those who participate in financial wellness program “have higher earnings, more initial knowledge and more wealth, while non participants are poorer, earn less and have little financial knowledge at baseline. This occurs regardless of the age at which the program is offered.”
So overall I think the thing to remember with financial education programs is that if you want to see consistent change there needs to be consistent effort, and just like those deferral rates we should consistently push the envelope with these benefits and programs if we want to develop long term habits.
Legislative Review + Regulatory Review
Now let’s move to Washington DC and look at the Legislative and Regulatory review sections of the guide. Now there has been quite a lot going this year as we’ve seen a lot of retirement focused legislation come out of Congress and we’ve seen the IRS, DOL and other regulatory agencies busy in their activities.
One of the biggest developments we saw this year was highlighted in the 3rd quarter 2018 guide where we provided details on a Private Letter Ruling issued by the IRS approving an employer’s program to provide employees a retirement plan contribution conditioned on student loan repayments. Specifically, the IRS found that such contributions would not violate the “contingent benefit” prohibition under the Internal Revenue Code, which has been the main issue limiting many of these programs in the past.
We later found out that the company that received this PLR was Abbott Laboratories. The letter allowed the company to set up a program where elective contributions will be made each pay period and provide for a payroll-by-payroll matching contribution of 5% of a participant’s compensation into their 401k account if he or she makes elective contributions of at least 2% of compensation towards student loan payments.
The main thing to remember is that unfortunately this ruling only applies to Abbott Labs, so if other companies want to provide such a program they’ll have to invest the time and money into a similar Private letter ruling. Now while that is the case I think this really opens the door for student loan assistance programs to be the next great plan design feature and our hope is that we’ll see regulations in the next year or so that will make this available to everyone.
Next I wanted to touch on two of the DOL’s pet projects that really give us an idea of the things they are focusing on these days. The first concerns the late deposit of employee deferrals which was covered in the 2Q 2018 guide. This project began in the Chicago EBSA office where it has threatened enforcement actions against plan sponsors who correct the late deposit of participant contributions or loan repayments without making a formal submission under the DOL’s Voluntary Fiduciary Correction Program. Plan sponsors are being warned via letter and if warned must file a VFCP application within 60 days of receiving the letter. Those most likely to receive the letter are plan sponsors who, on Form 5500, reported the late deposit of participant contributions and/or loan repayments.
Another project which came out of the Philadelphia DOL office and was highlighted in the 4th quarter 2017 DC Guide, was one where they looked at the Forms 5500 of defined benefit plans to identify employers with a high number of terminated vested participants who were not receiving payments and who had not received a lump-sum payout.
This project, between October 2016 and August 2017, recovered more than $165 million in benefits that should have been paid to participants.
So the question is how can we make sure we’re keeping track of these missing participants?
The four steps plan sponsors should take are:
- Send a notice using certified mail
- Check the records of the employer or any related plans of the employer
- Send an inquiry to the designated beneficiary of the missing participant
- And/or use free electronic search tools
Now sure you might not find them at the end of the day but in order to meet your fiduciary duties you need to at least make the attempt and then document that you made that attempt.
Moving on from those regulatory actions lets move to the fifth section of the DC guide and look at some legal actions through our legal review section which these days always has some very important information on new and ongoing lawsuits that have ensnared retirement plans and their fiduciaries.
Now if you’ve followed retirement plan litigation over the years you know that there have been over 100 corporate lawsuits that have led to more than $400 million in fines and settlements, but we have more recently seen over a dozen universities sued by participants for various alleged fiduciary breaches. One of the more noteworthy cases we’ve seen this year was the case against New York University and its 403(b) plan. We discussed the university’s case and subsequent victory in our 3rd quarter 2018 guide which was one of the first of these 403(b) cases to actually go to trial.
For some background remember that it was alleged that NYU’s Retirement Plan Committee, had breached its duties under ERISA by imprudently managing the selection and monitoring of recordkeeping vendors, which resulted in excessively high fees charged to participants, along with that they had imprudently failing to remove two specific funds from the plans’ investment lineup.
As I mentioned the case went to trial and NYU subsequently won but I feel the court’s written opinion really offers all of us plan fiduciaries and advisors some food for thought with respect to our fiduciary decision-making process.
The main points that came from the decision were these:
- Fiduciary decisions should be highly fact-based, in that those plan-related decisions are unique to each institution and its body of participants, and should come after reasoned consideration of all the circumstances, not just price alone.
- The court’s opinion emphasized that a plan’s investment committee and its individual members should understand their roles as fiduciaries and take the role seriously. More specifically the court noted that it was somewhat concerned about the Committee members’ in the NYU case, their knowledge base and participation, but it did find that Committee’s overall process as a body was sufficiently prudent.
- Finally, fiduciaries cannot defer blindly to an expert’s Advice as the court’s opinion emphasized that in order to rely on an expert’s advice; fiduciaries must investigate the expert’s qualifications, provide the expert with complete and accurate information, and make certain that reliance on the advice is reasonably justified under the circumstances. This includes meaningfully probing the investment consultant’s advice and making informed decisions.
So, along with the NYU case and the lessons it provides us I wanted to also highlight another case we saw in the first quarter of 2018. In the Goetz v. Voya Financial case we saw a participant in a $3 million profit sharing plan bring a suit against not the plan sponsor but actually against the plan’s record-keeper, and then be so bold as to do so, on behalf of the participants in 47,000 other plans on the record keeper’s platform.
Now the suit claimed that the record keeper violated and knowingly participated in violations of ERISA by charging excessive and unreasonable asset-based fees for its record keeping and administrative services.”
Along with that there was some interesting math used to come up with the $1 billion dollars that the plaintiffs requested to be returned to participants, and the case was filed by a personal injury lawyer here in Denver, but even with all that withstanding I think this case is most interesting for those of us in the industry because it shows that these retirement plan lawsuits are moving downstream and even small plan sponsors need to be consistently doing their fiduciary best.
To round out this year’s best of list let’s look to the Global Headlines section of our guide, where we see how participants and plan sponsors are viewing and dealing with retirement related issues around the world.
I feel one of the most interesting things I’ve seen and continue to see is how plan sponsors around the world are considering and implementing Environmental, Social and Governance or ESG factors into their investment policies.
Two items show this trend quite well.
First, in the fourth quarter 2017 guide we saw how the European Commission was recommending clarification around the fiduciary duties of institutional investors and asset managers to explicitly integrate material ESG factors and long term sustainability into their investment decisions.
Now, besides Europe I have seen other countries such as Australia look at this issue and overall I think it highlights how important ESG investing is becoming in our industry.
To that point, we then saw in the 1st quarter 2018 guide how Swiss retail company Migros rolled out a new sustainable strategy for its 20.2 billion euro pension. With its implementation the company said that moving forward all external managers would be required to adhere to “minimum environmental, social and governance standards” and that the pension would include ESG criteria in all investment selections.
So while many in the US see ESG investing as a passing fade or something that only millennials are interested in I think this provide some proof that there may be more to it than initially thought. Along with that if we think about the long term nature of retirement assets it really seems logical to at least use ESG as a metric when thinking about the long term prospects for an investment in a retirement plan.
So there you have it. There are a few of my favorites for the year.
Of course, just like music everyone has their favorites. Maybe it’s the items in participant’s corner since they’ll help keep employees engaged and educated, maybe it’s the legal review as they give us a roadmap as to how we should manage our plans and better understand our fiduciary duty.
All in all music is a wonderful thing and increased knowledge in the retirement plan space is wonderful as well. My hope as always is that today we’ve helped you better understand a few of the issues we’ve seen in the marketplace or given you an idea that you can use to educate your clients.
Remember we’ll continue to provide these updates, ideas and best practices in our Defined Contribution in Review Guide and through this podcast so be sure to subscribe.
Oh and for those of you who are music fans I’ve included a list of ten of my favorite songs from the past year in the blog post for this podcast, so be sure to check that out if you’re interested. Plus if I missed something drop me a line. Like I said I’m always interested to hear something new.
So, until next time I’m Ben Rizzuto and this is Plan Talk.