In our latest Plan Talk podcast, Retirement Director Ben Rizzuto provides a recap of this year’s most important updates, trends and stories in the defined contribution space at the plan, participant, legal and regulatory levels. And as a bonus, he shares a playlist of his 10 favorite new songs from 2019.
Plan Talk: Best of 2019 - Ben Rizzuto, CRPS®
Ben's Top Ten Songs of 2019
- "You Ain't The Problem" - Michael Kiwanuka
- "Cataracts" - Freddie Gibbs, Madlib
- "Low Down Rolling Stone" - Gary Clark Jr.
- "Tough On Myself" - King Princess
- "Georgia" - Brittany Howard
- "Ocean In A Drop" - GoGo Penguin
- "Comeback Kid" - Sharon Van Etten
- "Heavyweight Champion Of The Year" - Nilüfer Yanya
- "Confessions" - Sudan Archives
- "Hungry Child" - Hot Chip
- "Mujeres" - Y La Bamba
- "Thin Air" - Wand
Ben Rizzuto: Welcome to Plan Talk from Janus Henderson Investors, I’m Ben Rizzuto.
We’re near the end of another year, which means one thing: The podcast we’ve waited all year for … the Plan Talk “Best Of” episode, the episode where we highlight some of the best and most interesting stories from the last four quarters of our Top DC Trends and Developments Guide.
Along with that, as I’ve mentioned in the past, I am a huge music fan, so in order to provide not only some of my favorite stories from the retirement plan marketplace, I’ll give you a few of my favorite songs from the past 12 months as well.
First off, for those of you who aren’t familiar with the Top DC Trends and Developments Guide, it is a digest of important updates, trends and stories that we put out on a quarterly basis which helps you – plan sponsors and investment committees – stay up to date on that which is going on at the plan, participant, legal and regulatory levels.
My hope is that these best practices and ideas will be helpful to you as you head into annual reviews and into the new year and consider improvements to your retirement plans, ways to improve participant engagement or just make sure you’re meeting your fiduciary responsibility.
Finally, as I’ve noted in the past, I try to provide you with a little something different. And while there are all sorts of best lists when it comes to music out there, I like to provide mine as well. These songs are from all sorts of genres, some you may know, others you may not. But just like with the Top DC Trends Guide, my hope is that you can walk away with at least one idea or one new song that you’ll use in your daily life.
Quarterly Highlights – Hard vs. Easy
As I go through these ideas, I’m going to follow the order in which we present the Top DC Trends Guide. 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 to use it.
So let’s start in the Quarterly Highlights section, where we highlight best practices and new ideas that companies are using. Two stories I found important highlight some of the innovative ideas that plan sponsors are using to improve things for their participants. Now, there are all sorts of ideas and innovations out there when it comes to plan design and participant engagement. Some of them take a lot of work, but others can actually be quite easy to implement.
First, on the more difficult end of the spectrum – but also very innovative – is what United Technologies did with their plan’s QDIA option. It stems from an idea we continue to see in surveys where participants continually tell us how much they’d like some sort of guaranteed income solution available to them within plans. While solutions have been few and far between, we saw in the first quarter 2019 guide how United Technologies added a lifetime income strategy as a QDIA in order to provide participants with a defined benefit-like experience.
If participants select the strategy, starting at age 48 it will transition from a traditional investment-only portfolio into a secure income sub-fund. The secure income sub-fund purchases units of group annuity contracts, which in turn hold the assets in separate accounts invested at 60% equity and 40% bonds. Assets are then automatically allocated into these components in certain percentages based on the participant’s age and will slowly increase the level of income protection from 0% at age 48 to 100% at age 60. So, at age 60, all of a participant’s retirement income is protected.
So that’s a big change – one that may not be possible for every plan. But next I wanted to highlight a campaign that the University of Pittsburgh implemented – one that I think any plan of any size should consider. This campaign, which we highlighted in the third quarter 2019 guide, was called “Write Your Own Financial Story” and was started to get employees more interested in, and invested in, their financial futures.
The campaign focused on how an individual’s goals, passions and dreams for the future – whether they were financial or not – directly tie in to understanding how and why that person should be saving now.
To get people thinking about these ideas, the university hosted more than 30 campaign-related events, including in-person and digital sessions. This led to 2,100 participants increasing their deferral rates and making other positive changes to their plan accounts.
By getting people to stop and think about their goals, we can see how this simple exercise gets them more engaged.
Along with that, the thing that I love about this idea is that it’s easy, personalized, inexpensive, promotes a retirement-focused culture, and is something that any participant at any age should be thinking about.
Participants’ Corner – Ideas that Affect Everyone
From those two innovations, let’s move to the participants’ corner section and look at two ideas that probably affect a great number of participants in all of our plans.
Everyone experiences some level of financial stress, but financial stress is one of those ideas that can be hard to quantify. And if we’re trying to implement a financial wellness program, one of the questions that will inevitably come up is, “How much is this going to cost and how much is it going to help us save?”
So if we can’t quantify financial stress’s effects, it may be hard to get a CFO or business owner on board to implement a financial wellness program.
One of my favorite stories from the fourth quarter 2018 guide was a study that Willis Towers Watson put out that did a great job of putting some numbers to this important issue.
To do this, they studied an employer’s detailed records of work quantity and quality for a relatively homogeneous and sizable group of 17,000 employees – all of whom served in consumer-facing roles. They then determined the financial stress level of each employee based on the employer’s administrative records and categorized employees into high, medium or low levels of financial stress. They then compared stress levels with work quality and other factors.
Specifically, the survey found that employees who are financially stressed lose 41% more work time to absence than peers without financial worries. They have lower engagement levels than peers without financial worries and are less productive compared with peers without financial worries.
Overall, we all know financial stress isn’t good, but this paper does a wonderful job quantifying its effects not only on employees, but also on businesses.
Next, we saw an interesting survey from E*TRADE in the first quarter 2019 guide, which showed that women under the age of 30 are not confident about how much they are saving, with 76% saying they could be doing better. This is higher than the 69% of the general population who think they should be saving more. Plus, 59% of women have tapped into their retirement savings, compared to 38% of the total population.
Along with that, 69% of young women say images of exaggerated wealth on social media and television make them feel less successful compared to just 47% of the total population.
Finally – and I think very importantly – 60% of young women say financial jargon hinders their ability to invest on their own compared to 51% of the total population. In fact, many young women feel that talking about money is a taboo subject, which provides some very important insight that we can use to better communicate with younger women in our plans and maybe participants overall.
And here’s the thing that is important: If I’m a plan sponsor and I’m looking at this study, I would be asking myself, “Do we have women under 30 in our plan?” And even beyond that, might other participants – male and female, young and old – feel the same way? Have we checked to see how they are feeling? If not, this is a great reason to do an employee survey or consider some other types of financial education.
But overall, I like those two stories because I think they clue us in to how people are feeling, how we might help or better educate them, and how important financial wellness programs can be to participants and businesses alike.
Legislative Review – Excitement Leads to Blah
The third section of our guide is the Legislative Review, and when it comes to legislation this year, much of the excitement that started the year has fizzled out as things have become bogged down in Washington, D.C.
The SECURE Act epitomizes this more than anything. We’ve covered it over the past several quarters, and many took note because the legislation in its original form would have led to the largest changes to the retirement industry since the Pension Protection Act of 2006. Plus, it initially passed out of the House of Representatives by a vote of 417 to 3.
Well, that excitement has faded, and it now seems that the bill may simply fade away in the Senate, where it has been bogged down for months. We will have to see what happens, but I think it’s important to note some of the key provisions of the bill since if it dies, we will most certainly see these ideas again in other bills and legislation.
So, on the retirement plan side, the bill included provisions which would, one: delay the required minimum distribution starting age from 70½ to 72.
It would have increased the cap on auto-escalation of contributions for safe harbor 401(k) plans from 10% to 15%.
It would allow employers of all sizes to join together and create “open” multiple-employer plans to make defined contribution plans more affordable.
It would have encouraged lifetime income options in defined contribution plans.
And it would have increased or created tax credits for small employers that start new retirement plans or automatically enroll workers into new 401(k) savings plans.
So those are some of the ideas within the SECURE Act that got us excited in the beginning of the year.
Another idea that we have all been excited about is the idea of student loan repayment regulation coming out of Washington, D.C. This comes on the heels of Abbott Laboratories implementing a program that allowed it to match student loan payments with matching contributions into participants’ 401(k) accounts through a private letter ruling it received from the IRS in August of 2018.
Well, based on that, Ron Wyden reintroduced the Retirement Parity for Student Loans Act during the second quarter of 2019. The bill sought to address this issue and would allow all plan sponsors to be able to make matching contributions based on student loan repayments. But just like the SECURE Act, at this point the bill has gone nowhere after being introduced in May. But my hope is that, as we see this bill and others like it, we will more quickly get to a place where these types of benefits are available to be offered by retirement plans to their participants.
Regulatory Review – Follow the Money
From the excitement that some of those bills elicited, let’s next review some of the things that came out of the regulatory community which may not be all that exciting, but I feel always provide some excellent operational checks for our plans. In thinking about these two stories, the idea that came to mind was that of “following the money” as the DOL and IRS are more focused on making sure plan sponsors treat participant assets with care and do so in a timely manner.
EBSA Focused on Payroll Remittances
We first saw this as the EBSA and DOL increased its activity around payroll remittance in the first quarter of 2019. This focus led to “Invitation to Correct” letters being sent to plan sponsors who were not getting salary deferrals deposited in a timely manner. Now, as a reminder, employee contributions generally become assets of the 401(k) plan as of the earliest date that such contributions can be reasonably segregated from the employer’s general assets, but in no event later than the 15th business day of the following month. Plus, remember that failure to timely deposit 401(k) contributions and loan repayments is a breach of fiduciary duty.
It seems that many 401(k) plan sponsors mistakenly believe that the “15th business day” is the deadline to deposit employee contributions and loan repayments to the plan. However, in these letters the DOL reminded folks that the 15th business day is not a safe harbor and is included in the regulation only as an outside limit of the time that may be considered for segregation of assets.
So, as an action step, it is recommended that if you have received an Invitation to Correct letter, you should submit a Voluntary Fiduciary Correction Program application. And even if you haven’t, it may be a good idea to simply touch base with your payroll provider and make sure processes are set up efficiently and appropriately.
Another item to check, which comes out of a Treasury Inspector General report from the fourth quarter of 2018 is if you have participants who are overcontributing to their plan accounts.
The report found that 1,400 taxpayers appeared to have gone over the limits and an estimated 13,200 taxpayers may have contributed to multiple 401(k)s, potentially exceeding limits, and thus would owe additional taxes.
What I think is important is that the Inspector General found that some 401(k) plans didn’t have controls in place to prevent employees from exceeding the annual limits or that some taxpayers got tripped up when contributing to multiple 401(k) plans. So overall, employers should make sure they have controls in place to stop employee contributions at the maximum limit each year. Also, employees should check their pay stubs towards year-end and at year-end and adjust if needed, which is especially important if they switch jobs.
Legal Review – New Areas of Concern
Thinking about the Legal Review section of the guide, we continue to see all sorts of lawsuits against plan sponsors, and those fiduciary breach cases still in large part bring up issues like excessive fees, revenue-sharing arrangements, IPS violations and improper investments. Along with that, we continue to see these cases move downstream as more and more relatively small plans have been sued.
But while that’s the case, we have seen a few cases this year which I think highlight some new areas of concern for plan sponsors.
First, the Bell vs. Anthem case was highlighted in the first quarter 2019 guide as parties announced they had reached a settlement.
What’s most interesting – and almost shocking – about this case is that the lawsuit alleged that Anthem breached its fiduciary responsibility by not replacing “imprudent” funds. Many of the funds cited were passive funds. In fact, one fund cited had an annual fee of just 4 basis points, but according to the compliant, an otherwise identical 2 basis point version could have been obtained by an investor with the size and sophistication of the Anthem plan.
Many plan sponsors have felt that low cost is automatically better and is almost a de facto safe harbor. This case shows us that it is not. And what I think is really important is that one, this reinforces that fees are just one factor to take into account when selecting funds and two, we have to document why funds are added to and kept within a plan.
Another set of cases came up in the third quarter 2019 guide.
These are fiduciary breach cases against CHS/Community Health Systems, Walgreens and Intel. And what we found is that target-date funds have now entered the spotlight as far as ERISA litigation is concerned.
In the CHS case, the allegations said that the company did not give serious consideration to competitive index fund offerings and instead used the recordkeeper’s proprietary index funds, despite fees that were several times higher than marketplace alternatives that tracked the exact same index.
The plaintiffs also alleged that these target-date funds retained higher-fee versions of other underlying proprietary investments in the target-date funds’ separate accounts to increase its own fee revenue – at the expense, of course, of plan participants.
In the case against Walgreens, we saw allegations that the plan sponsor failed to monitor and remove a suite of poorly performing target-date funds. The lawsuit contended that funds performed worse than 70%-90% percent of peer funds and Walgreens “refused” to remove the funds. This led participants in the $3 billion plan to lose upwards of $300 million in retirement savings.
Finally, we saw another case against Intel. This one questions the fees and performance of custom target-date funds offered to its defined contribution plan participants. The funds in question had unproven and unprecedented investment allocation strategies featuring high-priced, low-performing illiquid and opaque hedge funds.
So, with these three cases we again see a new focus area, that being target-date funds. Previously, plan sponsors could add a target-date fund suite without having to worry too much. Those easy times seem to be over, and what this highlights is that target-date funds need to go through the same due diligence and review process as every other fund in the plan menu.
Global Headlines – Unintended Consequences
Two final stories I wanted to highlight come from our global headline section, and I feel that they highlight how sometimes there are unintended consequences that occur based on the changes we make.
Now, as you may know, the Australian retirement system is set to increase the compulsory percentage that will go into “Super” accounts from 9.5% to 12% in July of 2025. This percentage is made up of both participant and employer deferrals, and at first blush, we would think that this all sounds great. Getting more into participant accounts is what we all strive for. But, we highlighted in the third quarter of 2019 how the Grattan Institute feels that this change could lead to each middle-income Australian losing more than $30,000 over their working lives. Their fear is that those higher superannuation contributions would simply be paid for through lower wages, taking up to $20 billion a year from workers' pockets.
A second unintended consequence was seen in the second quarter of 2019, when we covered auto-enrollment in the United Kingdom.
You may remember that in 2012, auto-enrollment was phased in, making it so UK employers would have to auto-enroll participants. Along with that, minimum contribution amounts would be set for both participants and employers. The total contribution was set at 5% through April 2019. That was made up by 2% from employers, 2.4% from employees and 0.6% from the government. Now, based on data from the Office of National Statistics, this led the total average contribution rate to be about 5.1%. What’s unfortunate is that previous to auto-enrollment being implemented and mandated by the government, the average total contribution rate was actually 11%. So we can see how even though the UK is setting defaults and holding the hands of Britons, this has allowed them to become less engaged with their retirements. Now luckily, in April 2019 the minimum contribution rate increased to 8%.
But overall, while we all believe auto features are a best practice, I think it’s important to know that they could lead participants to not be as engaged as we would hope since they might feel that someone else is doing it for them.
So, there you have it: One year of information boiled down into 12 of my favorite stories.
As I always say, these ideas are just like music: Everyone is going to have their favorites. Maybe it’s the items from the Participants’ Corner since they might give you some ideas about the concerns of participants and how you can help them stay on track. Or maybe it’s the Legal Review, as they give us some new items to think about and review the next time our investment committee meets.
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 Top DC Trends and Developments Guide and through this podcast, so be sure to subscribe on iTunes or Spotify.
Oh, and for those of you who are music fans, I’ll be including a list of 12 of my favorite songs from the past year to go along with these 12 articles that I’ve highlighted today. They’ll be listed in the blog post that goes along with this podcast, so be sure to check that out if you’re interested. But remember, if I’ve missed something from the retirement plan marketplace or musically, feel free to drop me a line. I’m always interested to hear something new.
So until next time, I’m Ben Rizzuto, and this is Plan Talk.