As the Department of Labor closes in on finalizing its rules for retirement plan fees, advisors and plan sponsors in the defined contribution (DC) industry are asking themselves, “How does our plan compare to other plans?”
But the truth is, the industry benchmarks are pretty unimpressive, says Ben Jones, director of defined contribution for Russell Investments. “Average” DC plans, Jones notes in a blog post, often have insufficient participation, low savings rates, poor participant diversification, murky fee disclosure and too many investment options.
Russell Investments, which works with retirement plan advisors and plan sponsors, has identified seven key attributes that can help plans move beyond average, Jones said in an interview on Monday with AdvisorOne.
His tips are timely, considering that the Department of Labor’s Employee Benefits Security Administration in February released its long-awaited final rule on 401(k) fee disclosures, rule 408(b)(2), and in doing so extended the compliance deadline three months to July 1.
1. Adopt a retirement income mindset rather than a focus on account balances, says Russell Investments Director of Defined Contribution Ben Jones (left).
“This year, when the fee disclosures rule comes out, retirement advisors and plan sponsors are going to get a lot of information, and their tendency will be to benchmark themselves against other plans in their industry, looking at size, shape, everything,” Jones says. “Unfortunately, when you go out and benchmark yourself, you find out quickly that it’s an exercise in mediocrity. The majority of plans in the U.S. don’t have enough money saved or participation, and the fees, structure and even plan objectives are unclear.”
Russell recommends that all stakeholders, including advisors, plan sponsors and participants, focus on the end goal of investment income to be achieved in retirement. “We focus on the target replacement income that we’re trying to attain from our retirement plan, and then take that target to work backward and enhance the experience for plan participants,” Jones says.
2. Provide a thoughtfully designed plan menu based on participant profiles instead of an overwhelming number of plan options.
Many retirement plan menus have been designed to provide a lot of different investments across broad categories or the Morningstar style boxes, according to Jones. “A lot of times it’s been with good intentions that these investments are offered, but often the number of choices in the plan causes choice paralysis with the participants,” he says. A better retirement plan structure lets participants identify what sort of investment profile they match. Russell identifies three primary profile types in DC plans:
“Do it for me” investors who lack time, skill or desire to build their own investment strategy, and may be happiest with a target date fund;
“Do it with me” investors who actually show up to the enrollment and education meetings and want to learn about tailoring investment solutions to meet their risk objectives, such as a large blend fund.
“Do it myself” investors who take a lot of pride in designing their own investment strategies and want to have every option available to them, including stocks and bonds through a brokerage window.
3. Offer best-of-breed investments based on merit and analysis rather than proprietary and single manager solutions.
“For a long time, you took whatever investments the recordkeeper provided to you. If you were at XYZ platform, you got XYZ mutual funds,” Jones says. “Unfortunately, one firm usually can’t be the best at everything. So their specialty might be large-cap value, but they offered you a small cap and an international and a bond fund all from own investment management arm. We’re saying you want the best of breed managers in each of the investment disciplines that you’re hiring for inside the plan and not just taking what the recordkeeper would like you to take for revenue reasons.”
4. Work to increase the percentage of participants in an asset allocation strategy instead of maintaining a small percentage of assets in target date funds.
“We know that participants are likely to pick one fund when they enroll in the plan and never look at it again, but plans that focus on getting participants into asset allocation solutions generally have better outcomes,” Jones says. “We’re trying to harness asset allocation to keep participants from going down the right hand side of the enrollment sheet and picking the fund that did really well last year.”
5. Provide effective employee education based on building a financial plan for retirement, not on mastering overly sophisticated investment concepts.
“This point seems obvious, except our industry has spent hundreds of millions if not billions of dollars in trying to make sophisticated investment experts out of the everyday working American,” Jones says. “Candidly, we’ve done that pretty unsuccessfully. We go to enrollment meetings and we’re talking about the difference between stocks and bonds. If you walk down the street and ask someone what time it is, they don’t tell you how their watch is made and the intricate way the gears were put together. ”
6. Use auto features to drive employee savings rates greater than 10% instead of settling for 6% to 7% savings rates.
“We know that people need to save double digit numbers—in the range of 10%, 12%, 15%—to get to a comfortable retirement. We’re less than half of where we need to be in the United States, at just 6.8%,” Jones says. “Using an automatic escalation feature, you increase the contribution rate until you hit a ceiling, and you’ll find that most participants stay in that program.”
Companies are restructuring their matching programs to encourage a higher savings rate, Jones adds.
7. Strive for a participation rate above 90% instead of lagging in an average participation rut of 70% to 74%.
“The Pension Protection Act has worked to get people to save more, but just because you get 90% participation doesn’t mean that you shouldn't strive for 100%,” says Russell Investments’ Jones. “You’re never done as a planner even when you achieve your benchmarks. It takes a continual process of reviewing to be sure you’re on top of the objectives of the plan.”
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