Client Service June 22, 2017

Analysis Reveals Drivers of DC Plan Health

Wells Fargo discusses best practices it found has improved the health of DC plans over the years.
Reported by

An analysis of Wells Fargo’s bundled recordkeeping business, representing four million participants, finds that plan health has been improving.

Defined contribution (DC) retirement plan participation has increased 18% over the past five years, according to Wells Fargo’s Driving Plan Health report. Millennials have seen the biggest gains. The percent of savers with a total contribution (employee and employer) rate of 10% or higher has increased 9%.The percent of participants investing in a diversified portfolio has increased 15%. Older employees are the least likely to be diversified.

For more stories like this, sign up for the PLANADVISERdash daily newsletter.

For its plan health index, Wells Fargo has named certain participant behavior goals: All eligible employees participate in their DC plans; participants are contributing at least 10% of pay, including employee and employer contributions; and participants are invested in diversified investments, such as a target-date fund (TDF), managed account or a comprehensive advice program, or if a participant self-directs his investments, he is invested in at least two different classes of equity funds and one fixed income fund and has less than 20% in company stock.

The Plan Health Index is the percentage of eligible employees who meet the goals for all three savings behaviors. The Wells Fargo analysis finds a 40% increase in the Plan Health Index over the past five years.

Mel Hooker, director of relationship management at Wells Fargo Institutional Retirement and Trust, who is based in Charlotte, North Carolina, tells PLANADVISER, aside from automatic enrollment, total match is one of the key drivers for both participation and contribution rate. “Employees see that as an opportunity to take advantage of ‘free money’ which drives up participation and contribution rates,” she says.

Hooker suggests plan sponsors take a look at their match formula to make sure employees have the opportunity to take advantage of the match and get to a 10% savings rate.

Other factors that drive contribution rates are company stock and communication campaigns. Hooker says offering company stock can drive participation and contribution rates similar to a company match.

However, she warns that company stock can have a positive and negative effect for plan participants. The analysis found company stock is more heavily invested in by Baby Boomers. While it is a driver of participation and contribution rates for all generations, Wells Fargo sees a lack of investment diversification among Baby Boomers because of a high concentration of investments in company stock. “Looking at any one of the three goals, each has drivers that move them independently,” Hooker says. “Plan sponsors should dive down into plan design to make sure it is doing what they want it to do. For example, is offering company stock a mover of all goals?”

Wells Fargo says each of the three key savings behaviors it monitors helps a participant’s ability to reach an 80% income replacement goal.

NEXT: Some best practices

The Wells Fargo data shows the average participation rate for plans that automatically enroll new employees is 82%, compared to 88% for plans that include all employees in a re-enrollment. The participation rate for Millennials in plans with automatic enrollment is 84.9%, compared to 37.8%.

The most common default deferral rate is still 3%. However, a default rate of 6% sets participants up for greater success in terms of contribution rate, and does not materially affect opt-out rates. The average opt-out rate for plans with a 3% default rate is 11.1%, compared to 11.3% for plans with a 6% default, Wells Fargo says.

Some plan sponsors with high staff turnover are reluctant to implement automatic enrollment because it could lead to a high number of short-term, low-balance participant accounts, which can increase administrative costs. In these cases, sponsors may want to consider automatically enrolling only eligible employees who have completed one or two years of service, Wells Fargo suggests.

Nearly 90% of Wells Fargo DC plan clients offer some type of employer match (either a discretionary amount or a fixed formula) to participants in their retirement plans. For plans that offer a fixed match, on average about 46% of their participants reach the 10% contribution rate goal; for plans that don’t offer a fixed match, only 28% of participants meet the contribution rate goal. Wells Fargo also suggests using automatic deferral rate increases to help participants meet the 10% contribution rate goal.

“Trigger communications” are proactive communications sent to participants at key moments—milestone ages, positive actions and behaviors needing some attention—that suggest a next best step and congratulate them when they take actions toward helping achieve their retirement goals. Sponsors who take advantage of more of these communication and education campaigns average 44% of their employees contributing at 10% or more, compared to 31% for those who do not, the analysis found.

Having a qualified default investment alternative (QDIA) is a key driver to helping DC plan participants achieve diversification. Wells Fargo also suggests automatic rebalancing.

“The data shows plans are becoming healthier over time. This is due to plan sponsors taking advantages of the legislative changes of Pension Protection Act (PPA),” Hooker says. “We see a lot of movement by Millennials. Plan sponsors are winning at this stage by how much they’ve moved the needle.”

She adds: “If a plan sponsor is really clear on what it wants for it plan, it no longer has to guess: this report tells them how to move the needle. If plan sponsors look at every demographic and their plan designs, there are going to be changes that can be made.”

Compliance June 21, 2017

Putnam Wins Suit Over Proprietary Funds in 401(k)

Putnam was found not to have breached its duty of loyalty to its 401(k) plan participants, and the court found the plaintiffs did not prove a loss suffered from a specific breach of fiduciary duties.

Reported by

A federal district court has entered judgment for Putnam Investments and its 401(k) plan’s committees in a case alleging self-dealing in its investment fund lineup for the plan and excessive fees for lack of monitoring and replacing investments.

Previously U.S. District Judge William G. Young of the U.S. District Court for the District of Massachusetts dismissed prohibited transactions claims saying they were time-barred under the Employee Retirement Income Security Act’s (ERISA)’s three-year statute of limitations. In his most recent decision, Young ruled for Putnam on all remaining claims.

Want the latest retirement plan adviser news and insights? Sign up for PLANADVISER newsletters.

In his decision, Young noted that from the beginning of the class period through January 31, 2016, all of the designated investment options available under the plan’s investment menu were affiliated with Putnam. With the exception of certain categories of funds, i.e., closed-end mutual funds, hedge funds, and tax-exempt funds, all Putnam open-end mutual funds were added to the plan lineup upon launch, as required by the plan document. Up until early 2016, non-affiliated investments were offered exclusively through the plan’s self-directed brokerage account option. Starting on February 1, 2016, the plan’s investment menu included six BNY Mellon collective investment trusts (CITs).

According to the decision, for a period of time, the plan investment committee reviewed reports compiled by the Advised Asset Group (AAG), a subsidiary of Great-West. The AAG Reports showed that a number of Putnam funds were given “fail” ratings, but after internal discussions, the committee determined that the AAG Reports did not provide an accurate indication of fund performance. Still, Putnam recommended the AAG Reports as a source of investment advice to plan participants on their account statements.

The investment committee regularly reviews the qualified default investment alternative (QDIA) funds for risk-adjusted returns, costs, asset allocation, and performance as compared to competitors. “It is undisputed that [committee] followed a prudent process in reviewing and monitoring the QDIA funds,” Young wrote in his decision.

However, for other investments, the investment committee appeared to rely entirely on the expertise of the investment division to determine whether a fund was failing and needed to be shut down. As a result, the committee did not seem to have independent standards or criteria for monitoring the plan investments. The decision notes that the committee never once removed a fund from the plan lineup, and there seems not to have been separate discussion within the investment division as to whether a particular fund was appropriate for the plan.

NEXT: Arguments and discussion

The plaintiffs argue that the defendants violated the duty of loyalty by “stuffing the Plan’s investment lineup with all of Putnam’s publicly-offered mutual funds, as well as other Putnam affiliated investments, without regard to their expenses, track record, or other objective criteria.” But, Young found the plaintiffs failed to point to specific circumstances in which the defendants have actually put their own interests ahead of the interests of plan participants. “The Plaintiffs’ duty of loyalty claims are reduced almost exclusively to identifying instances of self-dealing. However, pointing to self-dealing alone is insufficient for the Plaintiffs to meet their burden of persuasion to show by a preponderance of the evidence a breach of the fiduciary duty of loyalty, particularly where the practices are common within the industry,” Young found. “Evaluating the totality of the circumstances, the Court holds that the Defendants have not breached the duty of loyalty owed to the Plaintiffs’ class.”

The plaintiffs also argue that the defendants violated their fiduciary duty of prudence by failing to implement or follow a prudent objective process for investigating and monitoring the individual merits of each of the plan’s investments in terms of costs, redundancy, or performance. In support, they point to the committee’s failure to remove funds from the plan that had repeatedly received “fail” designations in AAG Reports. Young said the AAG Reports alone, however, are insufficient to carry the plaintiff’s burden of persuasion with respect to the claim of breach.

The defendants counter that they fulfilled their fiduciary obligations by having Putnam’s Investment Division, some senior members of which sat on the investment committee, monitor the performance of Putnam’s mutual funds, including those in which the plan is invested. Young noted that such care for its mutual funds, however, is not sufficient to rebut the plaintiff’s claims of breach of fiduciary duty with respect to the plan. “Although Putnam is a defendant in the present lawsuit, it is in fact [the investment committee] that is the named fiduciary of the Plan under ERISA,” he wrote.

Closely monitoring Putnam’s mutual funds is not the same as closely monitoring the plan’s lineup, Young said. “The fact that some of the incentives of Putnam’s Investment Division aligned with those of the Plan participants is not sufficient to remedy the situation. A direct contribution 401(k) retirement plan could well have specific interests and goals different from a given mutual fund. ERISA fiduciaries ought take into consideration those differences in managing and monitoring Plan assets,” he wrote in his decision.

However, because the defendants have not yet presented the entirety of their case, Young refrained from making conclusive findings and rulings on whether the defendants breached their duty of prudence.

NEXT: Proving loss

“Where the evidence presented is insufficient to sustain either the plaintiff’s claim of breach of fiduciary duty or a prima facie case of loss to the plan, the plaintiff’s claim fails. Because the Court refrains from making any conclusive ruling about the alleged breach of fiduciary duty of prudence before the Defendants have had the opportunity to put forward all of their evidence, the question here becomes whether the Plaintiffs have made out a prima facie case of loss,” Young wrote.

Citing another case, he said “[A] fiduciary’s failure to investigate an investment decision alone is not sufficient to show that the decision was not reasonable. Instead, a plaintiff must show a causal link between the failure to investigate and the harm suffered by the plan.”

Young said the fundamental problem in the case is the broad sweep of the plaintiffs’ “procedural breach” theory. They argue that the alleged lack of an “objective process” by the investment committee to monitor the plan investments makes the entire investment lineup of the plan imprudent. He said this argument lacks legal support.

The plaintiffs must point to a specific imprudent investment decision or decisions to make a showing of loss due to a breach of fiduciary duty, according to Young. “The Plaintiffs’ theory that the procedural breach tainted all of the Defendants’ investment decisions for the Plan constitutes an unwarranted expansion of ERISA’s seemingly narrow focus on actual losses to a plan resulting from specific incidents of fiduciary breach,” he wrote.

Young found it is clear from the record before the court that Putnam employs sophisticated techniques to monitor its mutual funds. Even if these practices are not sufficient to meet the ERISA fiduciary duties to the plan, they are certainly sufficient to dispel the unsupported allegation that the entire plan investment lineup was per se imprudent.

“[The investment committee’s] review of the Plan lineup was no paragon of diligence. In light of the Plaintiffs’ failure to establish loss, the Court further declines to grant other declaratory or injunctive relief under ERISA,” Young wrote.

«