Compliance August 17, 2016

Discretionary Investment Managers Minimize Sponsor Risk

SEI held a webinar looking at how DC plans are changing and what this means for plan sponsors
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Defined contribution plans have now surpassed defined benefit plans as the primary savings vehicle, said Michael Cagnina, managing director of institutional business development at SEI, speaking during a webcast Wednesday on how defined contribution plans are changing and how plan sponsors can minimize their risks.

“Scrutiny of sponsors’ fiduciary responsibilities has intensified and there are more lawsuits that ever before,” Cagnina said. “Forty lawsuits representing fees have occurred in the past four years.”

The use of target-date funds will also continue to escalate, he continued. “Between 2010 and 2015, assets in target-date funds have increased by 200%, and it is predicted that by 2019, 90% of contributions to 401(k)s will flow into target-date funds. This means they need to be monitored and improved to ensure participants meet retirement income needs,” Cagnina said.

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In addition, “there has been a decoupling of asset management from recordkeeping,” he said. “Bundled providers are being challenged for transparency and independence.”

NEXT: Improving outcomes for participants

On the participant side of the equation, not enough of them are participating in their plans, and among those who are, few are actually saving enough, Cagnina said. “This could lead to their inability to retire, which affects plan sponsors. Auto enrollment and auto escalation have helped sponsors and participants, but menus need to be simplified and there needs to be more education and advice,” he said.

While some plan sponsors have their investment committee take full responsibility for the oversight of the plan without the help of an outside fiduciary and others hire an investment consultant, in both cases, when making changes to the fund lineup, it can be disruptive; blackout periods can last anywhere from 60 to 365 days, he said. “In addition, you can lose confidence of the participants,” Cagnina added.

"This is why SEI recommends that sponsors hire a discretionary investment manager who can provide greater fiduciary insulation and hire or fire investment managers within a fund, resulting in less disruption when changing the lineup,” Cagnina said. "Hiring a discretionary manager also enables the plan sponsor to focus on education, savings rates and strategic issues, which will ultimately drive success for the participants. The discretionary manager also has access to independent, open architecture, which means no revenue sharing and greater fee transparency.”

SEI also recommends that sponsors replace lineups that are complex and have many choices that participants don’t understand with a streamlined menu of white-label funds and/or target-date funds, he said.

Discretionary investment managers can be accessed in four ways, Cagnina noted: a fiduciary manager, an outsourced chief investment officer (CIO), a 3(38) fiduciary manager or a delegated investment manager.

Data & Research August 17, 2016

Most Americans Worry About Paying for Health Care in Retirement

While more than half of Americans across age groups are concerned about paying for health care in retirement, 41% of Baby Boomers say they are "very" concerned, according to a survey by financial-services firm Edward Jones.

 

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In the midst of rising projections for health care costs, an Edward Jones survey found that 60% of Americans varying in age are concerned about paying for health care in retirement. Baby Boomers, the closest to retirement or already in retirement, are the most worried, with 41% reporting being “very” concerned. Only 19% of Millennials said they are “very” concerned.

“Health care expenses can be difficult to project, especially when you are decades away from retirement,” says Scott Thoma, Principal and Investment Strategist for Edward Jones.

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However, according to research by Fidelity, a 65-year-old couple retiring in 2016 can expect to pay $260,000 for health care costs in addition to about $130,000 in long-term care costs. That estimate was the highest Fidelity has recorded since beginning annual calculations in 2002.

Medical conditions that tend to emerge later in life such as Alzheimer’s disease are another major concern for older generations. The Edward Jones survey found 51% of Baby Boomers know someone who suffers from Alzheimer’s. Thirty-Three percent of Millennials reported knowing someone with Alzheimer’s, which is the most common form of dementia.

“Unexpected conditions and medical expenses that manifest later in life pose a great threat not only to physical and mental health, but also to the financial well-being of both the care receiver and the caregiver,” says Thoma. “That’s why it is critical to start preparing early–proactive planning can ultimately help individuals protect their assets over the long term, even if health complications emerge during retirement.”

“The findings in the Edward Jones study are consistent with what we hear from Baby Boomers every day and underscore the need for families to include future health care costs in their long-term financial planning,”says Beth Kallmyer, vice president of constituent services at the Alzheimer’s Association.

The benefits industry is beginning to tout health savings account (HSAs), which work like a defined contribution plan for retirement health costs and offers multiple tax advantages, as a way to save for retirement health care expenses. 

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