Data & Research September 1, 2009

Employees with DB Plans More Satisfied

The majority (54%) of surveyed employees reported satisfaction with their company’s retirement program.

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The Watson Wyatt survey found more employees with defined benefit (DB) plans (62%) are satisfied with their retirement program compared with those with only defined contribution (DC) plans (51%). Some 46% of employees said they would be willing to pay a higher amount out of their paycheck to ensure a guaranteed benefit in retirement.

A Watson Wyatt news release said the poll also found 61% of employees view their company’s retirement program as the primary vehicle to save for retirement, and 29% indicated they would not save for retirement without it.

Sixty-one percent of workers younger than 40 are concerned about their future DB plan benefits being reduced, and 42% are concerned their future benefits will be eliminated as a result of the financial crisis.

More than half (52%) of workers covered by a DB plan said their company’s retirement program is a key reason they continue to work for their employer compared to 33% of those with only a DC plan. Workers with a DB plan are also more likely to want to stay with their employer until retirement (67% versus 54% of those with only a DC plan).

Other preferences of DB plans over DC plans that workers cited include having benefits distributed as guaranteed monthly payments over retirement years (39%) and guaranteed payouts with no opportunity for higher returns, but also no chance of lower returns (25%).

DC Flexibility

The Watson Wyatt survey found that employees also liked retirement plan features generally associated with DC plans. For instance, 50% prefer to have the freedom to make their own investment decisions and are willing to accept the associated investment risks for an opportunity to earn higher returns.
 
Fifty-three percent also prefer a plan that participants can take with them when they change jobs.

Meanwhile, two in five workers surveyed said they would be willing to pay a higher amount out of their paycheck to ensure access to health care benefits if they retire before they are eligible for Medicare.
 
The Watson Wyatt survey was conducted in February 2009 and includes responses from more than 2,200 full-time workers.
 
The research is available here.

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In Practice September 1, 2009

Establishing a Fiduciary Due Diligence Process at 403(b)s

Having a due diligence process can ensure that a 403(b) plan is running smoothly.

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In a recent Webinar for 403(b) plan sponsors sponsored by Cammack LaRhette Consulting, Mike Webb, vice president, Retirement Plan Services at Cammack LaRhette, discussed considerations for establishing a fiduciary due diligence process and the benefits of having one.

In his presentation Webb said 403(b) sponsors should review fiduciary practices to maximize investment results and establish a process that helps protect the plan, participants, and the organization from liability. A focused review also confirms that the plan is deriving value from fees that are paid and is maintaining compliance and competitiveness in the industry.

According to Webb, the goals of the due diligence process are:

  • overall monitoring of the investment performance of the funds, as well as the asset classes offered to participants, expenses of the funds, and the extent to which participants are diversifying their investments;
  • an analysis of the plan’s participation, with a focus on ways that sponsors are changing their programs to increase participation;
  • a discussion of ways that the plan is communicated today, versus other approaches which have been successful in the industry;
  • periodic review of the plan’s operation, its provisions, and any applicable compliance requirements; and
  • review of new trends in the retirement plan industry.

Webb said creating an investment policy statement (IPS) and establishing a committee for regular due diligence meetings are integral parts of establishing a due diligence process.

The IPS can guide regular investment reviews, in which Webb suggested sponsors should learn:

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  • funds’ performance against standard benchmarks and other similar funds;
  • the level of risk taken by a fund versus the return it attains;
  • cost of the fund versus others like it, and whether there has been a style change;
  • whether there has been any change in management recently or in the fund company; and
  • what global economic conditions exist and how do they interact with the fund.

Fiduciaries should make sure the investments conform to the IPS and are appropriate for the participant demographic and general organizational needs and desires.

Regularly scheduled committee meetings are a time to discuss best practices and new trends in the industry for participant education, plan design, and investment analytics, among other things. Webb said the committee should also discuss difficult plan issues and decisions and ensure adherence to the due diligence and fiduciary review process.

Ongoing Due Diligence Monitoring

Webb also said the due diligence process should include coordinated educational campaigns for participants. The subject of the educational campaigns can be guided by plan statistics, such as the number of participants who are not diversified in their investments (all in fixed-income vehicles or all in equity), participants who use more than one target-date fund or a target-date fund and other investments, the plan's rate of participation, or the average participant contribution percentage, among other things.

Webb suggested sponsors use different media for the education, including e-mails, podcasts, group meetings, and written communications.

Sponsors should regularly consider participation improvement methods such adding an automatic enrollment feature to the plan or stepping up enrollment drives.

In addition, making sure the plan is in compliance with regulations should be an ongoing part of any due diligence process. This includes addressing any vendor concerns, contractual requests, or participant complaints.

Webb said the ongoing due diligence monitoring could lead to plan design changes (employee or employer contribution provisions, eligibility requirements, vesting, etc.) and/or issuance of a request for proposal (RFP) from plan vendors to ensure regulatory compliance and that the plan meets participant and organizational needs.

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