Having a Philosophy Can Refocus Client on the 'Why' of Retirement Plan Decisions

Many companies have mission statements or philosophies that drive business decisions, products and services they offer and how customers are treated.

David Hudak, senior consultant at Portfolio Evaluations, Inc. in Warren, New Jersey, says a company’s retirement plan is just another piece of that overall mission. In an article he wrote with Attila Toth, partner at Portfolio Evaluations, they stress the need for having a plan sponsor philosophy.

In the article, Toth and Hudak say a well-defined mission or philosophy can help plan fiduciaries think about the “why” when making decisions and not just the “how.” As an example of “why” versus “how” thinking, the article considers the way an investment committee seeking an Employee Retirement Income Security Act (ERISA)-approved qualified default investment alternative (QDIA) may select a target-date fund (TDF) series. The simple choice to go with a TDF is “how” they meet their QDIA requirements. But those plan sponsors with a well-thought-out philosophy will also elect to assess the glide paths of a group of diverse TDFs, to ensure the final selection aligns with their plan’s goal. This is “why” one TDF series is selected over another.

“In some cases plan sponsors have gotten away from the ‘why’ for making decisions,” Hudak tells PLANADVISER. “Conversations with clients revealed they felt brow-beaten by regulations and litigation, and felt they have gotten out of touch with why they have the plan in the first place. They felt they were losing focus.” This led to the idea of establishing a plan sponsor philosophy.

Portfolio Evaluations has helped clients develop plan sponsor philosophies; it starts with the retirement plan committee asking some open-ended questions. For example, What is the purpose of the plan, does it align with the organizational mission, and does it fit with other benefits? Hudak warns that there will not necessarily be consensus among committee members in the beginning, but as they have the dialogue, they usually are able to come to a group consensus.

One thing to consider is whether the organization wants to be paternalistic. Paternalistic plan sponsors feel it is a company’s duty to help their employees reach retirement readiness in any way they can. They are more likely to offer a match and automatic plan features, often at higher levels than other plans. 

The article explains that non-paternalistic plan sponsors feel their primary obligation is to provide employees with the essential components of a retirement plan by meeting all Employee Retirement Income Security Act (ERISA) requirements, but not necessarily expanding on them. Beyond that, they feel it is up to the employee to make the most of it. Then, there are plan sponsors that fall somewhere in the middle.

Another consideration is the type of employee turnover a company experiences. Hudak explains that some clients in industries where there is very high turnover, say 50% to 70% on annual basis, don’t want to be paternalistic. For example they don’t want to auto-enroll employees that will be in and out of the plan within a year. On the other hand, companies with very low turnover, such as higher education institutions, want to be very paternalistic to reward employees and create loyalty.

It’s also important to know what other retirement benefits employees are offered, Hudak says. If a large portion of the workforce is eligible for a defined benefit (DB) plan, the plan sponsor may tend to be less paternalistic with its defined contribution (DC) plan, because it knows employees are already getting a benefit from the DB plan.

But, Hudak notes that even though two plan sponsors may have similar demographic and benefit traits, their philosophies may be very different.

“Having a plan sponsor philosophy shows sponsors realize how critical saving and having money set aside for retirement is for participants,” Hudak says. “A philosophy better articulates a plan sponsor’s fiduciary process, and helps it make decisions regarding the plan.”