Compliance June 12, 2012

PSNC 2012: How Not to Get Sued

When discussing how plan sponsors can protect against litigation, the main message from panelists at the 2012 PLANSPONSOR National Conference concerned documentation.
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According to David M. Weiner, shareholder, Littler Mendelson, PC, plan sponsors want to avoid lawsuits altogether, but at the least they should create circumstances where they can get out of a suit early, either by dismissal or summary judgment.  

Lucas Barton, partner and vice president at Lockton Investment Advisors LLC, recommended having an investment review process in place and making sure quarterly meetings address processes in the investment policy statement (IPS). In addition, plan committees should keep meeting minutes and document all processes for selection or rejection, not just of investments, but of plan providers. He notes that more detail helps as time passes and committee members change.  

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James Fleckner, partner at Goodwin Procter LLP, adds that there are two benefits to documentation; it shows you have processes in place and helps committee members recall decisions made years earlier.  

Weiner says plan sponsors need to know what their plan documents and IPSs say, so the processes will follow it. “This is an area of risk you have control over,” he told conference attendees.  

Fleckner advised that unless sponsors get a lawsuit dismissed on technical or legal grounds, the legal process moves to discovery, which includes a request for all documentation, including e-mails. He warned that some of the most damaging evidence comes from e-mails, so plan sponsors should be careful about this conduit of plan communication and treat it as formal documentation. He also noted there is a fiduciary exception to attorney-client privilege.  

Weiner said a good rule of thumb is if the conversation is about plan administration, assume it is not privileged and stop e-mail communications as much as possible.

 

Products June 11, 2012

Diversified Offers Guidance for Effective Plan Design

Diversified is offering a white paper of best practices for ensuring a plan sponsor’s retirement plan is designed to help employees achieve their savings goals.
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“Effective Communication Begins With Purposeful Plan Design” urges plan sponsors to spend time reviewing their plan’s design before developing new communication or education materials to ensure all features support the key objectives. It also offers guidance for maximizing every opportunity to shape participant behavior to help employees save for a well-funded retirement. 

Highlights from the white paper include: 

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  • Implement automatic enrollment to optimize its benefit. More than half of all plans that auto-enroll employees use a default rate of 3% or less. Don’t follow the crowd. Consider setting a default rate that is at least as high as your current opt-in rate and integrate automatic escalation to improve participants’ retirement readiness over time. 
  • Design employer contributions to maximize plan objectives. Despite studies showing the impact of matching contributions on savings rates, many sponsors default to standard formulas such as a 100% match up to 3% of pay or a 50% match up to 6% of pay. If increasing the average savings rate is a key goal for the plan, consider extending your match to 25% up to 12% of pay. In many plans, the rate at which the match is maximized is the most commonly chosen participant contribution rate, therefore, stretching this incentive will likely result in higher savings rates. 
  • Narrow the number of investment options. Research shows that the number of available investment options is directly related to participation. Plans that offer 10 to 14 funds have the highest participation rates, but as more funds are added,  rates decline. While retirement professionals may appreciate the subtle differences among asset allocation plans, target date funds, and one-decision investing solutions – the average participant does not. For many participants, more options implies more work.
  • Limit plan loans. Eighty-seven percent of all retirement plans offer loans, and 47% of plans offer multiple loans. If your plan is falling short on average balances, loan activity is likely to be at least partly to blame. If improving employee retirement readiness is a business goal for the plan, why not consider a change to plan design to limit or eliminate plan loans? 

To request a copy of “Effective Communication Begins With Purposeful Plan Design,” e-mail RetirementResearchCouncil@divinvest.com.

 

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