Client Service December 19, 2016

Suggested Areas for Review With DC Plan Clients

Mercer recommends areas for review that defined contribution plan advisers can go over with plan sponsors.
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As the New Year is a time of personal reflection, it can also be a time of reflection for defined contribution (DC) plan sponsors.

Mercer provides recommendations for DC plan sponsors given current market conditions and challenges for the coming year.

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“Change is the only constant in today’s market. As such, it is crucial to maintain vigilance over managing DC plans. Governance should always be a key focus, but it’s not a silver bullet,” says Liana Magner, partner at Mercer. “DC plans need to evolve with changes in legislation, regulations, industry trends and the changing needs of individuals. What may have been ideal a few years ago may not be as ideal today.”

Regarding plan design, Mercer suggests that DC plan sponsors should review their participants’ behavior and assess if matching plan design is influencing the choices being made by employees. Are these the correct influences? How could the design be more effectively structured to influence the preferred behavior?

In addition, DC plan design should be evaluated regularly to ensure it is relevant for the participant base, Mercer says. To do this, employers need to understand their participants’ behavior, needs and priorities. Areas for review include: cluster analysis; assessing participants’ financial courage; reviewing how participants are using existing investment options and relative retirement preparedness. Analyzing non-participants is crucial as well, Mercer contends, so employers can better determine how they can get them to participate.

NEXT: Investments and fees

Regarding DC plan investments, Mercer suggests DC plan sponsors need to check when was the last time they reviewed their managed account provider and review if they could currently defend their choice. In particular, in the wake of the new fiduciary rule, plan sponsors should fully understand exactly what fiduciary role the managed account provider will be accepting. Understanding potential conflicts of interest and what type of advice the managed account provider will provide (particularly related to distributions) is also crucial for plan sponsors.

Mercer notes that the Department of Labor (DOL) issued guidance highlighting how DC plan sponsors need to ensure target-date funds (TDFs) remain appropriate for the plan’s participants. Plan sponsors should determine if their participant group has changed. Employers should also take stock of their current TDFs and check if they are still high quality, appropriate investments, as the market has evolved significantly.

Mercer also believes DC plan sponsors should consider, or reconsider, retirement income options. More is happening in this area with an increasing number of DC plan sponsors open to the idea of retirees taking partial withdrawals from the 401(k) plan. In addition, the proposed Retirement Enhancement and Savings Act of 2016 includes a number of retirement income-relevant provisions that will spark more conversations.

Regarding DC plan fees, Mercer says focusing on fees is important, but the discussion should be focusing on fees relative to the value of services received and the expected benefits of any additional fees incurred. All things being equal, clearly, lower fees make sense, but DC plan sponsors need to make sure to also assess the best fee structure for their specific needs and objectives.

NEXT: Financial wellness and the fiduciary rule

Employers have historically focused solely on DC plan features targeting retirement accumulation: asset allocation, auto-enrollment and other features, Mercer notes. However, today, companies need to acknowledge that employees may be dealing with other more-pressing financial needs and as a result, retirement may not be their priority. Guidance and tools are necessary to empower individuals to cost effectively manage their broader financial situations.

Along this line, employers should decide if student loan repayment plans have a place within DC plan design alongside matching employee retirement contributions, Mercer says. For many, paying back student loans is more of a concern than saving for retirement, yet focusing on student loan repayment may cause individuals to miss out on the employer’s 401(k) match.

As things stand, key provisions of the DOL fiduciary rule will be in place effective April 10, 2017. DC plan fiduciaries need to monitor whether the fiduciary rule will roll out as initially anticipated and how a plan’s vendors are changing their services to accommodate the rule, Mercer suggests. DC plan sponsors need to confirm if the services they selected will actually be the ones being provided in the future.

In addition, Mercer suggests DC plan sponsors ask which fiduciary responsibilities they should keep and which would be better served by delegating to a third party?

Finally, Mercer recommends plan sponsors should create a strategy to address and mitigate cybersecurity.

In Practice December 19, 2016

A Year of Opinion from PLANADVISER Magazine

Few know the Employee Retirement Income Security Act (ERISA) as well as ERISA attorneys; at PLANADVISER, we’re lucky to rely on some of the best in the business for insight and analysis. 
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The 2016 volume of PLANADVISER marked our 10th year in print. 

Some features of the magazine have changed over the years, but looking back we are particularly proud of our consistent stable of Employee Retirement Income Security Act (ERISA) attorney columnists. We hope our audience has benefited as much as we have from reading their thoughtful and timely opinion articles about a variety of pressing industry issues. 

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

Collected below are some of the best 2016 columns from esteemed ERISA attorneys including Fred Reish and Joan Neri (authors of ERISA Vista), Marcia Wagner (author of Fiduciary Fitness) and David Kaleda (author of Compliance Consult). They will be back in 2017 for another year of opinion and insight. 

 

ERISA VISTA: Sweeping Changes in Advice

Retirement plan advice has changed to respond to plan sponsors’ desire for assistance in satisfying their fiduciary duties; the increased pressure on reducing costs; and the needs of aging Baby Boomers. Here’s our list of some of the most significant changes. [Read More]

 

ERISA VISTA: Rollovers Under the Fiduciary Rule

“I’m an adviser who provides investment advice to ERISA [Employee Retirement Income Security Act] plan committees. I also provide wealth management and financial planning services to individuals. Under the final Department of Labor fiduciary rule, will I be able to advise plan participants or wealth management clients about their distribution options under a plan or an individual retirement account?” [Read More]

 

ERISA VISTA: Referrals Under the Final Fiduciary Rule

If the person making the recommendation—the referrer—receives a fee for the recommendation, it will be a fiduciary act when the rule becomes applicable, on April 10, 2017. That means the referral fee may be a prohibited transaction. [Read More]

 

ERISA VISTA: Mastering Fiduciary Compensation

The compensation rules are complex, but it helps to understand that they center around three concepts—that they be: level, reasonable and neutral. The compensation rules also impact your firm. However, this column focuses on the rules that impact you. [Read More]

 

NEXT: Fiduciary Fitness 

Fiduciary Fitness: Government Plans Will Receive Face-Lift

Governmental employers and tax-exempt institutions operate under significant restrictions when offering nonqualified deferred compensation (NQDC) plans to management and other key employees. After signaling to these employers that further restrictions were in the offing, the Internal Revenue Service (IRS) recently issued a package of proposed regulations revamping the rules governing so-called “ineligible plans” or “Section 457(f) plans”; the rules are, in fact, more liberal than anticipated and will make it easier to design and operate these plans. [Read More]

 

Fiduciary Fitness: Burden of Proof

A recent case that defense attorneys likely believe is an example of the maxim “bad facts make bad law” is Estate of Barton v. ADT Security Services Pension Plan, for which a request for rehearing was recently denied. The facts of the case are straightforward; the implications of the decision are not. [Read More]

 

Fiduciary Fitness: Raising the Plaintiffs’ Bar

As Willie Sutton, the prolific bank robber, said, “Go where the money is … and go there often.” The recent crop of excess fee cases include a subset of lawsuits against banks and financial institutions that sponsor 401(k) plans making their own products available on the investment menu of an in-house plan and utilizing subsidiaries to serve as the plan’s trustee and recordkeeper. [Read More]

 

Fiduciary Fitness: The New Fiduciary Rule

The wide net of fiduciary advice would be unworkable and disrupt the delivery of plan services by providers unwilling to assume fiduciary obligations were it not strategically narrowed by a half dozen exclusions from the fiduciary definition. If a provider satisfies the conditions under one of these exclusions, it will not be deemed a fiduciary even when providing investment-related recommendations to retirement clients. [Read More]

 

NEXT: Compliance Consult

Compliance Consult: Fee-Only Fiduciaries

The DOL points to FINRA guidance as to articulating the meaning of “recommendation,” though it stops short of adopting that definition itself. Further, the final rule allows an adviser to provide “investment education” about distributions and rollovers without being deemed a fiduciary, for providing “investment advice,” but this educational exception may be narrowly interpreted by the DOL or a court. [Read More]

 

Compliance Consult: 'Fiduciary' vs. 'Suitability'

On the surface, the ERISA and FINRA standards are different. ERISA requires that an adviser act as a “prudent expert” when making a recommendation, while FINRA requires that the adviser “have a reasonable basis to believe” that a recommendation is “suitable.” However, there is commonality between the two regulators’ guidance in terms of what factors might be considered in determining whether a recommendation is prudent or suitable. [Read More]

 

Compliance Consult: The SEC Is Watching

In many situations, the courts and the SEC take the position that an adviser can fulfill his duties under the Advisers Act by adequately informing a client of a conflict and receiving the client’s informed consent. Of course, many advisers take additional steps to mitigate conflicts. For instance, an adviser may be “walled off” from other professionals in the organization, so that he is less likely to be put in a position where he will fail to act in his client’s best interests. [Read More]

 

Compliance Consult: Advisers’ Sales Partners

If sellers fail to qualify for the independent fiduciary exception or some other exception, they likely will be considered fiduciaries in connection with a sales transaction involving an ERISA account or IRA. Therefore, sellers must comply with an exemption under ERISA or the IRC, as applicable. [Read More]

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