The Option to Embrace Best Practices
You cannot wear two hats at once. You cannot look out for the best interest of an employer and an employee at the same time. But there is a third hat that can bridge the gap — one woven out of the threads of best practices.
You have the option to embrace best practices, Fred Reish, Partner at Drinker Biddle & Reath LLP told attendees at the recent Plan Sponsor Council of America (PSCA) Annual Conference held in Scottsdale, AZ. In his presentation, “The New Fiduciary Rule – Compliance and Best Practices for Plan Sponsors,” he offered insights on fiduciary compliance and risk management, as well as best practices and what plan sponsors are focusing on.
You Are a Fiduciary
No matter the fate of the Department of Labor’s (DOL) fiduciary rule, the bottom line remains the same. “You are what you always were — a discretionary fiduciary,” said Reish. “Every one of you should have a microscope and a periscope in fulfilling fiduciary duties,” he continued, so as to be aware of fine details now and of what may be on the horizon. And he added that now, “the expectations have been elevated.”
Reish outlined three steps for fiduciary protection:
1. Review expense ratios of investments.
2. Obtain lowest cost available share class.
3. Monitor compensation of the recordkeeper.
“This is where the action is,” said Reish. And he added that one does have “a duty to ask if there are lower-cost share classes available” to the plan, Reish said.
But the demands of the law and regulations do have limits, Reish also indicated. He observed that just because one makes oneself aware of costs does not mean it is the only consideration in play. “You don’t have to have the cheapest investments,” he remarked.
Reish also told attendees that “The law doesn’t say you have to be an expert.” However, he said, “If you don’t have the expertise, the law does expect you to hire people who do.” Accordingly, he shared additional fiduciary considerations:
- Don’t use conflicted advice.
- Review and improve cybersecurity.
- Monitor target date funds.
Reish also suggested critical questions to ask potential advisors:
- What percentage of your work is for retirement plans?
- How many plans of our type and size do you advise?
- Do you have any conflicts of interest and are you relying on any prohibited transaction exemptions?
- Are you a fiduciary under ERISA?
- Do you agree to monitor the plan?
And, he added, “get the answers in writing.”
A best practice that has come into sharp relief in recent years is protecting plan and participant data from cyber threats. Reish recommended putting in place comprehensive data security protocols, such as limiting access to confidential information to only those who need such access, and comprehensive incident response plans. He also suggested that plan sponsors regularly:
- check to make sure that employees meet comprehensive data security protocols;
- review security protocols to be sure that they meet current risk parameters and assessments;
- conduct security training sessions for employees; and
- test comprehensive incident response plans and review them to maintain their continued effectiveness.
Reish cited a 2015 study by CAPTRUST Advisors which found that 45% of plan sponsors selected the proprietary target-date fund (TDF) series offered by their recordkeeper. He considers it “simply too big a coincidence” that in that many cases, the most appropriate TDF series for a plan sponsor is the one from their recordkeeper. But that also means that just over half — 55% — employers are starting to pick TDFs other than those their providers offer.
Reish suggested that fiduciaries consider the following regarding TDFs:
- Where is your participant money going?
- Is your TDF designed to be aggressive, moderate or conservative?
- Is that design appropriate for your workforce?
- How are your TDFs performing relative to an “appropriate” benchmark?
Reish noted that auto features can have a dramatic effect on participation and savings rates, citing a study in which the Defined Contribution Institutional Investment Association (DCIIA) found that only 11% of plans had participation rates of more than 90% before they implemented automatic enrollment; 46% did after implementation. The effect on savings rates was even more pronounced. Just 44% of plans that had neither auto enrollment nor auto escalation had savings rates above 10%; 67% had such rates after implementing auto enrollment only, and 70% did after implementing both auto enrollment and auto escalation.
Reish noted that T. Rowe Price found that two-thirds of plans they surveyed in 2016 agree that they have a responsibility to help plan participants achieve retirement preparedness in order to have adequate income during retirement. And a whopping 99% agreed that they are at least somewhat responsible for that.
One step Reish suggested is to provide retirement income projections and gap analysis to participants. A factor affecting this, he noted, is that most Americans underestimate life expectancy, putting themselves at risk of outliving their savings. This is exacerbated by widespread poor understanding of how much can be safely withdrawn from retirement funds annually.
Additional steps Reish suggested include:
- Provide retirement education to participants age 50 and older.
- Include a retirement income product in the plan.
- Allow terminated participants to continue in the plan and take monthly distributions.
- Offer a financial wellness program to participants.