Evaluating Cost-Benefit of Service Providers

An article from Plansponsor in January 2015 listed several areas plan sponsors should consider when evaluating plan costs, especially when shopping for plan recordkeepers and third-party administrators.  The article warns that it is important to consider the value received from service providers and not just to shop for the lowest price.  The true fiduciary responsibility lies in achieving the best value for the money, not just the lowest dollar amount.  Greater value might be found in a recordkeeper that charges slightly more than other service providers but provides automated reporting and participant support services, such as education and financial wellness tools, which free up time and effort of the plan sponsor and increase participant satisfaction and participation in the plan.

Is your plan considering changing service providers?  What parameters are being used to choose the best provider for your plan?

The Importance of Communicating the Employer Match

A recent article from the March 2015 Employee Benefit News outlines areas plan sponsors can focus on to improve participant participation.  The article notes that how you phrase the company match to participants matters.  Principal Financial Group reported that those employers that matched 100% up to 2% of pay had total average contributions among its employees of 8.8% but employers that phrased their match as 25% up to 8% of pay had average employee contributions of 9.1%.  Both phrasings result in the exact same amount of match from employers but the later requires increased contributions from employees to receive the full match.

Has your plan considered modifying their matching formula to motivate participants to save more?

Survey Reveals Increased Concern Over Retirement Crisis

The recent survey from the National Institute on Retirement Security reveals a slight improvement in Americans’ concern over the retirement climate despite an overwhelmingly negative outlook at the system as a whole.

  • 74% of Americans are concerned that they won’t have enough money in retirement, down from 85% in 2013
  • 86% of Americans believe we face a retirement crisis
  • More than 80% of those surveyed believed that all employees should have a pension
  • 67% of Americans would be willing to take less pay in exchange for guaranteed retirement income (pension)

Have your plan participants expressed their concern over retirement security or interest in a defined benefit (pension) plan?

Supreme Court to Hear Tibble v. Edison International

The Supreme Court heard arguments Tuesday, Jan. 24, 2015 regarding Tibble v. Edison International (See our November 17, 2014 blog post), a case that might have significant impact on the fiduciary responsibilities of plan sponsors, particularly regarding plan costs and fee disclosures.  According to a recent article in the Wall Street Journal, this is only one of 13 lawsuits in the last several years to be brought against large U.S. companies for failing to act in the best interests of their retirement plan participants.   At the same time, retirement plans are facing greater scrutiny by the U.S. government, including the Obama administration, Labor Department, and Securities Exchange Commission.  Trade groups such as National Association of Manufacturers have voiced their support for Edison International, arguing that if the Supreme Court finds favor with the plaintiff, it would place a greater fiduciary burden on the plan sponsor and open up other plan sponsors to lawsuits.

Has your plan kept up with recent concerns regarding plan fiduciary responsibilities?

Plan Participant Files Lawsuit Against Aegon

According to an article from Plansponsor, a participant of the Aegon Companies Profit Sharing Plan has sued the plan sponsor, Aegon USA, an investment company, for failing to meet the ERISA requirement to act in the best interests of plan participants.  The suit alleges that Aegon designed the plan with layers of unnecessary fees, the majority of which are paid to Aegon, which lead participants to pay higher fees than other plans of a similar size. The suit claims that, when compared to benchmarking data provided by BrightScope and Investment Company Institute publications, Aegon’s Profit Sharing Plan pays three times the amount of fees than other plans with a similar amount of assets.

The lawsuit claims that the plan’s collective trusts and pooled separate accounts do not have a true managed feature but instead simply invest in an Aegon mutual fund of the same asset class and strategy as the trusts and pooled separate accounts.  This strategy would burden the investment with an unnecessary management fee which Aegon receives.  In addition, the suit claims that instead of paying the participant any additional interest earned on liquidated investments, Aegon uses the interest to pay plan expenses.

Has your plan recently compared plan fees to available benchmarking data?

Solutions to the Millennial Problem

For millennials, workers ages 22-39, participation in retirement savings plans has increased to more than 73%.  However, more than 30% of those participating are saving less than what is needed to maximize their company match.  A recent article from Employee Benefit News provided some recommendations for plan sponsors to engage the millennial generation and help spur them to increase their deferral rates.   These recommendations include adopting automatic deferral increases, targeted communications, and employing new online tools.  Focusing millennials on the big picture of how much they will have saved for retirement at their targeted retirement date rather than on their current savings rate and engaging participants competitive spirit by sharing how much others of the same generation are saving may help to bolster the millennials’ desire to save.

Are millennials taking advantage of the full company match in your plan?  Does your plan offer tools to motivate participants to increase deferrals?

ETF Benefits & Disadvantages

A recent article from Employee Benefit Advisor explored the benefits and disadvantages of exchange –traded funds (ETFs) which have experienced a recent boom in retirement planning.  ETFs are funds that follow indexes like the Dow Jones & the S&P 500 by holding the assets such as stocks, commodities, and bonds that are tracked by the indexes.  ETFs may only be purchased or sold using a brokerage account.  The advantages of ETFS include:

  • Lower expense ratios than most mutual funds
  • No minimum investment requirement
  • Daily trading is available

The disadvantages of ETFs:

  • The trading process might be difficult to follow for inexperienced investors
  • Frequent trading of ETFs can increase expenses

Does you plan investment offerings include ETFs? Is the plan sponsor considering adding ETFs to your plan?

Contribution Limits for 2015 401(k) Plans

The Maximum Employee Elective Deferral and Catch-Up Contributions limit (for those participants 50 and older) have each increased by $500 from the 2014 plan year.  The Maximum Deferral for both employer and employee combined contribution increased by $1,000.  This means that plan participants may choose to increase their contributions for the 2015 plan year while plan sponsor contribution limits will remain the same as the 2014 plan year.

The Employee Annual Compensation Contribution calculation and the Top-Heavy Highly Compensated Contribution calculation limit also increased for the 2015 plan year.  Note that the Top Heavy Key Employee Compensation Contribution calculation limit remains the same as the 2014 plan year

Maximum Employee Elective Deferral $18,000
Catch Up Contribution (50 and older) $6,000
Maximum Deferral (employer & employee combined) $53,000
Annual Compensation Contribution Calculation limit $265,000
Top Heavy Key Employee Compensation Contribution Calculation limit $170,000
Top Heavy Highly Compensated Contribution Calculation limit $120,000

Plan Liabilities- Tribble v. Edison International

A recent article from Employee Benefit News outlined the potential impact of Tribble v. Edison International, a recent case that the Supreme Court has agreed to hear, on fiduciary liability.  The plaintiffs in the case argue that the fiduciaries chose mutual funds with higher fees when cheaper alternatives were available. The key concern of the case is that these mutual funds were chosen more than six years prior to the plaintiffs’ suit, exceeding what would typically be the six-year ERISA statute of limitations.  The plaintiffs would argue that because fiduciaries have a duty to continually monitor investments in the fund they should be able to hold the fiduciary accountable for the losses due to excessive fees despite the six year limitation on the initial decision to include the mutual funds with higher fees.

According to the article, if the Supreme Court rules in favor of the plaintiffs, plan fiduciaries’ exposure to liability would increase because plan participants could bring suit against plan fiduciaries for events that happened 10 or 15 years ago if they can prove there are lasting effects from the fiduciaries’ decisions.  To reduce the liability to fiduciaries regarding the selection and monitoring of investments, it is recommended fiduciaries document the initial reasoning behind the selection of investments and document the monitoring process and evaluation of investments.

As plan fiduciaries, do you have records of why one investment was chosen over another?  Are there records of annual investment evaluations and benchmarking?

The 401(k) and Money Market Funds

According to a recent article from Employee Benefit News, the U.S. Securities and Exchange Commission has issued new amendments to the rules regarding money market mutual funds.

  1. Money market funds managed by mutual fund families will be required to allow their net asset value (NAV) to fluctuate based on the underlying value of the investments in the fund.
  2. Money market funds will have the ability to charge redemption fees and halt redemptions during certain periods of time in order to better manage the portfolio

What this means for participants is that selecting a money market account may no longer guarantee participants won’t lose money by investing in a money market fund.  Money market funds have traditionally been valued at $1 per share and typically have not experience redemption fees.

These changes will not go into effect until the fall of 2016 and keep in mind that government money market funds do not fall under these new amendments.

Does your plan have participants that will be affected by this change more than most?