Simplified Plan Design and Tools Help Employees Meet Retirement Goals
How to help employees retire by simplifying defined contribution plans
Interviewed by Leslie Stevens-Huffman
Plan sponsors have probably heard about the plight of baby boomers who haven't saved enough for retirement or don't understand the long-term impact of under-performing funds on retirement plan account balances. Unless sponsors wake up and address these issues, they could be blind-sided by a slew of new regulations or a class action lawsuit, since plan sponsors, as fiduciaries, are legally responsible for acting prudently and solely in the interest of the plan's participants.
Despite the good intentions of plan sponsors, many participants are struggling to manage their investments and meet their savings objectives. So, savvy sponsors are simplifying plan design and investment options to make it easier for employees to participate in the plan, save more and make prudent choices.
"Employers not only have a moral and legal obligation to help employees retire with financial security, but fiduciaries and trustees can be held personally liable," says Kyle Pifher, Principal and Practice Leader for Recordkeeping and Administration at Findley Davies. "Unless plan sponsors embrace their responsibilities and take action, they're going to be bombarded by tough questions from their participants, particularly with respect to the new fee disclosure regulations coming out soon."
Smart Business spoke with Pifher about the regulations affecting plan sponsors and how simplified plan design and tools can help employees meet their financial goals and retire with financial security.
What precipitated the new fee disclosure regulations?
Most plan sponsors, along with their participants, were challenged with determining the overall cost of the plan, both at the plan level and at the individual participant level. The Department of Labor's ERISA Section 408(b)(2) regulations require providers of certain services (known as 'covered service providers') to disclose to plan fiduciaries certain information concerning the services and related compensation. In essence, the law requires covered service providers and employers to close the communication gap and provide greater transparency around the costs related to investments, recordkeeping and administration, trust and custody, investment advisory, and other plan-related fees and administrative charges associated with defined contribution plans.
How can plan sponsors improve communications and close the gap?
Companies can begin by instituting a retirement plan committee comprised of HR and finance representatives, outside experts, select executives and perhaps a diverse group of associates. The committee's charter is to make decisions that are in the best interest of the plan participants. Responsibilities include oversight of plan operation, plan design, investment selection and monitoring, participant education, and overall compliance with the rules and regulations that govern retirement plans. The ultimate goal of the plan sponsor and committee should be to help their employees reach a secure retirement. Like anything else, a communication and education campaign should begin with a focused strategy based on the demographics of the company.
How can employers promote financial literacy and ease investment decisions for employees?
Many employees don't have the time, interest, or knowledge to engage in an educational process, particularly involving investments. Many sponsors are now simplifying investment options and leveraging planning tools that don't require a lot of action from employees. Many sponsors are regularly reviewing fund performance and altering investment options, and many are promoting the use of retirement date-based and risk-based models, thereby simplifying the decision-making process for employees. Plan sponsors should place a great emphasis on the appropriate savings rate for the individual, achieving a realistic rate of return based on their risk level, understanding the gap that may exist between their current situation and their retirement goal, and what steps can be taken to close or eliminate that gap.
How can plan design encourage savings and promote financial independence?
Many employers have implemented automatic enrollment and automatic escalation of employee deferrals to boost participation and employee savings rates, since history shows that few employees opt out once they're automatically enrolled in the plan. In fact, some experts speculate that enrollment and deferral rates may be regulated or mandated in the future. Statistics show that matching contributions also influence employee deferral rates. During 2008 and 2009 when some sponsors suspended their matching program, many participants ceased their deferrals. Since it's clear that employers have a legal and moral obligation to help employees plan for their retirement, a continuous review of your plan's design and employer contribution rates should be conducted to encourage positive behaviors.
What else can employers do to help employees retire with dignity?
Employees must understand the importance of saving early for retirement at a level that helps them reach their goal. Plan sponsors with successful retirement programs are proactive in communicating to their employees, and often leverage the expertise of professionals that deliver these services. Many employers engage independent investment advisers, retirement plan consultants, and communication specialists to design a communication and education program specific to their retirement plan. In addition, personalized communications can help tailor those messages for each employee to show them exactly what their retirement savings strategy means for them.
2011 Smart Business Network Inc. Reprinted from the June 2011 issue of Smart Business Akron/Canton