Change is a reality of life.
Establishing and maintaining benefit programs that are competitive and distinctive requires an awareness of trends in the marketplace, in the population, in the legislative and regulatory worlds, and in the needs of the workers that your plan sponsor clients hope to attract and retain. While product development and enhancements can certainly play a role, there are also the overarching issues that drive and shape those developments.
Here are 10 of which you should be aware.
Much has been written about the impact of the retirement of the Baby Boomers, the so-called Silver Tsunami. Every day, hundreds—even thousands—in that generational bloc do indeed leave the ranks of the employed, though not always by choice. Still, many are staying—or making plans to stay—longer than they might have chosen in less-stressful times. Indeed, the Boomers increasingly find themselves with a new labeling—the “sandwich” generation—in which they are not only focused on their own financial concerns, but those of their parents and children as well. This may give participants longer to save for retirement (and less time to spend in retirement), providing those still-meager accumulations a much needed cushioning, and it may also ameliorate some of the nascent concerns about talent transitions. But it’s not like that was part of “the plan.”
The “To Versus Through” Debate
Target-date funds have long offered an apparent simplicity of design and implementation that have made them appealing to plan sponsors and plan participants alike, a unique combination that allowed participants to do the “right” thing (letting professionals manage their money and rebalance it on a regular basis) while, for the very most part, doing nothing at all. Ditto plan sponsors, who stood to benefit from the application of the protective umbrella of the Pension Protection Act’s qualified default investment alternative (QDIA) status for an investment option that required no special participant education, involvement, or attention.
Of course, the 2008 market brought to light vast differences in the philosophies underpinning these designs in terms of asset allocation and glide path (in fairness, those were in evidence in 2006/2007 when more-conservative models were ridiculed for their lagging returns). Much of that difference was later explained as a function of whether the glide path was designed to take the investor to their anticipated retirement date—or past it (ostensibly till death).
The debate is not yet resolved, nor perhaps can (or should) it be. Still, ahead of changes on the regulatory front, fund manufacturers appear to be making a concerted effort to be clearer about those assumptions; and, if that does not make for an easier decision, it nonetheless makes it more obvious that a “decision” must be made.
The Match “Catch”
One of the more troubling trends of the past year was an apparent uptick in the number of employers cutting or suspending their 401(k) match. Coupled with the toll that the financial crisis had already taken on many defined contribution accounts, the retirement security of many participants (who were doubtless happy to have a job, even without a 401(k) match) was certainly under pressure.
Of course, it was never as bad as the headlines suggested. In fact, nearly 80% of the nearly 6,000 respondents to PLANSPONSOR’s annual Defined Contribution Survey said they had no plans to reduce, suspend, or eliminate their match, and, of the few who did say they were considering reducing their match, most were planning to reinstate it this year. Perhaps workers will no longer take such things for granted because, after all, “free” money really isn’t.
While company-stock-related lawsuits still seem to be the most common, that initial series of revenue-sharing suits is still “out there.” For the very most part, the plaintiffs have not fared well, but two widely publicized cases—one a $16.5 million settlement by Caterpillar, and a second involving Wal-Mart, where last December the 8th U.S. Circuit Court of Appeals found triable issues of fact in the case—are likely to keep plan fiduciaries “jumpy.”
Now, there are plenty of unique aspects to the Caterpillar settlement to differentiate it (see Tractor “Trailer”) the firm’s investment management arm was running the funds in question); and while the allegations against Wal-Mart were not dismissed, they have not yet been adjudicated (see The Benefits of the Doubt). Still, the omnipresent threat of litigation, coupled with new Form 5500 disclosures, are sure to keep things stirred up.
Ah, yes—those new Form 5500 disclosures. Out of sight may have been out of mind, but beginning with the 2009 plan-year filings, the Labor Department has broadly expanded the requirements for reporting compensation earned by plan service providers on Schedule C of the Form 5500 to explicitly require the reporting of both “direct” and “indirect” compensation earned by plan service providers. And it is clear that the DoL views compliance with the Schedule C reporting requirements as part of a fiduciary’s obligation to evaluate the reasonableness of a service provider’s total compensation—at the same time that it stands to gain a better ability to use this data, which is now also to be filed electronically.
While many continue to talk about the wisdom of modifying defined contribution designs to more closely resemble the better attributes of their pension predecessors, trillions of dollars (and future benefits) still reside in those traditional defined benefit plans. Caught in the cross-hairs of the financial crisis, more stringent accounting rules, and tighter funding requirements, these programs are responding in a variety of creative ways: some outsourcing more, others less, some taking a more active stance in asset allocation, others opting for a stronger focus on liabilities. But, regardless, most are asking for—and by most accounts, receiving—fresh insights and inputs from the marketplace. That could be an opportunity for enterprising advisers willing to make the commitment.
The End in Mind
For years the retirement plan industry has focused on trying to help participants save as much as they could—all the way acknowledging that the real challenge was likely to be helping them live on that accumulated savings. As it turns out, a new generation of products has emerged that not only will help them do that, but will help them begin making those investments/preparations while they are still in that accumulation “phase.”
Issues in product design (or perceptions about issues in product design) remain, but those gaps are closing (including the gap in perceptions), and the prospects for future market turmoil seem likely to keep these offerings high on plan sponsor radar screens. And let’s not forget that the DoL has been asking for information on “arrangements that provide income after retiring.” (see IMHO: Safety "Knot?")
What constitutes advice—and how those who can offer it can get paid for doing so—has long been a controversial issue. Earlier this year, the DoL took a step back from the position it took in the final regulations on the subject put together—by the DoL—in 2008 before being halted, and then withdrawn last November by the new Administration. The new proposed regulations largely seem to restore the status quo in favor of level-fee advice only. It’s not clear that is the end of things, nor is it (yet) clear that that will expand access to advice by participants. But it is clear that there is a “new” direction on advice (see IMHO: “Access” Points).
The 2008 elections brought in more than a new President and big majorities in Congress for his party; it also brought in new leadership at various agencies that have a large impact on retirement plans. That has already brought about shifts in direction on things like participant advice as well as a renewed interest in retirement income, while the financial crisis has reinforced the need for better disclosures on offerings like target-date funds.
By most accounts, much of the “oxygen” in Washington for the past year has been sucked up (out?) by health-care talk and proposals. With a bill now signed, employers can begin to focus on what that means for their programs—and their workers. What that will mean over the next decade is, however, anybody’s guess.
—Nevin E. Adams, JD