Three ‘Scary’ Things That Give Plan Sponsors Chills

Halloween is the time of year when one’s thoughts turn to trick-or-treat, ghosts and goblins, and things that go bump in the night—and, for plan sponsors, and those who support them, a good time to think about the things that give us pause—that cause a chill to run down our spine… 

Things like…

Changing Providers

OK, they may not exactly be “scared” of changing providers, but it’s certainly not a process for the faint of heart—particularly with all of the competing focus priorities confronting plan sponsors on a daily basis. Industry surveys routinely point to a certain amount of regular provider “churn”—indeed, by some counts as many as 10% of the plans change providers in any given year. That said, industry surveys (and excessive fee litigation) are replete with indications that the vast majority of plans not only don’t change recordkeepers, but may not even undertake a formal review of services, fees and capabilities.

Now, any plan sponsor who has ever gone through a recordkeeping conversion knows that, however smooth the transition, and regardless how improved the experience on the new platform, moving is a lot of work. And, as with relocating your home, the longer you have been in a particular location, the harder it seems to be (there are inevitably a lot of “skeletons” in those closets). Knowing that, it’s little wonder that many plan sponsors make those changes only under a duress of sorts, forced by poor service, a lack of capabilities, (relatively) high fees—and sometimes more than one of the above. 

And that, of course, means that the transition, however badly needed or desired, will likely be rougher—and take longer—than anticipated or desired (see also 3 Things Plan Sponsors Should Know About Changing Providers). And who knows how many intentions to pursue a review have simply petered out on the altar of “not enough time” to do so?

ESG

In fairness, it’s probably not Environmental, Social & Governance (ESG) investing per se that seems to “scare” plan sponsors from offering these options, but rather concerns about their level of accountability for choosing to do so. Indeed, there’s plenty of survey data to suggest that workers, particularly younger ones, want these options. That said, workable, consistent definitions of ESG remain fluid, and perhaps as a result, the adoption rate among DC plans has been tepid—and the take-up rate among participants who have the option is even lower. Indeed, fewer than 3% of plan sponsor respondents included that option on their plan investment menu, according to the Plan Sponsor Council of America’s 63^rd Annual Survey of 401(k) and Profit Sharing Plans, and only about 0.1% of plan assets were invested in those options. Those looking for a counterpoint might note that ESG options were more common among the largest plans (those with more than 5,000 participants) and the smallest (fewer than 50 participants), where 4.2% and 4.4%, respectively, offered that option.

The hesitancy likely comes (at least in part) from confusion about how the Labor Department views these options, or more precisely the prudence of including them as a participant investment option. For a long time there had “only” been Interpretive Bulletins (IBs) (in 1994, 2008 and 2016) and, more recently, a 2018 Field Assistance Bulletin (FAB) on this subject. And while the 2016 IB was read as encouraging consideration of ESG factors (or at least not discouraging it), the 2018 FAB was widely viewed as pulling back on that stance, in the process establishing what had been called the “all things equal” standard, which meant that so long as two otherwise identical investments met all the requisite prudence standards, a fiduciary could (prudently) pick the one that (also) had ESG attributes. 

And then, roughly a year ago, the Trump administration weighed in with a proposed rule that was harshly critical of ESG (unless a “pecuniary”—that is, financial—rationale was evident)– and ultimately a final one that moved off that stance a bit, but still left room for caution. 

After first announcing that it had no intention of enforcing that rule, the Biden administration’s DOL has recently provided a (new) proposed rule that—arguably—puts these options in a more positive light. Indeed, in its current form it actually seems more supportive than the “all things equal” standard put forth by the Obama administration, though it remains a proposed rule, with comments being taken for consideration in shaping a final version.    

All of which arguably (still) leaves plan sponsors contemplating a shift to ESG with a lingering uncertainty. They may not be “scared,” but one can certainly understand a bit of as-yet-unresolved apprehension.

Lifetime Income Options

Speaking of apprehension, while DC plan fiduciaries aren’t exactly scared of retirement income, DC plans have long eschewed providing those options. That despite the unquestioned reality that participants need help structuring their income in retirement—and little doubt that a lifetime income option could help.

There are in-plan options available in the marketplace now, of course, and thus, logically, there are plan sponsors who have either derived the requisite assurances (or don’t find them necessary) or feel that the benefits and/or participant need for such options makes it worth the additional considerations. On the other hand, those industry surveys notwithstanding, for the most part participants don’t seem to be asking for the option (from anyone other than industry survey takers)—and when they do have access, mostly don’t take advantage. Let’s face it, even when DB pension plan participants have a choice, they opt for the lump sum. 

It’s ironic that programs designed to provide retirement income pay so little attention to the realization of that objective; only about half of DC plans currently provide an option for participants to establish a systematic series of periodic payments, much less an annuity or other in-plan retirement income option, and that’s despite the 2008 Safe Harbor regulation from the Labor Department regarding the selection of annuity providers under DC plans (which was designed to alleviate, though it did not eliminate, those concerns), not to mention a further attempt to close that comfort gap in 2015 (FAB 2015-02).

Proponents are even more hopeful that the SECURE Act’s provisions regarding lifetime income disclosures (though many recordkeepers already provide some version of this), enhanced portability (a serious logistical challenge if you ever want to move from a recordkeeper that provides the service to one that doesn’t, though solutions are emerging that claim to have made progress on this front) and, perhaps most importantly, an expanded fiduciary safe harbor for selection of lifetime income providers, will—finally—put those “fears” to rest. We’ll see.

The Standard

Don’t get me wrong—there are plenty of things for ERISA fiduciaries—who are, after all, personally liable not only for their actions, but those of their co-fiduciaries—to be worried about. The standards with which their conduct must comply are (as one court has put it) “the highest known to law,” and with good reason. Prudence is often associated with caution, and fiduciaries generally find more comfort in the middle of the trend “pack” than on its fringes.

That said, the standard is to act (solely) in the best interests of plan participants and beneficiaries—and even though it may be “scary” from time to time… the alternative is surely worse…

- Nevin E. Adams, JD