Developing white-label and spend-down strategies for all DC plans is important and carefully explained here

January 16, 2013 — 5:25 AM UTC by Guest Columnist Amy Reynolds

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Brooke’s Note: Mercer knows retirement plans. We knew that. We were less certain the pensions giant knew how to produce the executive memo version of its knowledge. We still don’t. But we do know that Amy Reynolds of Mercer can take a library of knowledge and late-breaking developments and distill it into an RIABiz column. Thank you, Amy.

With defined-contribution plans continuing to assume greater importance in employees’ achieving retirement security, 2013 is shaping up as a year when many sponsors will take a fresh look at their plans’ objectives, investment options and communications with participants.

These days, it’s no longer a situation where DC plan sponsors can simply “set it and forget it.” The trend is for plan sponsors to regularly evaluate whether their DC plans are successful for both the organization and its employees. As a result, plan sponsors are more active in reviewing plan objectives, more prescriptive when it comes to investment options, and more invested in communicating with employees who want to understand how to achieve their own retirement income goals.” See: 9 things advisors to 401(k) plans must do to keep clients out of hot water.

Mercer believes that there are 10 steps that DC plan sponsors should take in 2013:

1. Define success: Optimize each step leading to “better” retirement outcomes and spend-down strategies

A successful DC plan hinges on four factors: increasing participation, increasing the savings amount, investing appropriately and spending wisely. Employers can optimize their plans through skillful, intentional intervention based on the plan’s demographics and employee behavior. Costs should be minimized where appropriate to increase the “value” of each factor.

2. Recalibrate your default option: Enrollment, deferral escalation and investments

Re-evaluate the level of auto-enrollment, auto-escalation, and re-enrollment in driving participant behavior, with the goal of accumulating sufficient retirement assets. The default investment option should provide a professionally managed, well-diversified, single-option solution for participants who cannot or do not want to make asset allocation and rebalancing decisions on their own. Review the appropriateness of your default option for your unique participant population. If you offer target risk funds, consider switching to target date funds. If you offer off-the-shelf target date funds, re-evaluate the asset allocation glide path construction, or consider offering customized target date funds based on your plan demographics. See: What Schwab’s new 401(k) study tells about the demand for financial advisors to manage retirement assets.

3. White-label your investment options: Drive participant behavior

Many participants build their portfolio based on an investment option’s name recognition (manager selection) rather than focusing on asset allocation. Consider “white labeling” your investment options designed for the plan. By this, we mean attach a descriptive name to the option that will help participants make a selection that reflects risk tolerance and diversification in allocating their assets. This can mean customizing a fund particularly for the plan or simply choosing well-managed funds and removing the “brand label.” A custom approach allows you to offer fewer investment options by building a well-diversified portfolio that otherwise may be difficult to offer on a stand-alone basis. You also have the flexibility to add or replace managers without the communication and administrative headaches with a branded option. See: Fidelity reports 57% boost in 401(k) sales as it sets its sights on smaller plans and advisors.

4. Maximize the impact of your communications strategy: Assess the right content and delivery

Many plan sponsors offer a tiered investment structure to help participants make better investment allocation decisions. Make sure that the investment options are communicated by tier in the participant education/enrollment materials and on the plan’s website/online tools. See: Which three of DOL’s new 401(k) rules represent the biggest land mines for financial advisors and plan sponsors.

5. Help participants understand their retirement income: Anticipate the impact of adding projections to participant statements

Participants can’t relate to large lump sum amounts in the distant future. Tell them how much monthly income, in today’s dollars, they can expect in retirement given their current balance, contribution rate, and years to expected retirement. Educate on how actions they take now may affect that outcome. See: Dimensional Fund Advisors tells RIAs it’s getting active in its quest for 401(k) assets.

6. Develop a spend-down strategy: Don’t leave participants’ retirements at risk

As important as asset accumulation is in building a nest egg for retirement, it is also important to help participants think through the spend-down or withdrawal strategy they will follow upon retirement. Handing retirees a lump sum check and wishing them “good luck” doesn’t cut it. While we’d all like more-developed retirement income tools and additional regulatory guidance, we can’t put our near-retirement employees on hold indefinitely. It’s time to start crafting real solutions for the spend-down challenge so that participants don’t outlive their retirement assets. See: Joe Duran tries out novel financial planning strategy on himself and his wife.

7. Complete a compliance audit: The IRS is a-knocking

With so much governance focus on fees, many plans have gone for years without a compliance audit. With both the Internal Revenue Service and Department of Labor increasing their focus on compliance, now is a good time to remedy that. Best practice includes checking all documentation and communications, as well as administration and transactions. See: A 401(k) plan dethroning deferred: The DOL-mandated disclosures may not set any legacy palaces on fire near-term.

8. Understand fiduciary responsibilities: Know the limitations of your record keeper’s role and the responsibilities you retain

While it may be convenient to let your vendor “take charge” of your plan, never forget that when the DOL, IRS or plan litigator comes knocking, it will be at your door, not your record keeper’s. You need to take control of your plan and ensure that decisions are made from an unbiased point of view. See: Which three of DOL’s new 401(k) rules represent the biggest land mines for financial advisors and plan sponsors.

9. Focus on fees: Investments, record keeping and much more

New fee disclosure regulations — 408(b)(2) and 404(a) — have led to increased scrutiny of all plan fees. Review and benchmark investment and record-keeping fees separately, rationalize the fee allocation methodology and document your review process to support a strong governance framework and help defend against excess-fee litigation. Evaluate moving from mutual funds to collective trusts and/or separately managed accounts in order to reduce investment fees. See: After years of DOL bluster, new 401(k) rules appear to make RIAs’ low expenses look higher than those of brokers.

10. Assess a discretionary relationship: It’s not all or nothing

Appointing an advisor to provide discretionary delegated solutions for a plan in its entirety, or for select investment options within a plan, transfers more fiduciary responsibility to the advisor and may result in time savings for management, as well as the potential for increased diversification, improved performance and decreased costs. Determining which governance structure is right for you is a critical component of the DC plan management process.

Amy Reynolds is a partner with New York-based Mercer LLC’s retirement business and has more than 20 years’ experience at the firm. She is responsible for assisting clients with the design and administration of their defined-contribution plans and has served as lead consultant for large and jumbo clients in the eastern United States. Amy primarily focuses on vendor management, plan design and administration, and administrative compliance issues. As a member of Mercer’s national defined-contribution consulting group, she participates in setting the direction for the business and contributes to the creation of intellectual capital.

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Elmer Rich III said:

January 16, 2013 — 11:04 PM UTC

These are some good standard steps. More concerning is some research we have been studying suggesting the serious problems in administrator and participant fund selection – precisely the problem advisors can help plan sponsors and participants with. In brief, here is some of what we learned with more coming as we go thru the research papers:

“....It is interesting to note why these differences in return occurred. The bulk of the differences in Sharpe ratios occurred because the plans had much more risk than a portfolio comprised of the 8 RB indexes. The problem lies not in plans selecting individual mutual funds that perform badly, but rather: in plans offering too few investment choices, choices with high risk, choices that are too highly correlated.

This means that, for 62% of the plans, the plan participants would be better off with additional investment choices. In fact, if these plans spanned the 8 RB indexes, participants’ average return would improve by 3.2% per year, which is 42% of the return on an 8-index portfolio with the same level of risk. While significant on a 1-year basis, over a 20-year period (a reasonable investment horizon for a plan participant), the cost of not offering sufficient choices makes a difference in terminal wealth of over 300%...”

More is posted on our blog – We are glad to share the papers and citations and will be writing a full review.

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