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The retirement committee that typically oversees an employer's defined contribution (DC) retirement plan is responsible for deciding how the plan is to be administered and for selecting service providers. It must establish and agree to contractual terms with the selected vendors and then monitor the services provided to ensure that they are operating the plan in compliance with its provisions, regulatory requirements and contractual terms.
Seemingly small oversights can grow into costly problems if left uncorrected. In many cases, rectifying these mistakes offers plan fiduciaries an opportunity to improve plan management and save money. Below are common mistakes made by retirement committees and descriptions of how specific employers corrected them.
Mistake #1Not Changing When Change Is Needed
As plans grow, they might need to change providers to ensure that their needs are being met. For example, an organization that launches a 401(k) plan with a brokerage firm as both recordkeeper and investment advisor should, at some point, as assets grow, think about switching to a separate recordkeeper and investment advisor to gain independence, reduce administrative expenses and offer funds with lower expense ratios in the investment lineup. Some plan sponsors might resist changing, even though there might be much to gain. Going out to bid and transferring a plan to a new provider is never easy and requires a thorough understanding of the marketplace.
Employer's correction: An organization sought an assessment of its 403(b) plan's state. The resulting appraisal recommended taking a look at the DC marketplace for comparative evaluation of services, fees and investment alternatives. After a comprehensive vendor search, the organization decided to make changes to its plan, the most significant of which were eliminating two longstanding vendors and redesigning the investment options.
Because the current vendors had been in place for many years, the organization was concerned that employees would resist the changes and view the new program negatively.
Understanding that effective communications would be crucial to ensuring that the transition to a single new vendor and that new investment options proceed smoothly, the organization hired an independent advisor to:
• Communicate the plan and fund lineup changes.• Ensure that participants receive the education and information they need to use the plan effectively.• Help the participants appreciate the new program's many positive attributes.
• Communicate the plan and fund lineup changes.
• Ensure that participants receive the education and information they need to use the plan effectively.
• Help the participants appreciate the new program's many positive attributes.
The independent advisor took primary responsibility for drafting and finalizing certain key transition communications, including the initial announcement to employees and pre-announcement presentations to the board of trustees, union leaders and other key constituencies. It advised the organization on the communications aspects of plan implementation throughout the process, serving as the organization's resource for reviewing, evaluating and (where necessary) revising vendor-provided communications materials—including brochures, website content, transition flyers, investment flyers and answers to frequently asked questions—to ensure that they met the organization's needs and goals.
Mistake #2Offering Participants ‘Too Much Choice’
Many sponsors think that the more funds they offer their participants the better, but offering too many funds can lead to "investor paralysis" and needlessly increase recordkeeping, administration and costs, especially if the funds are serviced by a large number of different providers.
Employers' corrections: A large organization significantly lowered the number of DC plan service providers it used and the number of funds it offered. When the evaluation began, it had more than 80 investment providers servicing its 403(b) and savings plans. The organization issued a request for proposals, received responses from 11 service providers and selected four, one of which would provide compliance/common remittance services for the plan with the other three vendors.
Another organization with 2,200 plan participants and approximately $106 million in plan assets consolidated from three service providers to one, which established a multitiered investment structure.
Mistake #3Investing in the Wrong Share Classes
Sponsors that offer investment choices in retail share classes rather than in institutional share classes incur higher fees. The difference in fees for a vendor's retail share classes compared to its institutional share classes can exceed 100 basis points (a basis point is one hundredth of 1 percent).
Employer's correction: Where feasible economically, switching from retail to institutional share classes can save 401(k) plans a significant amount of money. For example, the fee for the retail version of one vendor's balanced fund is 119 basis points while the fee for the institutional version of the same fund is only 63 basis points.
To the extent that such a switch can occur on a number of a plan's investment alternatives, these fee savings, which increase participants' retirement savings directly, can be substantial.
Mistake #4Failing to Monitor Vendor Fees
Plan sponsors need to take a hard look at their fees and expenses and validate them in the marketplace to protect themselves from lawsuits and enhance participant outcomes. This should be done at least every five years and is particularly important in light of the U.S. Department of Labor's participant and plan sponsor 401(k) fee transparency final regulations, which take effect in 2011 and 2012 (see the SHRM Online articles "DOL Issues Final Rule on 401(k) Fee Disclosure to Participants" and "DOL Issues Interim Final Rule on Disclosing Retirement Plan Fees to Plan Sponsors").
Employer's correction: A DC plan with approximately $130 million in assets and 3,000 participants with an average account balance of $45,000 was able to reduce its fees significantly by going to market with a comprehensive request for proposal (RFP). Although the company kept its current vendor, it was able to lower its overall costs (20 basis points, down from 34 basis points), saving approximately $1 million and establishing a more refined investment lineup (18 funds, down from 50 funds).
Moreover, by retaining its current provider, the company avoided a costly transition.
Like any plan fiduciary, the retirement committee must maintain the plan and its assets for the exclusive purpose of providing retirement benefits for participants and beneficiaries and defraying the reasonable costs of administering the plan, with the care, skill and diligence that a prudent person would use in similar circumstances.
The retirement committee should meet periodically, usually quarterly or semi-annually. It's important for a member of the committee to take notes and document the meeting proceedings. Any decisions made by the committee that affect the plan must be documented and may ultimately lead to the creation of plan amendments, written procedures, written policies and defined processes.
Robert McAree is a senior vice president in the New York Office of Sibson Consulting. He has special expertise in the design, administration and communication of retirement programs. Jeffrey H. Snyder is a defined contribution investment consultant in the New York office of Segal Advisors, Inc., the SEC-registered investment consulting affiliate of The Segal Company, the parent of Sibson Consulting. He conducts vendor searches and tracks regulatory and legislative changes for defined contribution plans.
A longer version of this article appears on the Sibson Consulting website as "More Heads Are Better than One: The Role of Committees in Maximizing DC Plan Effectiveness and Minimizing Exposure."
This article is adapted and reposted with permission from Sibson Consulting, a division of Segal.© 2011 by The Segal Group Inc. All rights reserved.
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