Plan Design: Setting the Cornerstone for a Solid Company Retirement Plan

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1 Plan Design: Setting the Cornerstone for a Solid Company Retirement Plan In building the tallest skyscraper or a one-story home, it s the blueprint that matters most. You cannot build up until you design the layout. That holds true for a 401(k) and other retirement plans, defined contribution or otherwise. A retirement plan s design, carefully constructed, monitored and maintained, forms the foundation of any effective, successful plan. On that footing, every other element and function of the retirement plan is built. The many facets of that design bring a plan to life and lead to the achievement of its desired goal providing a more stable and secure retirement for participants. Along the way, a well-designed plan serves as a magnet to attract and retain key employees; communicates to all participants that this is not simply an ordinary benefit at an ordinary company; and represents an opportunity for employers to illustrate their commitment to participants individual retirement plans and for participants to optimize their personal financial security. Decisions about design influence every aspect of a 401(k) plan investments, costs and performance, administration and recordkeeping, communication with employees, participation rates, contribution allocations and fiduciary liability. Strong oversight and informed choices among plan sponsors and fiduciaries particularly in prudently selecting service providers can elevate all areas of a plan as the various parts support and reinforce each other. Employee education and independent investment advice can boost participation, which can increase contributions, guard against a plan becoming top-heavy from executives contributions and ease fiduciary risks. Smooth administration and quality investment choices can contribute to plan growth, which can help reduce costs

2 Plan Design Questions to Ask and Examine Regularly: INVESTMENTS Are investment options rigorously reviewed to maintain quality and diversity? Are the Investment Policy Statement and other plan documents updated appropriately with amendments to reflect changes in laws and regulations? Does the plan have a qualified default investment alternative, or QDIA, an age-appropriate mix of investments for participants who fail to make investment decisions? The Department of Labor s QDIA regulation provides relief from fiduciary liability for plan fiduciaries who invest participant s account assets in a QDIA in the absence of participant investment direction, if the fiduciary satisfies all the requirements of the regulation. The Bottom Line: Your plan should have a defined investment strategy and documented goals. Consider annual or twice-a-year reviews that focus not only on investment performance, but also on revising plan documents documents that should be organic, not carved in stone. EMPLOYEES Is communication with employees as good as it could be? Does the plan offer employee education and online advice options? The Bottom Line: Open communication with employees is crucial to encouraging participation and should be a top priority for plan sponsors. Ask your vendors if they can hold employee meetings at least annually and if participants will have easy access to account services, opportunities for personal investment advice and a process to give their feedback on the plan. Participant education can be a springboard not only to more successful retirement outcomes, but also to better individual financial decisions in other areas. The benefits for participants of committing to regular savings and healthy personal finances can continue wherever life takes them, since most people no longer spend their entire careers with one company. PARTICIPATION Does the employer offer matching contributions for employee investments, and is the match optimum to drive participation? Are participants maximizing their contributions? Are the allocations of contributions varied enough? Does the plan offer automatic enrollment, a default contribution rate with annual increases and default investment allocation? The Bottom Line: Participation is the primary driver for plan success, from allowing higher contributions by key employee to holding down plan costs. Take every possible step to improve participation and contribution rates, including implementing or increasing the employer match, emphasizing employee education and adding auto enrollment and auto deferral escalation. COST & FEE STRUCTURE Are overall plan fees identified and reasonable? In addition to monitoring total costs, is the fee structure assessed to make sure it is consistent with plan goals and philosophy? The Bottom Line: Consider that lowest expenses may not translate to best. Have a conversation with your provider at least yearly about whether overall plan costs are reasonable in relation to the services provided to the plan. Costs should be weighed against investment performance and services in determining fee reasonableness. In addition, keep in mind the plan s goals and purpose, which will help determine service levels and, in turn, costs. 2 Plan Design

3 ADMINISTRATION & RECORDKEEPING Do these functions cause any issues or pain for the investment committee or staff? Are the vendors providing compliance services? How is their performance monitored? The Bottom Line: Your plan vendors work for you and your employees in functions that may not often be top-of-mind, but that hold the potential for great long-term reward and security. Pay attention to audit findings and consider the pros and cons of a provider that does administration and recordkeeping in-house, rather than out-sourcing those functions. FIDUCIARY LIABILITY Does the sponsor conduct enough due diligence on plan providers and vendors? Are outside sources used to review and benchmark the plan? Are there any potential conflicts of interest in plan investments or relationships? Who is signing on as the investment fiduciary to the plan one or more employees of the company, or an outside vendor? If it is not an outside vendor, are the employees designated as investment fiduciaries qualified to serve as such? Are they regularly and methodically reviewing the plan investments, and documenting that activity? The Bottom Line: A primary goal for plan sponsors should be reducing risk by strengthening oversight. Controlling planrelated liability has never been more important. Conduct due diligence annually and assess all areas of the plan, not just fund performance. Consider collaborating with an experienced provider that can offer or provide access to fiduciary guidance and a best practices approach for your plan. By ensuring a firm foundation through plan design, prudent sponsors and fiduciaries will be on their way to more rewarding retirements for themselves and for every employee counting on the plan for an important part of the future. 3 Plan Design

4 Conclusion Some businesses set up a retirement plan and then let it run on autopilot for years. No outside reviews or benchmarking. Little due diligence. No attempts to update the cost structure, plan services or practices. That is a formula for rising fiduciary risk. Other decision makers may lose focus on the reasons they initiated a 401(k) plan. The intent may have been to reduce employee turnover, to provide greater financial security for employees, or to lower taxes for participants and possibly get a tax credit for the company. Making decisions that strengthen your plan s design should not be burdensome or make you feel like fleeing the room, even though scrutiny and regulation of 401(k) plans are on the rise and administering a plan can be complex. However, plenty of plan sponsors who are smart businesspeople make basic mistakes in operating a 401(k). During the summer of 2012, the IRS published a 401(k) Fix-It Guide, outlining a dozen mistakes that plan sponsors should avoid when designing their plans, along with solutions for plan sponsors facing some of these pitfalls. The two most common mistakes were failing to update the plan document in recent years with changes in the law and failing to operate the plan according to the plan document. Other errors: not matching all eligible contributions, excluding eligible participants, making excess deferrals and improper loans, flunking nondiscrimination tests, failing to file the annual 5500 form and failing to make required contributions to top-heavy plans. The remedies primarily involve increased oversight or an independent review of the plan. Evaluating the elements of your plan s design can yield significant improvements, potentially lower fiduciary liability and improve outcomes for sponsors and participants. It is important that you work with legal counsel who is knowledgeable about these matters during this process. Over the past 15 years, the country s retirement system has continued to evolve. Many companies have closed or froze defined benefit (DB) plans and moved to defined contribution (DC) plans or converted to hybrid designs, such as cash balance plans. Rising regulatory and financial pressures have prompted employers and employees alike to seek more cost-efficient plans with less volatility. Any retirement plan will face challenges over time. Administering and monitoring a plan consumes a fair amount of resources, day-to-day, month-tomonth, and year-to-year. Without an intelligent and practical design one that is monitored and updated regularly the plan will never achieve the success it should. By ensuring a firm foundation through plan design, prudent sponsors and fiduciaries will be on their way to more rewarding retirements for themselves and for every employee counting on the plan for an important part of the future. 4 Plan Design

5 The material presented in this article is of a general nature and does not constitute the provision by PNC of investment, legal, tax or accounting advice to any person, or a recommendation to buy or sell any security or adopt any investment strategy. Opinions expressed herein are subject to change without notice. The information was obtained from sources deemed reliable. Such information is not guaranteed as to its accuracy. You should consult with your own legal counsel for specific advice regarding the matters discussed herein. For more information, please contact PNC at The PNC Financial Services Group, Inc. ( PNC ) uses the names PNC Wealth Management, PNC Institutional Investments and Hawthorn, PNC Family Wealth SM to provide investment and wealth management, fiduciary services, non-discretionary defined contribution plan services and investment options, FDIC-insured banking products and services and lending of funds through its subsidiary, PNC Bank, National Association, which is a Member FDIC, and uses the names PNC Wealth Management and Hawthorn, PNC Family Wealth SM to provide certain fiduciary and agency services through its subsidiary, PNC Delaware Trust Company. PNC does not provide legal, tax or accounting advice. PNC does not provide investment advice to Vested Interest plan sponsors or participants. PNC Wealth Management, PNC Institutional Investments and Vested Interest are registered trademarks and Hawthorn, PNC Family Wealth is a service mark of The PNC Financial Services Group, Inc. Investments: Not FDIC Insured. No Bank Guarantee. May Lose Value The PNC Financial Services Group, Inc. All rights reserved. INV PDF