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It’s time to change the conversation regarding qualified plans

It’s time to change the conversation regarding qualified plans

| August 17, 2018
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I sit here on an airplane flying back from a great national retirement plan advisors best practice seminar. 

About fifty of my peers from very successful retirement planning practices across the country met for two days sharing what is working for their clients, what needs their clients have and discussing ways we can create more efficient strategies for their plans and participants. 

I thought I would share a few highlights from this recent meeting;

  1. We still run across plan sponsors that think they can outsource their Fiduciary liability.

First –  Hiring a 3(21) or a 3(38) advisor along with adding 3(16) coverages does not eliminate a plan sponsors liability.  It will greatly reduce it but not eliminate it.

Second – A plan sponsor has an obligation to manage the plan and protect its participants.  This means a plan sponsor should be putting the plan to bid every three to five years to ensure the plan design is up to date, the fees are competitive, the education being delivered is current and appropriate for the participants and to share the latest and greatest ideas in the market.

This does not mean you move the plan every three to five years, but understand where your plan sits compared to other like companies and document the process for liability reasons.

  1. Request for Proposals, RFP’s – Unfortunately these requests still mainly focus on the three F’s of qualified plans, Fee’s, Fiduciary and Funds.

Let’s be honest about those 3 F’s. While important to discuss in the RFP process they are the wrong questions to focus on.

Fees – Fee compression has hit the qualified plan space.  During your RFP process, all your new bids should be very competitive on price.  Fees are rarely a differentiation point today if you hire a true retirement plan consultant and recordkeeper.

Fiduciary – This is important, and you should be hiring either a 3(21) or a 3(38) advisor to work with your plan and participants.  Also, don’t let an advisor shift the fiduciary responsibility to a third party, like Morningstar.  Make sure your advisor signs on the dotted line as one of these types of Fiduciaries.

Funds – I have three words to describe funds.  

Commoditized, Commoditized, Commoditized.

Yes, you need a great fund lineup that aligns with your Investment Policy Statement, has low expense ratios, provides coverage in all asset classes with a variance in risk profiles and is monitored on a set schedule.  However, using low cost Vanguard index funds instead of Schwab or Spyder index funds has no real bearing on outcomes for participants, or the health of your plan, nor enhances your Fiduciary oversight.

Today, I would only recommend working with a Record-Keeper that has ‘open architecture’ for your fund options.  Basically, that means a plan sponsor can add any index or mutual fund on the open market to their plan. 

Unfortunately, we are still seeing many Record Keepers that make a plan sponsor use their own proprietary funds.  As a Fiduciary on the plan, this could be a conflict and raise some flags.  I suggest staying away from those Record Keeper options.

The 3 F’s of a retirement plan should be a basic talking point and discussion but not the main characteristics to consider. 

Our industry-retirement plan specialists-need to do a better job getting plan participants ready for retirement and the 3 F’s of planning should be a small part of the overall conversation.

  1. Plan health is what plan sponsors should be asking about.

How healthy is your plan?  Do you know the answer to that?

Let’s ask a few more questions.

  • How many of your participants are on-track to retire at age 65?
    • Can you break this down by age group?
    • Are you targeting participants not on-track for retirement with specific education material, one-on-one or group meetings?
    • Do the Trustees review plan health at least once or twice a year and discuss opportunities to enhance this?
  • How does your retirement plan compare to your peers?
    • Expense ratios
    • Participation rates
    • Plan design
    • Retirement readiness
  • Do you use an auto-enroll process and auto increase features?
    • If so, are you starting with at least a 6% auto-enrollment and 2% auto increase annually up to 10% - 15%?
  1. Cleary outline the goals and objectives for the retirement plan and make decisions on plan design based upon those.

We are often referred to plan sponsors, and the first question they ask is for our team to obtain quotes on a retirement plan.  This is an order taking methodology by plan sponsors, not a consulting relationship.  It also puts the main focus of the conversation back on the 3 F’s of retirement plans instead of plan health.

At ISC we spend time discussing the client's goals and objectives for the retirement plan as it pertains to their business and overall employee benefits package.  This process is extremely important to our team as it allows us to better understand where the client is today, where they are going, and what outcomes they are looking for.  It also helps our team know which record keeper(s) we should consider, what Third Party Administrator, TPA, we should bring into the conversation, and how we should design the plan.

  1. What conversations are you having with your quailed plan advisor and your benefits broker collaboratively?

Why would a qualified plan specialist ask this question? 

A company only has so many dollars they can allocate toward employee benefits.  Discussing qualified plans in a silo and then other employee benefits in a silo does not produce the best overall employee benefits package plan design.

Case study

Recently, I was in a meeting with a plan sponsor and an employee benefits broker. 

The employee benefits broker was presenting on the standard benefits package and the increase in healthcare costs, and the ways to structure another new option for coverage for the plan sponsor’s employees. 

Once they were finished, the meeting agenda moved to the qualified plan discussion.  The plan sponsor was looking to increase the match to participants and consider profit sharing.  After a long discussion on why the plan sponsor wanted to look at these options I suggested the following;

  • Don’t increase the match or add profit sharing today.
  • Put the money you wanted to give the employees into an HSA for them as it will have a better impact and outcome based upon this client’s goals and objectives.

I have been in many meetings with employee benefits brokers and plan sponsors.  At the end of the day, I would like to say the qualified plan is the most important benefit, but it is not.  Participants are primarily concerned about health care and the rising costs.  Many companies started offering high-deductible health plans in the last couple of years to help control expense.  And, many times employees have viewed this as a negative thing.

However, when an employer partially funds an Health Savings Plan, HSA, for a qualifying high deductible health plan the positive impact it has on company moral is much more effective than an increase in the match or profiting sharing. 

And, the personal wealth advisor in me loves HSA’s.  This is a great savings/retirement tool the IRS has given us.

With the companies which I can work collaboratively with the benefits broker and understand the healthcare discussion, I can articulate the value proposition of the HSA to the employees, creating a third voice, employer/benefits broker/advisor, on how good this is for them.  The positive lift and appreciation we have received from participants in companies where holistic benefit planning takes place is drastically higher than those companies that still silo these conversations.

Thanks for taking a look!

 

Tim Jaynes, AIF®

 

 

This article represents opinions of the authors and not those of their firm and are subject to change from time to time, and do not constitute a recommendation to purchase and sale any security nor to engage in any particular investment or legal strategy. The information contained here has been obtained from sources believed to be reliable but cannot be guaranteed for accuracy.

 

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