Scott Matheson, CFA, CPA
Senior Director | CAPTRUST Consulting Research Group
Senior Director | CAPTRUST Consulting Research Group
Grant D. Verhaeghe
Director | CAPTRUST Consulting Research Group
Several CAPTRUST colleagues met in Chicago this past June to attend the 2012 PLANSPONSOR National Conference, where the theme was “From Plan Design to Participant Outcomes.” For those of you who could not make it to this annual event, we wanted to share several highlights from this year’s agenda in an effort to keep you abreast of industry developments and, perhaps more importantly, what other Plan Sponsors are talking about.
The conference opened with a keynote address from Mark Iwry, senior advisor to the secretary of the U.S. Department of Treasury and deputy assistant secretary for retirement and health policy, who focused on the history, current state, and future path of the 401(k). He spoke to us in the midst of “graduation season” about the 401(k) plan, as he says, “graduating from what it used to be, to what it can be.”
Iwry outlined his vision for what he called “401(k) 3.0,” which included:
• Rethinking or enhancing automatic features to get more eligible employees participating and deferring at higher levels
• Repositioning match formulas to encourage higher deferral rates— for example, a company might match 50% on the first 8% a participant saves, versus 100% on the first 4% in an effort to encourage participants to “stretch” their savings
• Challenging the status quo for eligibility requirements
• Exploring in-plan and out-of-plan solutions for retiree income generation
• Illustrating lifetime income projections based upon participant balances and deferral rates
• Controlling plan “leakage” at separation of service, perhaps allowing loan repayments to continue after termination to help keep a participant’s savings intact
• Further restricting or limiting use company stock in 401(k) plans
Mr. Iwry suggested that success for the next generation of defined contribution plans will be broadly judged on participants’ retirement readiness. His address set the tone for the rest of the conference, which encouraged sponsors to challenge today’s benchmarks for success while focusing more on outcomes than ever before.
Examples of this year’s sessions that echoed the “outcomes” theme included:
• “Creating Better Savers” outlined a few practical ways to overcome participant inertia and engage the unengaged participant.
• “How Much Is Enough?” focused on how best to educate participants about retirement readiness and retirement income options.
• “Investment Advice” explored the role for investment advice in retirement plans and how to gauge participant usage.
• “Defining Success” dealt with the important idea that participation rate is no longer an adequate measurement, and suggested that sponsors need to apply different benchmarks for success in plans.
Another topic of discussion throughout the event was behavioral finance, specifically the behavior of defined contribution Plan Participants. There was an agreement among sponsors in their desire not to allow negative participant behavioral tendencies to hinder their chance of ultimately navigating to successful outcomes. Rather than trying to force employees to become educated investors, many sponsors are investigating how to devise a benefit that will get them to retirement, while recognizing that they may not be equipped to make informed decisions.
CAPTRUST Advisor Mark Davis sat on a panel titled “Top of Mind: What’s Keeping Plan Sponsors Up at Night — and What Should Be.” Davis and fellow panelists discussed popular issues submitted by the audience prior to the conference. To no one’s surprise, the panel’s most requested topic was fee disclosure: both service provider and participant-level disclosure. It was clear that the full effects of fee disclosure and transparency are yet to be determined. These issues are still top of mind, and proved to be a hot topic for several other sessions, with frequent fee-centric questions asked by audience members.
The conference’s two most popular investment topics were target date and stable value funds. During a session titled “The Glide Path Conundrum: Target Date Funds Are Not Created Equal,” panelists from the asset management industry discussed the variety of demographic and capital market assumptions used and the resulting range of glide path designs. They also discussed the linkage of various glide path assumptions to the investment outcome of target date funds. Plan Sponsors continue to be challenged by selecting the glide path and target date funds that are right for their Plan Participants, a task that becomes increasingly more important as participant balances continue to shift toward target date funds. In a session titled “Stable Value: Five Things All Plan Sponsors Should Know,” panelists discussed the continuing issues stable value funds face and the impact these constraints have on the way portfolios are offered and managed.
Defined benefit pensions received their fair share of attention during the conference as well, with the theme of de-risking being most prevalent. In a standing-room-only session titled “Five Things You Need to Know About Pension Risk Transfer,” Steve Ellis, chief financial officer at Hickory Springs Manufacturing, sat alongside representatives from MetLife and Prudential to discuss the considerations and benefits of transferring pension risk to an insurer. Later in the conference, CAPTRUST Advisor John Pickett represented the consultant point of view alongside representatives from the actuarial and bundled provider industry on a well-attended panel titled “Liability-Driven Investing.” Pickett and fellow panelists discussed many considerations surrounding liability-driven investing, including a question Plan Sponsors routinely struggle with in this era of persistent market volatility and historically low interest rates: “Is now the time?”
In summary, we felt the conference was well worth our time and travel, as it offered an agenda packed with topics both timely and relevant for anyone responsible for managing a retirement plan. We have found in the past that “conference buzz” is often a leading indicator of the nature of conversations we will have in coming months (and years) with our Clients. If this holds true once again, here are a few clear themes we foresee we will all be talking more about in the future:
1. Outcomes as a New Definition of Success. The evolution of the defined contribution marketplace continues, and success for the next generation of defined contribution plans will be judged not only on procedural prudence, but also on the plan’s ability to prepare its workforce for retirement.
2. Fee Disclosure, Chapter 2. The full ramifications and effects of fee disclosure and transparency are yet to come. Plan Sponsors not only must rigorously comply with the fee disclosure regulations, but also should contemplate potential impacts and challenge the status quo where necessary to ensure that participants are protected and treated equitably.
3. The Evolution of Target Date Funds. As participant balances shift toward allocation funds — such as target date funds — it is imperative that Plan Sponsors routinely reaffirm the appropriateness of the allocations used in the funds they are offering in their plans. As plan demographics shift and morph over time — through acquisitions, divestitures, or simply the passage of time — the optimal solution and method of delivery may also change.
4. De-Risking Is Alive and Well. Persistent market volatility and low interest rates serve to not-so-subtly remind defined benefit Plan Sponsors that some pension risks are unrewarded. As such, sponsors are understandably clamoring for opportunities to de-risk their plans. Plan Sponsors should be exploring all aspects of de-risking—from simple asset-only, to asset and liability, all the way to de-risking the liability itself.
As 2012 continues to unfold, and until next year’s annual conference agenda takes shape, our team looks forward to discussing and assisting you with any and all of these topics. Should you have any questions, feel free to contact your CAPTRUST Financial Advisor.