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10 Key Considerations for Plan Committees in 2022

Fiduciary Governance

Against a backdrop of record-setting litigation and workforce management challenges, many retirement plan committees are asking what steps they can take to put participants on a path to creating a fully funded retirement income stream.

To address those challenges and more, a new blog post from Russell Investments, 10 steps for DC plan sponsors to consider this year, reviews key strategies for navigating the legal and regulatory issues faced by plan fiduciaries. 

The second of a five-part series on 2022 investment insights, the post by Kerry Bandow also examines tactics to better fund future liabilities, including increasing savings and creating more efficient investment strategies for both active participants and retirees. “Today’s DC committees face significant challenges in preparing their participants for retirement, which are further complicated by a myriad of legal and regulatory concerns. However, committees must avoid being paralyzed by fear of litigation if they hope to improve participant outcomes,” Bandow writes. 

Following are the 10 areas he identifies that plan committees should consider to avoid legal jeopardy and help improve participant outcomes.  

1. Review and update plan governance to meet the new challenges. Establishing formal investment beliefs and objectives for the plan is an important initial step in the process of improving governance, the post suggests. “They are considered a core factor in global best-practice models and fundamental to improved governance, and are now utilized by many of the largest plans in the world,” writes Bandow. He adds that establishing beliefs saves time and allows committees to focus more on managing fiduciary risks, along with strategies to improve participant outcomes. 

2. Improve governance through delegation of investment decision-making. While the SECURE Act included reforms to broaden plan coverage, MEPs and PEPs are not the panacea for avoiding fiduciary and litigation risks, the post warns. “Russell Investments is supportive of committees delegating their investment decisions, but we believe that an internal subcommittee for those with sufficient resources, or an outsourced chief investment officer (OCIO) arrangement, is more appropriate for mid and large sized plans,” says Bandow. 

3. Cybersecurity. Even though the DOL issued a list of tips for hiring service providers last April, Bandow suggests that it is not sufficient to simply ask the right questions or gather information from the plan’s service providers. “We recommend that fiduciary committees review the responses with their internal IT team, or with a trusted external vendor, to ensure that the provider’s processes are reasonable and considered best-in-class,” he advises. 

4. Environmental, Social and Governance investing. Noting that the DOL’s recent proposal is intended to make it easier for plan fiduciaries to incorporate ESG into their DC plans, Russell believes that the most appropriate way for plan fiduciaries to incorporate ESG—while minimizing their legal and regulatory risk—is by leveraging ESG integration, which considers factors that have a clear financial benefit. 

5. Funding policies for DC plans. As to improving participant outcomes, sponsors should be using participant inertia to their advantage, the post further suggests. “Optimizing the use of automatic features is among the strategies that likely have the biggest impact in improving personal funded ratios,” writes Bandow. He emphasizes that it’s critical that employers understand the impact their decisions have on participants’ retirement readiness and that periodic re-enrollment should also be considered. 

6. Consider the use of private securities in white label and custom TDF portfolios. Observing that DB plan fiduciaries have long created portfolios with the appropriate balance between return seeking and hedging strategies, the post suggests that DC plans that offer white label portfolios or custom TDFs should consider incorporating similar strategies. “Although not suitable as a standalone option, Russell Investments believes a competently managed exposure in a custom TDF or white label fund to illiquid assets has the potential to improve the risk-and-return profile versus comparable liquid assets in many market environments,” says Bandow. To mitigate legal risks, plan sponsors will want to review these issues with counsel, he advises. 

7. Rethink core menu design and portfolio structure. With it becoming even more important to have a well-designed core menu to improve the likelihood of successful retirement outcomes, the post suggests that including both an active and a passive investing tier is a reasonable approach. Moreover, for committees seeking to engage participants, the firm believes that using a multi-manager, white-label structure to consolidate and simplify the plan menu is an appropriate step, Bandow adds. 

8. Revisit the QDIA. “Just like funding and investing policies for pension plans are unique to each sponsor, DC participants would likely benefit from more comprehensive and personalized advice for more successful outcomes,” the post observes. According to Bandow, an alternative that is starting to garner interest is a hybrid approach where participants are initially defaulted into a TDF but are then moved to a managed account as retirement nears. 

9. Provide retirement income solutions. With the SECURE Act providing a new fiduciary safe harbor, more committees are now expressing interest in evaluating retirement income solutions for their DC plans. The post suggests that initial efforts should first focus on strategies that incorporate automatic or default distribution options in the plan’s QDIA and the managed account option if available.

10. Managed efficient implementation. In DC plans, implementation comes in many forms, including transitioning assets from one investment manager to another, centralized investment implementation of multi-manager portfolios or an implementation account within a custom TDF, the post explains. “We believe that plans should engage with implementation specialists because it is a natural extension of the current focus on fees,” writes Bandow, adding that efficient implementation reduces costs, keeps participants fully invested in the markets and avoids blackout dates commonly associated with transitions.