Ours is a business guided by black and white laws, but with lots of gray nuance and interpretation applied to individual situations. This week, we asked readers to weigh in on some questions that normally get answered with nuance — and, shed of (most of that), got some “clarity.”
QDIA/Default Investments
First up, and realizing that different plans (and participants) call for different approaches, at a plan level, we asked readers what they (generally) preferred to recommend:
55% - Target-date fund with a “through” retirement date glidepath
17% - Target-date fund with a “to” retirement date glidepath
11% - Risk-based target-date fund
9% - Managed account
8% - None of the above
To which we got a number of “other” responses — many because there weren’t enough options — and some because, well — there apparently wasn’t enough “nuance” in the ones provided. Here’s a sample:
I've marked one selection but it depends on the plan and it's demographics. I don't treat all the same.
So, there are at least two correct answers here. "None of the Above" is showing up as the first choice...with nothing actually above it, so it would be an appropriate option. ;)
Dual QDIA with TD before age 45 and MA over age 45. Include guarantee income on MA where appropriate.
Balanced Fund
Looking into In Plan income TDF now.
As a general rule we are philosophically in favor of through but if we have a plan that see large outflows to rollovers we might use a to approach.
Model allocation built by our firm
Participants are working longer, living longer...
I believe it should say, "none of the below"... But what I generally recommend is a multi-glide path to retirement solution.
Balanced Fund
With DC lifetime income becoming more of a priority, I think a shift from "through" to "to" may be needed depending upon the solution chosen. Here is a question for you: I think QLACs are needed and as they become more available, will this change glidepaths at later ages?
Dynamic default glide path with target date funds below age 45-50 yrs of age and managed accounts above.
I prefer they have the option of a managed account, target dates (QDIA) as well as a list of funds to choose from. Everyone can have what is best for them.
I assume you are asking about my recommendation for a QDIA. For those I prefer through glide path target date funds. That said I typically try to include risk-based funds as an alternative to the target date. I also find that a through glide path fund isn't always available yet. I'm hoping to see more and more of them. Given the increasing American life span I think a to path fund is shortsighted and becomes too conservative too quickly for most participants.
If this is for QDIA, most common is TDF because date of birth is collected by payroll and routinely provided to RK. We have a handful of plans that have a managed account solution as QDIA. These select cases are where RK was engaged and plan sponsor is paying for services that include managed account for participants at no participant borne cost. Otherwise, managed accounts are offered through RK as an additional service with an additional fee by participant. Since we are engaged as 3(21) at plan level, not participant level, we don't recommend anything to participant. We will educate on options and trade-offs. Typically I use the analogy that participant paid managed account is like a personal trainer at the gym. If you won't show up unless you pay someone to be there, then a managed account is for you. I personally think a participant in "asset gathering" mode is not well served to pay for a managed account solution. However, for someone actively planning to retire and needing to model/vet different draw-down strategies, (and look at multiple retirement income sources in & out of the 401(k)) it can be worth it.
Depends on the plan. As a QDIA we recommend a TDF based on the clients needs, which can be to or through.
Customized managed account that contemplates a through glidepath along with risk considerations.
Dependent on the plan sponsor goal — 'to' and/or 'through'
The personalization of TDF's, Managed Accts. and Asset Allocation Funds Makes it difficult for a Participant or a Plan Fiduciary to accurately "Measure Risk-adjusted and Relative performance. How can these funds be accurately-measured against appropriate Benchmarks when there is so much "seasoning" and "tweaking" occurring in the asset allocation?
Risk and Aged based Target Date Fund
Or if we can add asset allocation models that use core plan investments e.g. GoalMaker, Retireview, Portfolio Xpress, I prefer those over a Target Date Suite
Offer both Risk based and Target date (through)
Definitely requires an evaluation of each particular case.
My preferred is to offer a low cost set of risk-based model portfolios and model target date fund.
My definition of a managed account is a risk-based asset allocation model.
Risk based professionally managed models that are rebalanced quarterly.
Termination Distributions
Next, we turned our attention to distributions, more specifically (and, again, generally speaking), we asked readers, “Assuming a participant has an accumulated balance in the plan greater than $5,000, do you…”:
35% - Let them do whatever they want to do.
25% - Encourage terminating participants to roll their money to a new plan.
15% - I don't work directly with participants.
13% - Encourage terminating participants to roll their money to an IRA.
12% - Encourage terminating participants to leave their money in the plan.
Once again — there were some comments to provide context/nuance:
I generally provide them the options they have and discuss the pros and cons without any bias. Since we don't work in the rollover side, our approach is to give them the best information.
I have discussions with plan participants and help them decide what's in their best interest. It can sometimes be any of the above.
We talk through their options. For many low balance participants, the best option is often to roll it to their new plan and keep it moving with them.
I educate them on the options. If their account size is attractive for our wealth management side, I will encourage them to consider our management. If their account size is not attractive, I encourage them to roll into their new plan (when applicable), leave the money in the plan or open an IRA at Fidelity or Schwab and roll into that.
Generally, encourage to roll to an IRA so the individual has options with that money and can diversify their retirement with options of better products available with bonuses and guarantees. Sometimes rolling to a new plan does make sense if the balance isn't large enough to provide for that diversification. I am not a fan of this auto portability that was passed, the cost to the individual for the only "approved" company is excessive. When you add in the distribution fees from many of these recordkeepers are fleecing participant's accounts are, i.e. Voya $140 distribution fee, it should be classified as extortion.
For balances in size...over $50,000 ,we will facilitate the rollover and capture the asset.
But would evaluate each option for best personalized option for participant.
We spend time educating on the cost benefits of one plan vs the second or the flexibility of the IRA. Generally the client will put their money either in the new employer plan to better keep track of it, or keep it in the old plan due to a better fee structure. IRAs are often only an answer if they need something outside of the plan offerings or would like to have someone manage their accounts.
Again as general rule of thumb we will recommend either leave in plan or move to new plan if economics of new plan are better for participant.
Each situation is different and depends on amount ($5k or $500k?), investment choices available, cost, recordkeeper and website usage, financial wellness opportunities, etc.
Unfortunately, I cannot "click" on ALL. There is a discussion, and based on that discussion a recommendation.
Anything to keep it tax qualified — keep it in the plan, roll it to a new company or IRA.
This is at the plan sponsor’s discretion. In certain rural areas the plan sponsor feels that they want to help the terminated to leave their funds at the lower cost pricing. On plans where the turnover is high and they move frequently, they want the participant out of the plan for liability purposes.
Given the $5,000 threshold we encourage them to view their options based on the balance and compare new employer plan options/features/expenses.
Actually depends on client circumstances. Younger clients I suggest that they move their funds to new plan at next employer. Retirees typically suggest that they look at their options and need for flexibility.
I give them guidance about their options, pros/cons, and let them decide.
We're not that proactive with terminated participants, but if a plan is moving, we might try to clean it up of smaller terminated balances. We don't make any effort to have the client start a force out process. If the balances are under $5k, we want them to move it before the participant gets lost.
Case by case basis
Educate on their options and pros/cons
I explain all options to terminating participants, but I encourage them to roll funds into an IRA or a new plan if available, and to leave their money in the plan if not. The only thing I strongly encourage is avoiding taking a tax penalty and turning qualified money into unqualified money through a distribution.
I encourage participants to do what is best for them. It depends on if they are retiring or moving to a different employer. Also, it depends on if the plan design allows for systematic distributions, or what the other distributions options are for terminated employees. Generally, leave it in the plan, or roll it over to a new plan. Next, is into an IRA, and the option I never offer is a cash payout.
All of these three: 1) I don't work with participants/do individual investment advice. (See above) 2&3) I do like plan sponsor to encourage rollover of terminated participant assets to an IRA or new company 401(k). My advice to plan sponsor is because: 1) The longer someone is terminated with balance the greater the likelihood they become a missing participant. 2) I don't like compliance requirements and expense for employer to manage ever-growing number of terminated participants with account balances, especially if they tip the employer into the requirement for independent audit.
It all depends on the clients individual situation and needs.
I educate them about their options and any tax ramifications.
Depends on the size of the balance, the participant's timeline to retirement, and other factors.
Counsel them on their options and then let them decide.
If plan is already subject to audit then let them do whatever they want to do. Encourage rollovers in plans with participant counts nearing audit threshold.
Give them guidance on their options, pros/cons, etc. Not all situations are the same and therefore the advisor must be flexible and objective.
Handle each participant uniquely. I discuss their options with them. A (sometimes) typical scenario... If the plan offers the XYZ Target Date series, it may be the better option to move the dollars to a self-directed retail IRA to acquire the same investment option and not be subject to recordkeeper and advisor fees (if the employer is not paying the fees directly).
If they already have an IRA, then that is first suggestion. If not, then new employer's plan if it accepts rollovers.
This would depend on the fees and investments at their new employer. Assuming all things equal or better at the new employer, this is what I'd recommend. Consolidation makes it easier to manage.
If the employer asks us to help them "nudge" the employees to roll out, we generally assist them with that. Otherwise, we don't generally get involved.
After discussing their options with them
We encourage a plan. A plan to roll over to a new employer or an IRA. A plan should be what to do each time the participant leaves one employer and goes to another. Education.
I think the better answer is that I review the options available to them and also review some of the benefits and downsides of each option. It's not just the education required of my broker/dealer, but is the only way I think we can act as a fiduciary on the plan.
Using a participant advice solution either in managed accounts for when an advisor is advisor of record to the plan or a system to provide participant advice and be compensated through a non-qualified account when the advisor has no connectivity at the plan level.
My option is not on there. I help them figure out what is best as each participant is different.
It depends on the balance and if it will help overall plan pricing, but typically if they have under $100K, the encouragement is to roll to their new employer's plan or to an IRA.
If the company pays all of the fees, I would generally encourage to leave in the plan. If the new company is paying the fees, I may encourage them to roll their money into the new plan so they can keep it all together. Every situation is different.
Retirement Income
And then — we moved on to the hot topic of retirement income, and asked “…when the subject comes up with plan sponsors, do you generally…”
47% - Talk about the possible option(s), but nothing specific.
24% - Remind them that there are “complications” yet to be sorted out.
19% - The subject of retirement income never comes up.
10% - Recommend a specific product offering/design.
Interestingly enough — no one opted for “Change the subject.” And yes, we got some additional “context”:
When I bring it up, plan sponsors aren't excited about it. Most want their former employees to roll their money out and take care of it themselves.
I found a great solution through IJoin. They offer Retirement Edge, where a participant can invest in an in-plan investment that guarantees future income.
need to guess the Plan sponsors attitudes, some plans do not want the "marketing" to plan participants we do discuss product, but with BIC? we keep it light.
If available in Olán but personalize to each situation. No one size fits all strategy with guarantee income in plan.
IF there is an option that we have vetted and are comfortable with we recommend but those are few and far between at this point.
Encourage them to learn about the complications and solutions available.
This subject really only comes up if we bring it up OR if that business owner/committee member themselves is looking for help. We generally prefer to steer the dialogue towards an 'out of plan' solution.
The fees are too high for in-plan retirement income options. We'd direct smaller balances to a low cost IRA, and try to take on $250k+ participants as a client.
I don't like any of these choices because they all seem irresponsible to both the plan sponsor and their participants. If I have to pick one I'm obviously going to make a recommendation, usually a self-directed or trusteed IRA for estate planning purposes. That said, when a sponsor retires there is an important conversation to be had about what will happen to the participants. They need education on what their options are. If the business has a succession plan or is being sold, then those would be different conversations. I really hope there aren't advisors out there avoiding these conversations as the other options suggest.
sometimes we bring it up and remind them.... what you have in the first bullet point
If the subject warrants more conversation, I will bring in a subject matter expert with more expertise in this income solution.
All of these three: 1) Discuss options, including if their RK has any specific product offering 2) Depending on situation, may recommend a specific product 3) Let them know that there are trade-offs and there are complications that may impact.
We welcome the conversation but as of yet, we haven't been made aware of solutions we think are in the best interest of the participant.
In-plan solutions have yet to provide the flexibility (and pricing) available outside the scope of the plan and with specific participant needs in mind. This shouldn't be a "one-size-fits-all" conversation, but specific to each participant.
Educate/discuss in terms of their plan sponsor goal — 'to' and/or 'through' — and the implicit retirement income solution within that glidepath.
While it might seem to make sense to have in plan Retirement Income solutions, the participant behavior and evolution dictate an out of plan solution. It’s easier to consolidate assets from former employers and rollover accounts outside vs. inside a plan.
Nobody ever asks about retirement income. We discuss it proactively but I don't receive any incoming questions.
Generally I would refer them to an advisor that specializes in the distribution side/individual planning side.
Still waiting for this area to evolve a bit more
The income issue is being "sold" by the insurance companies and not asked for by the plan sponsor. We have guaranteed income solutions in approximately 1/2 of the plans I advise and there is VERY low adoption. I would also note that I spend a vastly disproportionate amount of time reviewing the nuances of the income solutions with plan participants relative to other investment options. It makes me wary of wide adoption of these tools. If I spent as much time with each participant with standard investments (index funds, TDF, asset allocation, etc.) as I do those with guaranteed income options I would need 3 more of me and need to charge substantially more.
(Excessive?) Fee Litigation
And then — with an option to choose more than one of the choices, and an eye back on the DC Pension Geeks podcast this past week, we asked, “Overall, do you think that the excessive fee litigation has…:”
76% - Reminded plan fiduciaries of their obligations.
51% - Helped to reduce 401(k)/403(b) fees.
43% - Only made some attorneys wealthier.
41% - Driven up the cost of fiduciary insurance.
30% - Helped improve the quality of plan investment menus.
11% - Actually driven up plan costs.
And while the positioning of THIS question provided room for nuance — well, we still got some expanded (and interesting) comments.
As has been the case for basically eternity, the DOL has never provided any "official" guidance on fees other than "reasonable". Certainly, there are fees that can be deemed as excessive but, there needs to be information and benchmarking to support that. Getting attorneys involved for a plan that "seems" excessive is overkill in my humble opinion. The concern is, there are good advisors out there that should be helping plan sponsors with this.... including benchmarking their own fees. There are always going to be bad actors that take advantage of sponsors who just don't know what to ask and that is where the lawsuits should be.
It likely has made some attorneys wealthier, but that is not the only ramification. I believe it has affected investment companies and recordkeepers the most in reduced revenue. I have reduced some of my asset-based fee, but have also added fees for being a co-fiduciary to plans and covering that liability. Overall, my average fee is down from 10 years ago, but the asset values are higher...as is my revenue.
There were legitimate suits that did highlight actual problems with the Fiduciaries making backroom deals, but many were decisions based on reimbursements to cover the cost of administration. The participant may not of had the highest return, but the participant was paying high administrative fees, which are hard dollar reductions to their future earnings potential. Generally, now attorneys found their glory hole and have exploited it for their benefit.
In the end with all final settlements, participants received very minimal amount per participant but attorney received a significant amount. Not sure participants were helped much.
We tend to think of ourselves as specialists and focused in the space, so we are doing what we feel is in the best interest and often low compared to competitors. Litigation may help weed some out of the space, but seems to add more "to dos" to an already pretty detailed list.
The lawyers filing these suits are mostly ambulance chasers with no real regard for participants but they have had a positive impact on the industry so they serve a purpose in the overall ecosystem...not unlike dung beetles.
Some plan sponsors care more than others. If they have had a prudent and documented fiduciary process in place for years such as with our clients, there is less concern by plan sponsors.
Audit prices have definitely increased. I believe many have to do with this litigation.
The marketplace and the 408b-2/404a5 materials did more to drive down fees than fee litigation at the jumbo plan level.
Terrified plan sponsors
Scared sponsors from innovation as it seems like a protective measure from lawsuits to be like others.
As much as we don't like litigation, I feel like plan litigation of all kinds (not just fee litigation) plays a critical role in keeping our industry as well as plan sponsors accountable to participants.
Made fiduciary applications more lengthy!
Fee litigation helped correct course for the disingenuous RK practice that their services were "Free." The resulting transparency over fees, from regulation (although burdensome) and threat of lawsuits brought down 401(k) costs for participants, since plan sponsors could move their plan to a more cost effective RK once they were able to compare costs. (In contrast 403(b) fees have not had the same level of transparency, and costs are still relatively high. Fee litigation here is interesting, as plans can't move in the same way, since contracts and investment are held at the participant level, not plan/plan sponsor level.) Unfortunately, the commoditization of RK fees has dropped prices/margins so low that resulting vendor consolidation has made the marketplace inefficient again; too few service providers means that fees will eventually go back up and in the meantime, service and other means to make money become more common (e.g. managed accounts and CITs).
Unfortunately excessive fee litigation does not take into account helping participants with retirement readiness and how good plan advisors have helped plan participants.
I believe it has brought attention to investment management fees/share classes (where there appears to be the greatest needed concentration). More attention should be paid to stable value investments and their restrictions (back-end puts, MVAs, etc.).
The ultimate beneficiaries have been the plaintiffs attorneys, but it has also reduced fees because plan sponsors inaccurately perceived that cheap would reduce the potential to get them sued.
Made it more likely to have a plan sponsor encourage non-employees to 'take their plan balances' to another employer's plan or to another investment structure/vehicle (IRA or Annuities)
Improvement to some plans that were obviously asleep at the wheel, but equally (potentially greater) detrimental impact of scaring sponsors away from better performing options on cost alone.
We have long past reached the point where the majority of the suits are doing more harm than good. Cookie cutter cases in search of a victim. We've seen Plan Sponsors and advisors running their Plans in a manner to avoid litigation, rather than doing what's in the best interest of participants. Those two approaches don't always align.
Generally speaking, it's been good for the consumer. The unfortunate side of fee compression is that some providers are now lacking on their service. Plan participants would probably pay a little more to not wait in a call center phone bank for over an hour.
Definitely a mixed bag.
It caused the industry to focus plan fees. And it helped hasten the demise of bad ideas — revenue sharing and strategies for equalizing revenue sharing.
It’s going too far at this point. It helped out participants initially but I think it affects the quality of the investments.
I think two primary results of the litigation are to enrich attorneys. I think the other two outcomes are a reduction in plan expenses and a reluctance of some companies to offer 401(k) plans. I work in the small marketplace and I have had several employers indicate that if they have to deal with all of the complexities of a 401(k) plan AND fact liability, they just won't offer it.
Finally — we asked what readers would like Nevin (that’s me) & Fred to focus on at our LIVE podcast session at the NAPA 401(k) Summit — so, stop on by and find out…
Thanks to everyone who participated in this week’s NAPA-Net Reader Radar Poll!
