Sound Plan Management Top 2018 Priority for DC Plan Sponsors

Ensuring sound plan management by creating a foundation structured around strong governance principles to help protect a plan’s fiduciaries against litigation claims will likely be a top DC plan sponsor priority for 2018, according to a new report.

Mercer’s white paper – Top Priorities for DC Plan Sponsors for 2018 – offers a top 10 list the firm believes will be major trends and priority areas of focus for DC plan sponsors as they look to improve plan participant outcomes, mitigate excessive fee litigation risks and manage fiduciary responsibilities.

In addition to having multiple operational and investment challenges to manage, DC plan sponsors increasingly have a sense of feeling responsible for participants’ financial well-being and success in retirement, according to the report. “As such, sponsors are starting to integrate three major areas within their purview: improving participant engagement and decision-making, adopting strategies that enhance returns and prudently reviewing fees,” explains Liana Magner, U.S. Delegated DC Leader for Mercer.

The major trends that Mercer believes warrant consideration as the top priorities for DC plan sponsors include:

Ensure a foundation of sound plan management: Establishing a regular cadence to activities such as performance meetings and fee and vendor management can help reduce the risk that “your plan’s fiduciaries will end up in news headlines or court papers,” the report suggests.

Conduct a financial needs analysis for employees: Understanding what issues a sponsor’s employees are facing is critical and yet often overlooked, according to the report. Once sponsors understand their employees’ needs, they are better equipped to deliver more relevant, effective solutions.

Targeted engagement efforts: A clear communication strategy that simplifies decisions and drives engagement can enhance participant outcomes. Sponsors should consider segmenting their population based on key economic and demographic data, driving action by creating simple investment tiers, offering binary choices where possible, and customizing priorities based on the key needs of each segment.

Establish success measures: Once employees’ needs are evaluated and strategies are developed, establishing and monitoring success measures along with adjusting strategies as required can help enhance participant outcomes.

Consider ESG options: Environmental, social and governance (ESG) factors should be evaluated and considered as part of the plan’s manager evaluation program, and consideration should be given to introducing ESG focused options into the plan lineup, which may encourage participation.

Enable “rainy day” savings funds for employees: According to Mercer’s Inside Employees’ Minds financial wellness survey, 52% of workers responded that they would find a $400 unforeseen expense either difficult to cover or a major crisis. The report notes that the industry is beginning to explore parallel retirement and “rainy day” savings accounts, which, while in their early days, could prove effective.

Increase diversification through multi-manager/white-label funds: The firm anticipates more activity in the diversified fixed income area in 2018. To that end, multi-manager funds provided through a white-label structure can offer great benefits, including reduced manager risk, broader diversification, simple naming conventions that are easy for members to understand, and the ability to quickly and efficiently switch out managers when needed.

Consider financial wellness solutions: Noting that some financial wellness needs cannot be addressed by the DC plan, the report suggests that plan sponsors should consider exploring financial wellness solutions that address specific needs, such as financial coaching, student loan repayment plans, short-term loans and income smoothing.

Evaluate managed accounts: Though managed accounts are not a new addition to the DC landscape, their role is evolving since their cost has been decreasing, according to the report. The ability to tailor asset allocation advice to personal circumstances, even if participants do not input information themselves, has increased significantly and managed account providers typically provide additional support for retirees and broader financial wellness needs.

Examine retiree-focused tools and investments: Plan sponsors appear to be allowing — and even encouraging — retirees to remain in the plan post-retirement and to take partial withdrawals. Consequently, sponsors should consider how suitable the investment structure is for retirees, as there may be a place for some investment options more aligned with retirees’ needs.

Lastly, the report notes that the fastest-growing trend in DC plan management is the move to delegating responsibilities to a professional organization. While much of the delegation has occurred with investment 3(38) services, professionals are also increasingly taking on the role of “named fiduciary” under ERISA. The firm says that it views delegation as more than risk mitigation; delegated/outsourced CIO services can potentially improve participant outcomes through simplified investment structures, better diversified investment options and lower fees.

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