Fiduciary Misperceptions
On a recent LinkedIn Live, Chris Augelli from T. Rowe Price and I talked through common fiduciary misperceptions and what you SHOULD be paying attention to in your retirement plan. What can we learn from the litigation that’s been making headlines recently in the retirement plan industry, and how can that help when structuring retirement plans?
What’s Old Is New Again: Litigation
There’s been quite a few lawsuits lately in the defined contribution retirement plan industry, but there is a silver lining. With the volume of cases we’ve had over the past 10+ years, the resulting decisions have given us a template and roadmap to consistent best practices that every plan fiduciary can adopt to truly optimize their plan over time.
So what are those best practices? Here are the 3 tenets Chris outlined that have emerged as a result of past litigation.
It’s All About Process - One of the most important practices to adopt is a good decision-making process that is consistently followed and structured exclusively with participants’ interest in mind. Process is the primary focus, not outcomes.
Focus on Value for Cost - Fiduciaries need to focus on the value for cost proposition; it’s not just about settling on the cheapest option.
A Range of Choices and Strategies Can Be Appropriate - One size does not fit all when it comes to plan investment lineup construction.
It’s All About Process
Here at Retirement Planology, one of the processes we implement with clients is to make sure they inventory everything related to their retirement plans, from A to Z, at least once a year. That involves reviewing operations, payroll, enrollment, etc., and documenting everything.
We also focus on our clients’ investment policy statements - that’s the criteria on selecting, monitoring, and holding retirement plan investments. Our meetings are structured around reviewing investment performance and using the framework of the IPS to monitor and make any decisions. Again, documentation is key to being able to explain the decisions you make with regards to retirement plan investments.
Documentation makes implementing processes much easier, because you have the roadmap - your responsibility then is to follow that process and check all the necessary boxes.
Here’s an example of how important documentation is: we had a client who went through a DOL inquiry recently regarding an investment. Thanks to implementing the proper processes, we were able to go back to meeting minutes and other documents that demonstrated that they had made the appropriate decisions regarding this particular investment. The trail of breadcrumbs we needed had not been eaten, thank goodness, and everything worked out fine in the end.
Focus on Value for Cost
Yes, it’s important not to focus exclusively on cost, but how do you define value? Here’s a salad analogy that might help.
Let’s say you were chosen to bring a salad to a party. What would your options be, and how would they compare cost-wise?
You could go to the neighborhood grocery store and pick up some lettuce (iceberg if you’re looking to save a few pennies, romaine if you’re feeling fancy). This is your cheapest option, but it takes a bit of work on your end in the form of washing the lettuce, cutting it up, etc. That will run you roughly $1.98-$2.25.
Your next option is to buy a couple of bags of pre-made salad. This will cost a bit more than option 1, but everything is washed and chopped, so you don’t have to do much work. $2.98 - $4, or a 66%-100% increase in cost.
Your third (and most expensive) option is to go to Whole Foods and purchase your salad there. You grab a container and get a lovely salad that’s ready to eat. And maybe you’re in a rush, so you’re more than willing to pay the higher price. This will cost you $8.99/lb. A head of romaine is approx 1lb for our comparison so that’s 450% more in cost.
My point? The purchasing criteria and the cost you are willing to pay for the value you are willing to get varies. Price/cost are only an issue in the absence of value. You need to know your criteria for what you are trying to accomplish in order to determine if you're willing to pay that cost to get that value.
As Chris mentioned, the retirement plan market is a lot more diverse and complicated than the lettuce market. So how do we help clients navigate the market and make the best decisions?
It all starts with the plan’s purpose for existing - plan sponsors need to be clear on what they’re trying to accomplish and who they are serving. Once you have that, you can put together a “shopping list” and go to the different recordkeepers to see what services they can provide and whether those services fit what you need.
As for RFPs, there are two approaches plan sponsors can take. One is benchmarking the plan against a group of peer plans of similar size, design, and industry. This will indicate where you fall on the range of pricing and may give you leverage to discuss what you’re getting with your current providers. Being able to refresh the pricing and making sure you’re getting the most bang for your buck from your current recordkeeper may be the way to go.
The second approach is to put out a formal RFP because you want to change your recordkeeper for various reasons. In lieu of an RFP, you can just get a request for information (in other words, we’re not changing, we’re inquiring though). Whichever approach you choose, you want to make sure you have the data you need to make good decisions in regard to your retirement plan.
A Range of Choices and Strategies Can Be Appropriate
So what does a “range of choices and strategies” even mean? Does it mean we have all major asset classes covered, with both active and passive selections offered?
Let’s start with QDIA (Qualified Default Investment Alternative); this is the default investment for many plans because it features automatic enrollment. This way participants are defaulted into an investment that has some protections from the Pension Protection Act. The important thing here is to scrutinize what the default investment is. Some recordkeepers who also produce investments have used QDIAs as a way to get more money into their own proprietary investments.
All these different target date series are constructed differently, with different goals. It’s important to know what’s under the hood when it comes to selecting a target date fund. Consider the glide path, the assets, the diversification, etc…does it all align with what your participants want and need?
Then there’s the fact that some participants are very hands-on, some are hands-off, and some are in the middle. All of these factors need to be considered when structuring your investment line-up in order to do it properly. This means knowing who your people are, how much financial knowledge they have, what other outside investments they might be making, etc., and then tying it all back to determining the range of options that is best for them. Personalization is permissible, and can be a good thing!
Are there limits when it comes to personalization of retirement plans? Well, NFTs/cryptocurrency does not have the same scrutiny and protections as other types of investments, so that’s pretty much a no-go. It’s important to keep in mind that for many participants, the company retirement plan forms the bulk of their retirement savings; your investments generally need to be vanilla enough for the masses, but also robust enough for anybody at any point in their career to be able to invest.
Key Takeaways
When it comes to process, it’s all about documentation and repeatability
When it comes to value for cost, it’s all about bringing context and information into the equation
When it comes to the range of choice and strategies, it’s all about being guided through the process and making sure any personalization is attuned to the participants’ specific needs
If you are a growing organization in the small/mid market, we can help you figure out what you need to focus on in your company retirement plan. Just email us at hello@retirementplanology.com, or contact us here.