What Plan Fiduciaries Should Be Talking About With Their Advisors
As we set out to prepare this month’s newsletter, we first encountered a strange feeling: it seemed that the retirement landscape had entered a momentary standstill. The United States Supreme Court (SCOTUS) is waiting to hear oral arguments in the Northwestern v. Hughes case, Congress continues to toss and turn over SECURE Act 2.0 and various proposals to increase retirement plan participation, and the Department of Labor continues to consider its permanent approach to the fiduciary rule and ESG investing. Not much is actually happening at the moment.
After about five seconds of that feeling, we snapped back to reality and were confronted with the ongoing onslaught of important developments for plan sponsors and fiduciaries. Employers are facing an incredible amount of risk right now, but not necessarily in the conventional sense; right now many employers run the risk that they’re missing out on the chance to do something better with their retirement programs.
Given the challenging labor market, this month’s newsletter dives into five emerging trends that highlight the risk and opportunity for plan fiduciaries who are in a position to make progressive, thoughtful decisions about their organizations’ retirement plans.
#1: Litigation: There’s a Reward for a Process. Many lawsuits are in a bit of a holding pattern while SCOTUS waits on the Northwestern case. But a Federal court’s recent opinion in the Alas v. AT&T Services, Inc. case described a desirable reward for prudent plan fiduciaries: granting their motion for summary judgment. The defendants had advanced many common retirement plan fee litigation allegations, including their contention that defendants had failed to monitor excessive recordkeeping fees.
The court sided with the plaintiffs and blocked the suit from proceeding. In one paragraph it confirmed that the fiduciaries had presented “extensive evidence that they acted prudently” and highlighted the following actions:
- Periodically reviewing the recordkeeper’s 408(b)(2) disclosure and invoices;
- Engaging experts to evaluate the reasonableness of the recordkeeper’s fees; and
- Seeking fee reductions after negotiations.
Fiduciary Lessons: It pays to have a good process. It’s just as important to document the process. It generally pays to pay attention.
#2: Saving Habits: Good Savers Made Good Decisions. Principal published results from a study of participants’ behavior since the outset of the COVID-19 pandemic. It found that the majority of “super savers” – those who were saving at least 15% of their income or at least 90% of the IRS maximum – saved even more than usual over the last 18 months. The immediate reaction may be to assume those are higher paid employees who have more flexibility than the average worker. However, Principal was careful to emphasize that more than half of those individuals made less than $100,000 in the last year and that roughly half of the “Generation Z” super savers made less than $35,000.
Fiduciary Lessons: Employers do their employees a disservice when they assume those workers: (1) can’t afford to save more; (2) don’t want to save more; and (3) won’t make good decisions. Plan sponsors do well by their employees, however, when they assume that employees are interested in making good decisions when armed with the information needed to understand their choices and implications of decisions.
#3: Saving Habits: Employers Can Help Employees to Become Better Savers. As we enter the fourth quarter, now is the time to ensure the plan’s design features have been updated to reflect what the law allows and encourages, and what employees need and want. Employees are looking to their employers to look out for their future needs. They believe – rightly or wrongly – that their employers have given thought to the plan structure. If the plan allows immediate or early eligibility, they’ll be more likely to proactively sign up. If the plan offers automatic enrollment – frankly, at any percentage up to around 10% – they’ll accept the default number. If it offers automatic escalation, they’ll accept the annual increase. If they offer a do-it-for-me solution as a QDIA (whether that be a target date fund or managed account), they’ll press the easy button.
Fiduciary Lessons: Progressive changes in plan design help to demonstrate that an organization cares about retirement. They show that an organization cares about its people. As employers scramble to retain and attract employees, they can better position themselves by ensuring the retirement plan design is built to increase the likelihood of positive outcomes and to demonstrate care for employees’ futures.
#4: Lifetime Income: Employees Want It. They Really Want It. A recent participant survey reflects that employees now consider access to guaranteed lifetime income as a factor in choosing whether to stay with their employer. Around 75% of employees said they were much or somewhat more likely to stay at their current employer if offered a lifetime income option; around 74% said they were much or somewhat more likely to change employers if not offered a lifetime income option.
The survey reflects that employers still have a lot of work to do in communicating with employees regarding lifetime income options. But when they offer the option and communicate well, employees experience much greater retirement confidence. Only 32% of employees think their savings will last at least 30 years, but that number doubles to 64% among employees who already have guaranteed lifetime income.
Fiduciary Lessons: Finally. The need has been bubbling under the surface for years. The SECURE Act finally opened up the window of innovation, and we are starting to see supply grow to meet the demand. It’s time to explore which offerings – including but not limited to Income America 5forLife – are available on the recordkeeping platform and demanding more access when the options aren’t sufficient.
#5: Financial Wellness: Employers Feel Responsible. Although we have certainly seen an increase in employers’ devotion to employees’ financial wellness over the last few years, results from a recent employer survey revealed two encouraging statistics: 95% of employers feel a sense of responsibility for their employees’ financial wellness and 46% of employers now offer financial wellness programs. A staggering 56% of employers feel an “extreme” sense of responsibility.
Fiduciary Lessons: This data brings a breath of fresh air. More and more employers are learning how important it is to care – and how much the organization benefits from it caring – about their employees’ financial wellness. As employers look ahead with hesitant optimism that 2022 will get us where we thought we’d be in 2021, programming and resources intended to improve employees’ financial wellness should be at the heart of the planning conversations.
Closing Thoughts. The sense of a standstill was short-lived, indeed. There’s a lot to discuss. Now, let’s make sure we’re having these important conversations and taking advantage of the opportunity that rests in our hands.