Download Revolutionizing DC Plan Design

RETIREMENTPERSPECTIVES
RevolutionizingDCPlanDesign
January20,2017
BrianP.Roach,CRPS
RegionalDirector,DefinedContribution
424Views
Whyinstitutionalfeaturesaremovingtoalldefinedcontributionplanmarkets
Designf eaturesonceavailableonlytodef inedcontributionplansworthmorethan$1billioncan
nowbeof f eredtoplansassmallasstart-ups,andthistrendismovingf astthankstoadvancesin
technologyatrecord-keepersandbecauseof moreef f icientinvestmentlineups.
Muchof thischangewillcontinuetobeaidedbytheDepartmentof Labor’s(DoL)pending
f iduciaryrule,asmoredef inedcontribution(DC)plansponsorslooktoengageinf iduciary
arrangements,level-izedcompensation,andprovidethemostcostef f ectiveinvestmentvehicles.
Whathassparkedthistrend?Certainly,onef actorhasbeentheconcertedef f ortof DCplansto
incorporatedef inedbenef it(DB)f eaturesintotheirplandesign.
The“DB-ification”ofDCPlans
AlthoughDCplanssupplanteddef inedbenef it(DB)plansyearsagoastheprimaryretirementplan
f oremployees,the“DB-if ication”of DCplansshif tstartedwithinstitutionalf eaturessuchasautoenrollmentandauto-escalation,whichprovideapension-likecontributionmethodf orparticipants,
especiallyif therealsoisacompanymatchorprof it-sharingcontribution.
Onceparticipantsareauto-enrolledintotheplan,theytypicallyareinvestedintheplan'squalif ied
def aultinvestmentalternative(QDIA).SincetheQDIAusuallyisatarget-datef und,withagrowing
movementtowardmanagedaccounts,hereinaretheinvestmentconceptsof DBplansthatare
beingusedf orDCplans.
Inwhat’scommonlyref erredtoas“glidepaths,”plansponsorsbringparticipants'portf oliostomore
conservativeallocationsastheygetclosertoretirement,andprof essionalassetallocationis
provided.Thisdynamicisenhancedf urtherbythegrowingavailabilityof customtarget-date
solutionsavailable.
Withacustomtarget-datef und,onecantrulyprovidesimilarassetallocationandassetclasses
thatwouldbecommoninaDBplan,butarenotf oundinyourtypicalDCplan.Thisincludesa
varietyof f ixed-incomeassetclasses,alternativeinvestments,andotherassetclasses.Inthe
past,onlylarge-planrecord-keepersandtheirconsultantswhereabletoof f ercustomized
solutions;butnow,manysmallermarketrecordkeepingplatf ormscantakethecoremenu
investmentoptions,andsometimesnon-coreinvestmentoption,tocreateacustomtarget-date
f undf orthatspecif icplan.
If theQDIAisnotatarget-datef undbutamanagedaccountinstead,planswouldhavetheability
of creatingacustomportf oliotailoredspecif icallytothatparticipant.Notonlycantheyhavea
customglidepathandmorecustominvestmentallocationbutalsotheycanf ormf iduciary
engagementswiththatmanagedaccountprovider.
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BeyondtheQDIAs,coremenusareevolvingaswellinordertoappearmore“institutional”in
nature,intermsof consolidationandef f iciency.Asmanyinstitutionalconsultantsareadvocating
f orstreamlinedmenusof eightto12options,moreplansinthesmallermarketsaref ollowingsuit.
Partof thisconsolidationcomesf romtheplansinthemega-marketthataregravitatingtoward
“white-label”strategies,wherebymultipleassetmanagerscanoperatewithinasingleoptiononthe
coremenu.
Althoughthewhite-labelconcepthasnotbeenimplementedacrosstheboard,therenoware
certainsmallerplanprovidersthathavepackagedwhite-labelf undsontheirplatf orm.Asthe
technologyadvances,thisideasurelywillcontinuetoevolve.Butwhetherornottheplanhas
white-labelcapabilities,moreplansarelookingtof ollowandconsolidatetheircoremenulineups.
Inadditiontoconsolidationof thecoremenu,wealsoareseeingmoreandmore3(21)and3(38)
f iduciaryprogramsatboththeplanlevelandtheparticipantlevel.Theseprogramsprovide
additionalf iduciaryguidancewiththein-depthresearchprocessthatoncewasonlyavailable
throughaninstitutionalconsultingf irm.
Finally,themostuniversaltrendthathasspreadtosmallermarketsisthereductionof f ees.Ithas
becomeincreasinglycommonf orplansof allsizestohaveinstitutionalmutualf undshareclasses,
or“R6”shares.Theseshareclassesnotonlyproducethelowestexpensesf orthatf undbutthey
alsoprovidef orthetransf ormationof f eelevelsthathasbeenstandardintheinstitutionalmarket
f oryears.Duetotheheightenedf ocusonf ees,wealsohaveseenmoreplanslookingtoutilize
CollectiveInvestmentTrusts(CITs).CITshavebeenutilizedinthemegamarketasamorecost
ef f ectivevehiclethanaf undgovernedbytheInvestmentCompanyActof 1940,andarenow
commonplaceinmanysmaller-planlineups,especiallyasthevehicleof choicef orstable-valueand
target-datesolutions.
WiththeimpendingDoLf iduciaryrule,allthesetrendsshouldcontinue.Notonlywillmanysmallerplansponsorshavethelook,f eel,andcostof aninstitutionalplanbutalsoitismorelikelythatthey
willhavethebenef itof institutionalserviceexperiencef romtheiradvisorandconsultantaswell.
That’sbecausemanyadvisorswhohaveworkedwithplansponsorsinthepastmaynolonger
prospecttheseplansduetotheadditionalrulesandscrutinysurroundingretirementplansasa
resultof thef iduciaryrule.Astheretirementbusinessbecomesmorespecialized,thiswillprovide
anenvironmentwherebymoreplansponsorswillstartworkingwithdedicatedDCadvisorsand
consultants,andtrulyhaveaninstitutionalexperience.
TocomplywithTreasuryDepartmentregulations,weinformyouthat,unlessotherwiseexpresslyindicated,any
taxinformationcontainedhereinisnotintendedorwrittentobeused,andcannotbeused,forthepurposeof(i)
avoidingpenaltiesthatmaybeimposedundertheInternalRevenueCodeoranyotherapplicabletaxlaw,or(ii)promoting,
marketing,orrecommendingtoanotherpartyanytransaction,arrangement,orothermatter.
Theinformationisbeingprovidedforgeneraleducationalpurposesonlyandisnotintendedtoprovidelegal
ortaxadvice.Youshouldconsultyourownlegalortaxadvisorforguidanceonregulatorycompliancematters.
Anyexamplesprovidedareforinformationalpurposesonlyandarenotintendedtobereflectiveof
actualresults.
A401(k)isaqualif iedplanestablishedbyemployerstowhicheligibleemployeesmaymakesalarydef erral(salary
reduction)contributionsonanaf tertaxand/orpretaxbasis.Employersof f eringa401(k)planmaymakematchingor
non-electivecontributionstotheplanonbehalf of eligibleemployeesandmayalsoaddaprof itsharingf eaturetothe
plan.Earningsaccrueonatax-def erredbasis.
QualifiedDefaultInvestmentAlternative(QDIA).AQDIAisadef aultoptionof aretirementbenef itplanthat
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providesadditionalf iduciaryprotectionwhenchosenbyaplansponsor.AsdescribedbytheDoL:AQDIAisaproduct
withamixof investmentsthattakesintoaccounttheindividual’sageorretirementdate(anexampleof suchaproduct
couldbealif e-cycleortargeted-retirement-datef und).Aninvestmentservicethatallocatescontributionsamong
existingplanoptionstoprovideanassetmixthattakesintoaccounttheindividual’sageorretirementdate(an
exampleof suchaservicecouldbeaprof essionally-managedaccount).Aproductwithamixof investmentsthat
takesintoaccountthecharacteristicsof thegroupof employeesasawhole,ratherthaneachindividual(anexample
of suchaproductcouldbeabalancedf und).
Coremenusareindividualinvestmentoptionsavailabletoallplanparticipantsandpartof theplan’sinvestmentmenu.
Non-coreinvestmentoptionsareinvestmentoptionsthatarenotavailabletoindividualparticipantsasastandalone
allocationandarenotpartof theplan’sinvestmentmenu.
“White-label”strategiesref ertocustominvestmentoptionsthatusuallyconsistof multipleassetmanagersand
potentiallymultipleassetclassesthatarepackagedasonechoiceonadef inedcontributionplan’sinvestmentmenu
3(21)Fiduciary-Af iduciaryprogrambasedonEmployeeRetirementIncomeSecurityActof 1974("ERISA”)Section
3(21)
3(38)FiduciaryAf iduciaryprogrambasedonEmployeeRetirementIncomeSecurityActof 1974("ERISA”)Section
3(38)
CollectiveInvestmentTrusts(CITs)Aninvestmentvehicledesignedf orretirementplansthatof f ersf lexiblepricing
andtendtobelessexpensivethanaf undgovernedbytheInvestmentCompanyActof 1940.
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