Halloween is the time of year when one’s thoughts turn to trick-or-treat, ghosts and goblins, and things that go bump in the night. But what keeps - or should keep – plan fiduciaries up at night?
Well, there are the things like…
Changing Providers
Industry surveys routinely point to a certain amount of regular provider “churn” – indeed, by some counts as many as 10% of the plans change providers in any given year. That said, industry surveys (and excessive fee litigation) are replete with indications that the vast majority of plans not only don’t change recordkeepers, but may not even undertake a formal review of services, fees and capabilities.
Now, any plan sponsor who has ever gone through a recordkeeping conversion knows that, however smooth the transition, and regardless how improved the experience on the new platform, moving is a lot of work. And, as with relocating your home, the longer you have been in a particular location, the harder it seems to be. Knowing that, it’s little wonder that many plan sponsors make those changes only under a duress of sorts, forced by poor service, a lack of capabilities, (relatively) high fees, or more than one of the above.
And that, of course, means that the transition, however badly needed or desired, will likely be rougher – and take longer – than desired. And who knows how many intentions to pursue a review have simply petered out on the altar of “not enough time” to do so?
Getting Sued
Plan sponsors will often mention their fear of getting sued (actually, their advisors frequently broach the topic), and little wonder. The headlines are (still) full of multi-million-dollar lawsuits against multi-billion-dollar plans, and if relatively few seem to actually get to a judge (and those that do have – to date – largely been decided in the plan fiduciaries’ favor), they nonetheless seem to result in multi-million-dollar settlements. Oh, and not only has this been going on for more than a decade, the issues raised are evolving as well.
As a plan fiduciary, you can be sued, of course; and let’s not forget that that includes responsibility for the acts of your co-fiduciaries, and personal liability at that.
That said – and more than a decade after the first series was launched – those cases (still) seem to involve a relatively small group of rather large plans. If it’s (still) astounding that some of the plans do the things they are alleged to do (and not do), for those familiar with the math of contingent fee litigation, there’s little mystery to the big plan focus (though every so often we’re reminded that a new generation of litigators might well have less auspicious goals).
Getting Audited
Of course, most plan sponsors won’t ever get sued, much less get into trouble with regulators. That said, plan operations are complex, and audits – those required of each plan, not to mention the unplanned ones by the IRS or DOL, are, anecdotally, anyway, on the uptick. The recent Plan Sponsor Council of America 403(b) Survey found that the percentage of organizations indicating they have undergone an IRS audit in the past has nearly doubled from 8.1% in 2016 to 15.4% in 2018.
Plan sponsors are, therefore, prudent to be concerned about the possibility of an audit; and well-advised to both monitor those operations – and, where necessary – to talk advantage of the various self-correcting programs to remedy any shortcomings before they show up on audit.
Retirement Income
Okay, plan fiduciaries aren’t exactly SCARED of retirement income. Not that you’d know it from the tepid adoption rate among defined contribution plans.
Now, there’s little question that participants need help structuring their income in retirement – and little doubt that a lifetime income option could help them do that.
There are in-plan options available in the marketplace now, of course, and thus, logically, there are plan sponsors who have either derived the requisite assurances (or don’t find them necessary). Or who feel that the benefits and/or participant need for such options makes it worth the additional considerations. That said, industry surveys indicate that only about half of defined contribution plans provide an option for participants to establish a systematic series of periodic payments, much less an annuity or other in-plan retirement income option, and that’s following the 2008 Safe Harbor regulation from the Labor Department regarding the selection of annuity providers under defined contribution plans, not to mention a further attempt to close that comfort gap in FAB 2015-02.
Thus far those steps don’t seem to have been very effective – but proponents are hopeful that the SECURE Act’s provisions regarding lifetime income disclosures (though many recordkeepers already provide this) and, perhaps more importantly, an expanded fiduciary safe harbor for selection of lifetime income providers, will – finally – move the adoption needle.
That said, the biggest impediment to adoption may simply be that (industry surveys notwithstanding) participants don’t seem to be asking for the option – and when they do have access, mostly don’t take advantage, even when defined participants have a choice, they opt for the lump sum.
Plan Costs
It may be more about the fear that plan costs – at least what might be deemed as excessive plan costs – might bring in the way of litigation – but whether you feel that the aforementioned wave of litigation has been a force for good or ill, it has certainly contributed to a heightened awareness of fees by plan sponsors – and one that finally seems to be moving beyond squeezing that extra pound of flesh from recordkeepers (though there’s still plenty of that).
These days it’s as likely to show up in questions about shifting to passive options, or at least an inquiry about a different share class. Questions are good – actions potentially better.
Regardless, it would seem to be difficult to live up to ERISA’s fiduciary admonitions to ensure that the fees and services provided to the plan are reasonable if you don’t know what you’re getting, or how much you’re paying – or how much you’re paying for what you’re getting.
The ‘Squeaky’ Participant
We’ve all heard (and likely experienced) the response to that squeaky wheel that every organization has, and that every plan sponsor fears, or at least dreads. Other than sheer human inertia, there is perhaps no more powerful force in freezing proposed plan changes in their tracks than concerns about the response that this individual (and the individuals whose attention they always seem to garner) might wreak on those responsible for those changes.
We all know who they are. We all know what they do. We all know what they (inevitably) keep us from doing. And yet they continue to be a force to be reckoned with in many organizations.
They might even be on your plan committee…
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