Navigating the maze of defined contribution plan administration
Sponsors of defined contribution (DC) retirement plans have their work cut out for them. They face a thousand and one important decisions that can seriously impact their plan.
Deciding who decides
These decisions run the gamut from strategic decisions, which may have a large impact on ultimate retirement readiness (i.e. the company match structure) to non-strategic, but necessary, decisions (i.e. replace manager A with manager B?). One very important decision is choosing who makes the decisions themselves: is all plan decision-making kept in-house, is a consultant hired to help, or are critical chunks of work outsourced?
In some cases, keeping management of a plan in-house might be a good decision. But that can come with costs, in particular the time demands placed on a company’s senior executives. In some cases, delegating to a third party can result in a more efficient use of company time, while also reaping the benefit of a third-party partner who is up to date on the latest trends in DC plans and how to take advantage of them. Any final judgment should consider what makes sense for a particular organization and plan.
The labyrinth of DC plan decision-making encompasses key decisions about how to design the plan itself. That includes: “How do we manage automatic features, such as auto-enrollment and auto-escalation?” These issues can impact plan participation and, ultimately, the success of a company’s employees when it comes to planning retirement.
Considering match rates
Another turn in the labyrinth involves setting a company’s match rate. Employees tend to save up to the match rate, so setting that rate can have a significant effect. And of course, a company’s match rate has an impact on its financial state. A generous match helps workers, but the CFO may wince at the impact it creates on the income statement.
Finding the best QDIA
A fourth big choice involves the selection of the Qualified Default Investment Alternative (QDIA) option, which determines how auto-enrolled or defaulted plan participants’ contributions are invested. 90% of plan participants invest according to the default option, and tend to stay there.1 But what if a more appropriate product exists? How might one get employees moved into that? Again, plan sponsors can go it alone, find a consultant or fiduciary services provider who might offer guidance on how to make and implement this decision.
Sometimes these key strategic decisions can become overshadowed by day-to-day responsibilities such as monitoring service providers or preparing plan materials and regulatory filings, particularly of the plan has a complex operating structure.
Finding a way through the maze of decisions
Elsewhere in the labyrinth there are questions about how to handle plan expenses or how to sort through qualitative issues related to outsourcing. My colleague Bob Collie recently wrote about the latter issue in a recent blog post. As he writes, “outsourcing is an option, not a requirement”.
When defined contribution plan administration leads fiduciaries into a complicated maze, having more options is far better than having less. Another colleague, Eric Macy, also recently wrote about a new, free Russell Investments tool that helps evaluate the steps in this maze for the different kind of plan sponsors and decision makers. Click here to take the tour.
1 Cerulli: Retirement Markets 2014: Sizing Opportunities in Private and Public Retirement Plans.