As the Department of Labor closes in on finalizing its rules for retirement plan fees, advisors and plan sponsors in the defined contribution (DC) industry are asking themselves, "How does our plan compare to other plans?"
But the truth is, the industry benchmarks are pretty unimpressive, says Ben Jones, director of defined contribution for Russell Investments. "Average" DC plans, Jones notes in a blog post, often have insufficient participation, low savings rates, poor participant diversification, murky fee disclosure and too many investment options.
Russell Investments, which works with retirement plan advisors and plan sponsors, has identified seven key attributes that can help plans move beyond average, Jones said in an interview on Monday with AdvisorOne.
His tips are timely, considering that the Department of Labor's Employee Benefits Security Administration in February released its long-awaited final rule on 401(k) fee disclosures, rule 408(b)(2), and in doing so extended the compliance deadline three months to July 1.
1. Adopt a retirement income mindset rather than a focus on account balances, says Russell Investments Director of Defined Contribution Ben Jones (left).
"This year, when the fee disclosures rule comes out, retirement advisors and plan sponsors are going to get a lot of information, and their tendency will be to benchmark themselves against other plans in their industry, looking at size, shape, everything," Jones says. "Unfortunately, when you go out and benchmark yourself, you find out quickly that it's an exercise in mediocrity. The majority of plans in the U.S. don't have enough money saved or participation, and the fees, structure and even plan objectives are unclear."
Russell recommends that all stakeholders, including advisors, plan sponsors and participants, focus on the end goal of investment income to be achieved in retirement. "We focus on the target replacement income that we're trying to attain from our retirement plan, and then take that target to work backward and enhance the experience for plan participants," Jones says.
2. Provide a thoughtfully designed plan menu based on participant profiles instead of an overwhelming number of plan options.
Many retirement plan menus have been designed to provide a lot of different investments across broad categories or the Morningstar style boxes, according to Jones. "A lot of times it's been with good intentions that these investments are offered, but often the number of choices in the plan causes choice paralysis with the participants," he says. A better retirement plan structure lets participants identify what sort of investment profile they match. Russell identifies three primary profile types in DC plans:
"Do it for me" investors who lack time, skill or desire to build their own investment strategy, and may be happiest with a target date fund;
"Do it with me" investors who actually show up to the enrollment and education meetings and want to learn about tailoring investment solutions to meet their risk objectives, such as a large blend fund.
"Do it myself" investors who take a lot of pride in designing their own investment strategies and want to have every option available to them, including stocks and bonds through a brokerage window.
3. Offer best-of-breed investments based on merit and analysis rather than proprietary and single manager solutions.
4. Work to increase the percentage of participants in an asset allocation strategy instead of maintaining a small percentage of assets in target date funds.
6. Use auto features to drive employee savings rates greater than 10% instead of settling for 6% to 7% savings rates.
