Understanding the impact of service providers on retirement plan success.
How do you define outstanding service for your business? You probably describe your specialized expertise, the value you deliver relative to the cost, and the quick response time and quality of your customer interactions. Do you hold your retirement plan services providers to these same high standards? A plan’s service providers have a significant impact on retirement plan success. Robust administrative outsourcing from experienced providers can help alleviate critical administrative duties for plan sponsors, saving them time and costly compliance errors. Effective plan design and employee communications have proven successful in driving stronger employee savings and improving retirement readiness, which could have a positive impact on worker productivity.1 Selecting high quality service providers isn’t just good business – it’s a legal mandate for retirement plan sponsors. In most plans, the employer adopting the retirement arrangement has overall fiduciary responsibility for managing plan operations and plan investments.2 When employers engage service providers to help administer the plan and manage plan investments, they need to make certain that fees are reasonable relative to the services provided. The wave of class action litigation against fiduciaries along with intense Department of Labor (DOL) and IRS enforcement efforts in recent years provide a constant reminder of the need to build a team of service providers that can help ensure the retirement plan is compliant. The retirement plan industry is constantly evolving and introducing innovative solutions. There are countless choices, so plan sponsors must be savvy shoppers – and that begins with knowing what to look for in a retirement plan solution. This paper explores the factors plan sponsors should consider when evaluating service providers to ensure they are getting the high-quality services they need for their retirement plan and their employees.
What does great service look like?
Most retirement plan sponsors engage outside expertise to provide three dimensions of plan support:
1. Plan administration and compliance
2. Investment oversight
3. Employee education and communications
For each dimension of plan support, plan sponsors should prioritize the quality indicators that are most important for their plan.
1. Plan administration and compliance
Few plan sponsors would consider themselves experts regarding the numerous operational requirements and plan limits that apply to retirement plans. But compliance missteps can be costly. In fiscal year 2018, the U.S. Department of Labor (DOL) recovered $1.1 billion for civil violations of the rules under ERISA.3The IRS also has a robust enforcement effort focused on compliance with the retirement plan-related tax rules. Unlike the wave of lawsuits that have been waged against large plans, compliance fines and corrections costs affect plans of all sizes, including small plans. Most plans sponsors will engage third party administrators (TPAs) and recordkeepers to shoulder much of the day-to-day burden associated with operating a retirement plan. But not all service providers deliver the scope of services or can meet the quality standards needed to prevent costly plan mistakes. Following are some quality indicators for plan administration services. Experience with similar plans. A TPA or recordkeeper should be able to demonstrate experience in administering plans of the type and size selected by the plan sponsor. Some firms specialize in one segment of the retirement plan market, so it’s important to confirm the service provider’s primary focus on plans with similar characteristics. For example, services and fee structures designed for mid-size and large plans may not translate to small plans and solo business owners. Business focus. A close review of the service model is critical. Is recordkeeping the primary business focus or is it secondary to other products? Some recordkeepers treat their plan administration services as a loss leader in order to gain assets for their proprietary investment products. If a provider subsidizes its recordkeeping operation, its administration services may not receive the focus and funding needed to stay competitive with providers that specialize in recordkeeping services and require that business to stand on its own in terms of profitability. Skilled and responsive staff. It’s important to make certain the employees who will be servicing the plan have the experience and skills to deliver high quality services. Low tenure and high turnover rates can be indicators of inexperienced staff or an ineffective team. Assess the depth of internal training and preparation provided to employees before they interact with plan sponsors or participants.
Do any employees hold industry certifications reflecting specialized retirement plan education and expertise? Confirm the team includes specialized skills that a plan may require from time-to-time such as plan design or corrections services. It is also essential to understand whether the plan will be serviced. by dedicated staff or through a call center or team model. How does the staff score on customer service surveys (e.g., response time, ability to resolve issues, etc.)?Traditional vs. fiduciary services. Under the traditional TPA or recordkeeping service model, plan sponsors retain the fiduciary responsibilities for plan administration.2 Most TPAs and recordkeepers are not fiduciaries; they perform the list of services outlined in the service agreement based on directions provided by the plan sponsor. Some TPAs have recently expanded their services to take on ERISA fiduciary discretion and control over plan operations. Plan sponsors that are risk averse or challenged to manage their administrative responsibilities may want to explore the scope and cost of these enhanced fiduciary administration services. Access and automation. The efficiency of completing transactions without manual or repeated employer interactions is another key quality indicator. Explore which transactions are processed automatically or monitored by the service provider without an employer touchpoint such as ACH loans, qualified domestic relations orders(QDROs) or hardship distributions. Participant access, easy navigation and automation are also critical. The expectation today is that participants will have 24/7 access to their retirement plan account with intuitive navigation. Flexible solutions. A business’s retirement plan needs may change over time. As a business grows and evolves it may need more options or a different plan design approach. Make certain the service options offered by the administrative service provider are broad and deep enough to meet both present day and future needs. Examples include the ability to support a variety of plan design features (e.g., automatic enrollment, automatic escalation, safe harbor plans, cross-tested profit sharing), multiple size plans, expanded participant communications efforts.
2. Investment oversight
Access to investment expertise is critical to plan success. A plan sponsor may benefit from engaging a service provider that can offer a range of investment support models so that as needs change over time, the plan sponsor can expand or adjust services with minimal disruption. There are several quality indicators for investment support services. Robust investment platform. Most retirement plans gain access to their investment options through their recordkeeper. In the past, many of these platforms were populated primarily(in some cases exclusively) with the recordkeeper’s proprietary products. Today, most recordkeeping platforms use an open architecture design that includes an expansive list of fund families from which a plan sponsor can build the menu of investments they will make available to plan participants. Plan sponsor investment support. Plan sponsors must prudently select a menu of investment alternatives for their plan. Most plan sponsors prefer to share that fiduciary duty with a financial professional who specializes in retirement plan services and is willing to assume fiduciary responsibility for overseeing the plan’s investments. Two service models are available for fiduciary investment support.
Investment professional ERISA 3 (21)Shares co-fiduciary responsibility with plan sponsor for selecting and monitoring the plan’s investment menu, with plan sponsor typically retaining final discretion regarding investments (broker, investment professional, or third-party outsourced vendor).
Investment manager ERISA 3 (38)Has discretionary responsibility for selecting and monitoring plan investments (must be a bank, insurance company, or registered investment advisor (RIA).
Some plan sponsors appoint an ERISA 3(38) investment manager to serve as a fiduciary with discretion to select and monitor a universe of investment options that are made available on the recordkeeping platform, while also engaging a financial professional to select the specific plan menu. Recent litigation against plan fiduciaries is a strong reminder to plan sponsors that investment oversight is not a one-time duty. They have an ongoing responsibility to monitor investments and adjust the menu when appropriate.4
Continuum of participant investment options
A retirement plan’s participants likely have a wide spectrum of investment skills. A service provider that can support a variety of investment support models is often the best solution.
• Easy auto solutions – Employees who do not feel equipped to make investment decisions for their retirement savings and who are not interested in investing the time to gain that expertise may prefer easy-to-use auto solutions managed by investment professionals, such as age-based target date funds (TDFs) or risk-based model portfolios.
• Flexible self-serve options – Employees who want to build their own portfolio need a sufficient variety of high-quality investments in the menu to build a personalized portfolio. They also need access to sufficient education and information regarding the investments to equip them to take on this responsibility.
• Personalized, professional advice – Personalized professional investment advice is the optimum service for some participants – automated investment advice tools, face-to-face investment consultation and advice, or investment management.
Systems integration
Investment support services are most effective when the tools or services are integrated with the recordkeeping systems. For example, the likelihood of follow-through is much higher if an advice tool that recommends a certain allocation is connected to the recordkeeping platform and can automatically reallocate the participant’s account. Managed account and auto rebalancing capabilities connected to the platform offer similar efficiencies.
3. Employee education and communications
Helping participants build their retirement savings and reduce financial stress is a primary objective for most retirement plans. There are a variety of quality service indicators toward this plan goal. Targeted, effective communications. Employees have different levels of investment and financial experience, so employee education and communication programs need to adapt messages to specific audiences. Generic paper mailings and one-size-fits-all presentations are a thing of the past. Personalized, relevant communications that drive positive participant behavior are the quality indicators plan sponsors should expect from service providers. Employee information needs to be engaging, and service providers should be able to demonstrate the positive impact of their services (e.g., increased participation or savings rates, higher use of retirement planning resources). Multiple delivery channels Employees have different learning styles. A service provider should be able to accommodate these differences. For example, some individuals prefer to access tools and information on their own such as savings projections or investment modeling tools, or short educational videos available on-demand. Live one-on-one consultation is more effective for others. Surprisingly, even many technology-savvy Millennials have positive views of financial professionals and want someone who will educate them and customize their approach to the client.5 Financial wellness components. An increasing number of plan sponsors are offering more holistic financial wellness programs, having learned that talking about retirement savings independent of competing financial needs is not effective. These financial wellness programs are valued by employees. A growing number of programs are now available through retirement plan services providers. Compare the breadth of financial topics addressed in these programs (e.g., managing credit card debt, budgeting, student loan management) relative to the needs of your employees when evaluating service providers.
1. Employee Benefit Research Institute (EBRI) Issue Brief, “Perceived Helpfulness of Financial Well-being Programs: Results From the 2017 and 2018 Retirement Confidence Surveys,” Executive Summary, August 20, 2018, https://www.ebri.org/retirement/content/perceived-helpfulness-of-financial-well-being-programs-results-from-the-2017-and-2018-retirement-confidence-surveys.
2. ERISA 402(a), ERISA 3(16).
3. U.S. Department of Labor (DOL) Fact Sheet, “EBSA Restores Over $1.6 Billion to Employee Benefit Plans, Participants and Beneficiaries,” https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/fact-sheets/ebsa-monetary-results.pdf.
4. Tibble v. Edison International, 135 S. Ct. 1823 (2015).
5. FINRA Investor Education Foundation, CFA Institute, “Uncertain Futures: 7 Myths about Millennials and Investing,” October 2018, https://www.cfainstitute.org/research/survey-reports/millennials-and-markets-2018.
This is a general communication for informational and educational purposes. The materials and the information are not designed, or intended, to be applicable to any person’s individual circumstances. It should not be considered investment advice, nor does it constitute a recommendation that anyone engage in (or refrain from) a particular course of action. If you are seeking investment advice or recommendations, please contact your financial professional. Securian Financial’s qualified retirement plan products are offered through a group variable annuity contract issued by Minnesota Life Insurance Company. Securian Financial is the marketing name for Securian financial Group Inc., and its affiliates. Minnesota life Insurance Company is an affiliate of Securian Financial Group, Inc.