Defined Contribution plans are at the center of providing retirement security to the majority of workers. Contained within this post are questions that fiduciaries, plan sponsors, and financial professionals should ask themselves when working with DC plans.

[PDF Download] DC Plan Worksheet

1.) What is the Objective of Your DC Plan?

Successfully managing a DC plan begins with setting a clear objective. Depending on your organization and other plans available, the plan’s objective may vary. For most organizations, plan participants will rely on their DC plan to replace 30% or more of their final pay. Note that even workers who have a defined benefit plan will likely need a DC plan to replace a certain percentage of pay. As a plan sponsor, your plan objective may be to help participants build retirement income. While you cannot guarantee that your workers will succeed in reaching this objective, your plan can be designed to improve the likelihood that they will reach the goal you set.

2.) Who Are the Plan Fiduciaries and What Are Their Responsibilities?

Plan governance begins with understanding who’s responsible for overseeing a plan - that is, the fiduciaries. The government spells out these responsibilities in ERISA, which stands for the Employee Retirement Income Security Act of 1974. ERISA protects the interests of employee benefit plan participants and their beneficiaries. It establishes standards of conduct for plan managers and other fiduciaries. Plan fiduciaries can be held personally liable for failing to fulfill their fiduciary obligations.

An ERISA Fiduciary, generally named in the plan document as a fiduciary, has discretionary authority over the management of a retirement plan or its assets, and offers investment advice with respect to plan assets for a fee.

Note: the employer that sponsors a plan is always a fiduciary, yet there may be other fiduciaries who share in the responsibility of operating a plan. It is important to note that plan sponsors can never shed themselves fully of fiduciary responsibility with respect to their plan.

3.) What Are Your Plan Success Metrics and Benchmarking Disciplines?

Plan sponsors may consider a host of metrics to evaluate the success of their plan. These may include the plan’s participation rate and contribution levels.They also may consider leakage from the plans, such as hardship withdrawals and loans outstanding. The ultimate measure of success is whether the plan is meeting its objective. For instance, if your plan has an objective of building retirement income, is it on track to succeed for most of your population? Your plan’s participation rate, contribution levels, leakage and investment returns will all contribute to meeting a retirement income objective.

They should also consider how they will benchmark their plan, both in terms of design and investment offerings. A plan’s recordkeeper or consultant may offer a range of reports to help you compare your plan design to others and to evaluate your investment offerings relative to performance, risk and cost benchmarks.

4.) Are Your Plan Documents Complete, Current & Accurate?

Fiduciaries have important responsibilities and are subject to standards of conduct because they act on behalf of participants in a retirement plan and their beneficiaries. These responsibilities include:

  • Acting solely in the interest of plan participants and their beneficiaries, and with the exclusive purpose of providing benefits to them;
  • Carrying out their duties prudently;
  • Following the plan documents (unless inconsistent with ERISA);
  • Diversifying plan investments

Plan fiduciaries should seek legal counsel to confirm your plan documents are complete, current and accurate.

5.) Can Your Participation Rate & Contribution Levels be Improved?

Plan sponsors are encouraged to consider automatic enrollment and contribution escalation to increase employees’ retirement savings. The Pension Protection Act of 2006 includes a number of provisions to encourage employers to use automatic arrangements, and establishes “safe harbor investments” known as Qualified Default Investment Alternatives.

The Defined Contribution Institutional Investment Association, a nonprofit industry group that’s dedicated to enhancing retirement security, supports implementation of automatic programs. In a July 2017 paper, “Design Matters: The Influence of DC Plan Design on Retirement Outcomes,” DCIIA recommends that:

  • Automatic enrollment is in place, with a default contribution rate of 6% of earnings;
  • Automatic escalation places a cap on contributions only when they reach 15% of earnings;
  • There is no leakage from the system, due to effective plan design and communication efforts

6.) What Investment Structure Best Fits Your Participants & Plan Objective?

Plan sponsors are responsible for creating the investment menu. Most organizations hire an investment consultant to help with the investment menu design, manager selection and monitoring. The investment consultant or legal counsel may also help write an investment policy statement for the plan.

DC plan investment menus have evolved largely with greater understanding of participants and what they tend to do, or not do. With acknowledgement that participants are not the same, plan choice has evolved into what we often label “tiers” of choice.

The first tier is for the “do-it-for-me” group, which we’ve learned tends to be the majority of plan participants. This tier is the most common investment default category, including the government identified QDIAs; generally target-date, managed accounts and balanced funds. A second tier may be for those participants who would rather create their own portfolio using a list of investment choices, which may be as short as 3 or significantly longer.

Less than a quarter of plans may offer a third tier such as a brokerage window.

This tier is for those who want even more choice; they may want more mutual funds or ETFs to select from or the opportunity to invest in individual securities such as stocks and bonds. There are many pros and cons to offering a brokerage window.

Determining the investment structure and types of investments will depend on your participants and plan objective.Your structure and choices may also vary significantly based on the asset size of your plan.

7.) Does Your Plan Offer Support, Distribution Flexibility & Investments Appropriate for Retirees?

If a plan sponsor desires to keep retirees in the plan, they should carefully review their plan and make sure it is as attractive as possible.

First, they should look at retirement education and support. Do they communicate the value of remaining in the plan? Do they offer retirement income tools? Do they offer advice or counseling? Might they offer a total wellness program, including both financial and health-related services?

Next, they should consider distribution flexibility. Does the plan allow partial withdrawals or only lump sum? Can a retiree set up installment or periodic payments to transfer money for instance monthly to their checking account – in essence, creating a paycheck from their DC plan assets?

The plan sponsors should also look carefully at their investment choices and determine whether they have a complete and appropriate list. Do they have target-date vintages that are retiree appropriate? Do they offer stable value and income-oriented bond funds? How about bond ladder strategies?

They also may want to consider offering access to an annuity buying platform to allow the retiree to roll money out of the plan to an IRA and buy an immediate or deferred annuity with a percentage of their retirement money.

Click Here to Download: [PDF] DC Plan Worksheet