All that is old becomes new again. It is an old adage that applies just as equally in the world of retirement plans. In the 1950s, if you had a retirement plan, most likely it was a defined benefit plan that provided lifetime income to participants that was funded by an insurance contract. In the 1990s and early 2000s, lifetime income was rapidly replaced, often due to decisions by plan sponsors, with lump sum payouts from 401(k) plans. In 2017, lifetime income is now a hot topic again.
Lifetime income is but one example of this circular evolution in the retirement plan world. Other examples of changes that have come full circle include the following:
Bundling and Unbundling. For a long time, plan sponsors, from the largest of the large to small companies purchased an all in “bundled” 401(k) product. During the past two decades plan sponsors have increasingly moved from bundled solutions to having multiple products and advisors – such as investment consultants, recordkeepers, managed account providers, etc. However, in some parts of the retirement world, there is now a move, in part triggered by the Department of Labor’s “new” fiduciary rule, to bundled solutions.
Collectivized Investments. Before the rise of mutual funds as the dominant investment in 401(k) plans, many 401(k) plans invested in group annuity contracts that had collectivized money management structures. Now, many 401(k) plans are turning back to collective investment trusts and other vehicles.
Outsourcing. For decades, if you were to have asked a plan sponsor “who runs your plan”, the answer would have been “my vendor X”. With the rise of more in depth Department of Labor investigations and active plaintiffs lawyers, many plan sponsors (and their fiduciaries specifically) began to take a more active role in plan administration. Recently, with the lawsuit and enforcement risk, some plan sponsors have been looking again at outsourcing professional management.
So where does the plan sponsor (or plan fiduciary if different than the plan sponsor itself) head from here? A starting point is that there is no one “right” direction to go in. A plan sponsor could be well served to be both open minded – but skeptical at the same time. As in most industries, there are innovations on a daily basis. The key for many plan sponsors if dividing what is a good use of resources for them and their employees (and plan participants) and what may not be worth the investment. Some may feel comfortable making many or all of these decisions without outside advice while others may look to lean on outside trusted advisors like their consultants, attorneys, or accountants.
As we look forward to the next several years, the options and other solutions made available to plan sponsors are likely to multiply. Some considerations plan sponsors might consider include the following:
What Does It Do For Me? Under ERISA, a plan fiduciary’s duty is to act for the exclusive benefit of plan participants and their beneficiaries and paying the reasonable expenses of administering a plan. However, it is not necessarily inconsistent with ERISA for a plan sponsor to evaluate solutions that could lower administrative burdens and provide potentially higher quality services or advice. The key is understanding and documenting the expectation of true value. For example, if a new investment advice service is offered, what evidence can a plan sponsor document to show the plan sponsor expects it to be effective?
Who Makes Money Off It? Retirement plans are a big, large dollar value industry. What interests or relationships underlie the product? Is it okay that the person selling it might have a relationship with another one of your vendors? Yes, but understanding those relationships is often key.
Later, Does It Do What It Promised? Selecting a service or product can be an effort in itself, but retirement plan services are not subject to a “set it and forget it” standard. If a plan sponsor chose a service or product, does the rationale – its improved savings outcomes, its expected return, its plan utilization increase – actually hold up? A plan sponsor will always need to revisit its decisions.
Like many aspects of a business, retirement plans are constant evolving. In many cases, ERISA does not dictate one “right” answer but instead just asks for a process. For those who have worked with retirement plans for a long time, the future will evoke memories of the past.
David N. Levine is a Principal at Groom Law Group.
He can be reached at firstname.lastname@example.org or 202-861-5436.