Brand Name Recognition and Participant-Friendly Provisions

Transcription

1 The Ideal 401(k) Plan SM 7-8 Brand Name Recognition and Participant-Friendly Provisions Savant Participant Success Kit The following is the fifth in a series of six Savant position papers. The mission of this series is to enable managers to aspire to excellence as investment stewards of their employees retirement plan assets. This edition will provide you with the tools and strategies necessary to build confidence in your 401(k) plan. A plan s success can easily be determined by the endorsement of the participant. If employees are taking full advantage of the benefits offered, it typically means they are comfortable with the provider, investment options, tools available, and they trust their plan fiduciaries to have their best interest in mind.

2 7 Brand Name Recognition Think of the Participant Success Kit as a set of tools and techniques that will help your participants build the most efficient personal retirement plan. It Starts with Brand Name Recognition To build an Ideal 401(k) plan, start with well-known brand name options. This includes widely recognized and trusted service providers and well-designed investment options and strategies that participants will fully understand. As consumers, we continually seek out brand name items when we shop. Whether we are buying our favorite coffee, vehicles, or electronics, we look for familiar and trustworthy brand names because we know what level of service to expect. We should expect the same from a 401(k) provider. Working with brand name providers will help you, as a plan sponsor and fiduciary, to design an efficient overall platform. You will be one step closer to meeting global fiduciary standards of excellence in the management of your plan assets. Why is brand name recognition so important? 1) Increases confidence Participants are confident in the results they can expect from their provider. 2) Provides familiarity Participants may be more comfortable with a reputable advisor who is well-known locally. 3) Delivers consistency Brand names have a solid history of information and a track record that is easy to understand and measure. 4) Assures certain quality standards Working with providers and fund features that are consistent with global fiduciary standards of excellence builds an optimal platform for you and your participants. 5) Allows management to highlight their pursuit of excellence If you have taken the time to hire a quality service team (advisor, TPA, recordkeeper, etc.) it will boost participants confidence. It will also allow you to focus your energy on managing your company while fiduciary professionals are managing your plan. 6) Increases predictability and reliability Working with wellknown providers who have a solid track record of client service success minimizes future roadblocks.

3 The Results: Building your plan s brand and utilizing quality providers and products should lead to the following: A. Increased Consistency: Participants know what to expect in the service they receive, the performance of their portfolios, and the success of their retirement game plan. B. Increased Confidence: With increased confidence, participants want to contribute and participate. They appreciate that there are no hidden agendas and that their best interest was in mind during the plan design process. D. Increased Participation: As you add more efficient service models and products to the current plan design, participants will be more confident and take a more active role in their retirement planning than ever before. E. Decreased Skepticism: There are no hidden agendas. Participants realize that management cares about them and will do what is in their best interest to make their plan the most efficient possible since cost, risk, and communication are now being managed more efficiently. C. Increased Satisfaction: Participants will be satisfied with the communication, the turn-key solution, the risk/ return/cost of their options, and the results down the road at retirement. Skepticism is Low; Transparency is High Brand Recognition = Proactive Approach to Participant Success. The Advisor Participants favor advisors who have their best interest in mind - those that act as a fiduciary for the plan. A fiduciary avoids conflicts of interest and takes responsibility for the plan s long-term operation and performance. Participants often favor local advisors over national firms. Credentials, recognition, and trust go a long way toward participant satisfaction. A local presence and a solid reputation is key to making participants feel more confident and satisfied with the plan features. They want access to professionals who can show them how to do retirement right. A best-in-class bundled solution simplifies the plan process and makes it understandable. An advisor who builds a plan using the best options, including third-party expertise, is preferred over a provider that offers all services in-house under one umbrella. The bundled approach leads to cost and service model efficiency. For more information on how to choose the most efficient recordkeeping and technology platform, refer to the paper Savant Plan Design & Coordination Tools. Mutual Fund Products (Brands) The Ideal 401(k) SM incorporates investment funds selected from the lowest-cost and most well-known fund companies. Many of your employees will recognize and welcome them: Vanguard, PIMCO, Dimensional Fund Advisors (DFA), etc. In addition, the plan benefits from having asset class funds included in it. An asset class is a group of securities that exhibit similar risk and return characteristics (e.g. small company vs. large company stocks). By having these specific asset class funds in the plan, the investment choices will be lower cost, straightforward and very transparent. Participants can use asset class funds to build portfolios that minimize risk while maximizing return. This is the most effective way to allow participants to build diversified portfolios. In this way, asset class funds are more suitable investments from a fiduciary perspective. Finally, transparency is also important. Publicly-traded, openended funds that are marketable and liquid are preferred in an Ideal 401(k) plan. Once the right number of asset class funds is made available, you can build asset allocation models made up of these various funds. (Refer to the Savant Investment Consulting paper for more discussion on asset allocation and model building.) Custodian PREFERRED: Funds with low expense ratios and asset class funds Low turnover = Lower transaction costs No sales charges From a plan design perspective, it is important to decide the investment selection separately from deciding where the investments are held. An outside custodian that is a separate entity from your fiduciary advisor adds credibility, as well as a layer of checks and balances, to the entire plan design. Outside custodians charge a fee for their services; however, the costs are very reasonable in exchange for the ability to add this layer of professional oversight. Also, custodians that act as a directed trustee add yet another layer of fiduciary protection.

4 Low-Cost Providers Can you lower the overall cost of your plan now and add a better service model that offers these options? More efficient fund choices Better recordkeeping and technology platform Better plan design advice Fiduciary management and protection Get a Cost Analysis Gather your current plan statements, plan invoices, and other documents. Your current providers may include accountants, attorneys, recordkeepers, fund companies, etc. Understand what you pay each of them, directly and indirectly. If you have funds that compensate advisors for recommending them, you will also need to account for such hidden costs. Sometimes indirect fees are hard to determine. If you work with a plan consultant or fiduciary advisor, they can perform this analysis for you. Determine what you are paying for the following: Advisor fees Mutual funds Custodian fees Expense ratios Recordkeeping Transaction costs Third-party administrator (TPA) Other hidden costs such as sales commissions, loads, 12b-1 fees, trading costs, or revenue sharing

5 8 Participant-Friendly Provisions The right plan provisions and features encourage employees to participate and allow them to customize their portfolios to their unique personal needs. The right tools will engage participants and give them an opportunity to efficiently manage their retirement plans. What is your role as plan sponsor? You should make it as easy as possible for employees to participate and offer the right tools so they can do retirement right. Ensure they utilize all plan features. Are they diversified? Are they contributing enough for a successful retirement? Do they understand why they are investing, and how it is being managed? Do they know how to maintain their appropriate allocations? What should you offer? By taking a few simple steps and adding a few basic features to your plan, you can go a long way in encouraging your participants to be successful savers. Some of the basic tools you can consider are: A well-diversified Qualified Default Investment Alternative (QDIA) Automatic rebalancing Automatic enrollment

6 Auto-Pilot Features Investment Options One benefit you can offer your participants that is more than just a money market or cash account is a Qualified Default Investment Alternative (QDIA). The Pension Protection Act of 2006 allows model portfolios to be used as a QDIA. Though you may like each participant to design their own portfolio or choose among diversified model portfolios, some participants might still not fully participate. What happens if you don t receive an investment election from a participant? What if employees leave the company, but keep their money in the plan? The QDIA, using diversified models, is a prudent way to address these issues. One QDIA solution is to use age-based QDIA models. For example, if your plan has the ability to use model portfolios, you can break the QDIAs into age ranges. Under age 50, the default could be a Growth Model with 80% stock and 20% bond. Those under 50 with years until retirement will benefit more from this growth orientation over the long run. Perhaps those between ages would get a 60% stock and 40% bond allocation. Those over age 60 would get a 40% bond and 60% stock allocation, and so forth. This is a wise approach to employees who have not given you an investment alternative. Think of this as auto-pilot investing. It is the job of the advisor to educate and guide participants to the right allocation based on time horizon, risk tolerance, and other personal factors; but if that effort fails to motivate the participant to act, you are covered with a well-designed QDIA. Auto-enrollment is SMarT Plan participants are typically unmotivated when it comes time to contribute. The solution is to set them up to automatically contribute a percentage when they are first eligible for the plan, and then require them to opt out to stop contributing. Since the default (and easiest) selection is to contribute, most participants will not opt out. Autoenrollment can be a very powerful tool in encouraging participants to save. One specific auto-enrollment program is Save More Tomorrow, or SMarT. It was developed by behavioral economist Dick Thaler from the University of Chicago. Under the SMarT program, the 401(k) contribution automatically increases every year that a participant gets a pay increase. Participants often embrace this option since it does not affect their current pay. The Benefits of SMarT: Proactively increases participation Future salary increase = increase in savings Easy to administer Costs nothing to implement Figure 1 shows how the average deferral rate has increased in a sample SMarT plan. Before the program was implemented at the studied company, the average deferral percentage was 3.5% across all participants. After 40 months of SMarT, the average deferral percentage jumped to 13.6%. SMarT also helps with compliance testing and gives you more flexibility with the plan design and contribution types you wish to implement. As more people contribute at a higher percentage over time, high income earners will benefit from increased contributions. Figure 1: Save More Tomorrow Source: Save More Tomorrow: Using Behavioral Economics to Increase Employee Saving. Shlomo Benartzi, University of California at Los Angeles. Richard H. Thaler, University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER). Journal of Political Economy, Vol. 112, No. 1, pp. S164-S187, February 2004.

7 Automatic Rebalancing The goal of asset allocation and diversification is to build efficient portfolios that maximize return and minimize risk. In fact, five model portfolios with varying levels of risk and return expectations may be all you need. These portfolios are typically reviewed and rebalanced periodically so the participant workload is very minimal. Rebalancing is an important tool for increasing portfolio efficiency and maintaining the right risk profile for each participant. Studies show that periodic rebalancing of the portfolio can add return and also decrease volatility. (See our Savant Backstage: Rebalancing paper for more information.) These participant-friendly features lead to increased confidence, consistency, quality, and reliability. Simplicity in Process Implementing this Participant Success Kit will benefit three core constituents: Participants Participants will be more confident in the plan. Participation rates will increase and retirements will have a more positive outcome. Company The Company benefits by having a solid benefit program that it can use to gain and retain top talent in the industry. It will do so while being confident that it has the most optimal platform in place. Management Team The Management Team will be more confident in the professionals that manage all aspects of the plan. This will free up their time to focus on running the business, rather than running the plan.

8 Savant Capital Management savantcapital.com Savant Capital Management is a Registered Investment Advisor. Savant s marketing material should not be construed by any existing or prospective client as a guarantee that they will experience a certain level of results if they engage the advisor s services. The Advisor does not attempt to furnish personalized investment advice or services through this presentation. Past performance is no guarantee of future results. Revised 1/14