The KISS Method of 401(k) Plan Design and Review Carl Gagnon, AVP, Global Financial Well-being & Retirement Programs, UNUM Group.

When defining a retirement program that is centered on a DC component, some plan sponsors and participants desire, and often can, choose from countless shapes and flavors of plan designs and investment options. This might strike some as a reflection of the diverse composition and needs of the U.S. workforce, but I would argue there is a balance between offering the right amount of choice and adding plan features and investment options that create excessive complexity and confusion. Excessive plan features and investment choices can muddy participants’ understanding, impede engagement, and create choice paralysis – any and all of which can lead to poor decisions, or (even worse!) inactivity. 

U.S. employees are generally quite willing to save for retirement and gain financial wellbeing, and they want choices in their benefit offerings. But they need a program that makes sense and is easy for them to work through to a decision, and importantly, participants want guidance, education, and communication to help them make informed choices.

So, how do plan sponsors achieve a balance of offering a strong, yet simple DC product that meets the objective of helping participants achieve better retirement and financial wellbeing?   My mantra for 401(k) plan design and review is KISS, or Keep it Simple, Sponsors. Here are a few keys to doing just that:

Make sure your company and your fiduciaries are on the same page

Insuring that the objectives of the 401(k)/DC plan are clear is an important first step. If you’re trying primarily trying to help employees effectively save for retirement and meet their financial needs, why add complexity that goes beyond that? Sure, there are scenarios where a plan sponsor and its fiduciaries offer a retirement savings program with complex plan components that could be favorable for its membership. For the majority of employer sponsors, however, those are unlikely scenarios. The Department of Labor clearly identifies a few of the responsibilities of plan fiduciaries as the following:

• Acting solely in the interest of plan participants and their beneficiaries with the exclusive purpose of providing benefits to them;
• Paying only reasonable expense of administering the plan and investing its assets;
• Making sure that participants have sufficient information on the specifics of their investment options, so they can make informed decisions. 

Make sure your fiduciary committee includes individuals that are engaged and knowledgeable about your 401(k) plan and its purpose. Regular training is important, as are regularly scheduled and attended meetings with agendas that include consistent periodic discussions of industry, regulatory, and plan design options. Include your investment managers, consultants, and your plan’s recordkeeper in these meetings will help to insure you are being thorough in your approach and diligence. 

Keep designs simple

One of my actuarial consultants once said to me, “If you’ve seen one retirement plan, you’ve seen ONE retirement plan.” Every company or plan sponsor has their own idea as to what should be included in a 401(k)-plan design. Remind yourself that it’s your employees’ plan – you may be the sponsor, but they must live with your design. You can simplify your plan and increase participation by…

• Offering auto-enrollment and auto-escalation.
• Keeping to a smaller investment lineup that’s clearly categorized for employees.
• Grouping investment offerings in tiers (active, passive, target date) and avoiding other “fringe” investment structures.
• Using target date funds as the investment default investment option (QDIA).
• Developing and regularly reviewing a clear and concise investment policy statement.
• Providing tools that are easy to find and that help employees predict 401(k) balances at various ages and, just as importantly, that help them maximize their company matching contributions.
• Including predictive modeling that helps create understanding of the assets members will need to last their lifetime.
• Giving access to an investment advice and guidance service, either through your TPA or another source.
• Offering one loan, followed by standard hardship withdrawal provisions.
• Allowing a simplified distribution and withdrawal option.

Creating a plan that offers these features will help employees feel comfortable with the plan design.

Periodically (and not less than annually) review the plan at an asset and individual fund and investment option level.

Regulators look for plan sponsors to complete a periodic review of the adequacy of their investment lineups. The diligence of your review, including the need for a reasonable lineup and an appropriate number of investment choices, is key. This type of review goes beyond the typical exercise that looks at performance versus benchmarks, and helps you and the fiduciaries determine if your lineup has the appropriate number and type of investments. Ask these questions:

• How many investment options is enough?
• Is there investment overlap or too much correlation within the lineup?  
• Can you achieve an appropriate level of diversification while eliminating some of the investment options? 
• Can you add diversification to participant portfolios without increasing the number of fund choices by broadening the existing offerings?

Review what your employees (and your company) pay for fees

This might be the most challenging work you will complete, and you’ll need to be actively involved with your third-party administrator and your investment consultant. Ask the following questions:

• Are there cheaper available investment share classes? Can collective investment trusts or separate accounts be utilized in place of higher cost mutual funds?
• Is the administration cost of the plan a flat fee or bundled into the cost of investments? Is there an opportunity to simplify this and become more fee transparent to your membership?
• Are there additional processing fees (loans, hardships, statement fees, etc.) that have simply been in place for years and serve no purpose? Are these fees competitive with your peers? 

Reviewing the answers to these questions should become a normal part of your fiduciary diligence. Even if fees appeared reasonable in your last review it doesn’t guarantee that circumstances haven’t changed, or that the investment market hasn’t shifted since that last review. 

Carefully consider the value of plan elements to participants.

Brokerage links are a good example. They do add exposure to the full market, but continue to show low utilization among plans that offer this investment “tier.” They are also difficult to understand for many (even most) employees, offer specific stock risk not present in mutual funds or collective trusts, and continue to lack clear direction from the Department of Labor on best designs or safe harbor practices.

ESG is a newer trend than brokerage links, but it should be considered carefully. Participants like the spirit behind ESG, but ESG funds are generally more expensive than other funds, and don’t necessarily provide the same risk and return characteristics. The April 23, 2018, Department of Labor Field Assistance Bulletin specifically reminded fiduciaries that economic performance should be the primary driver of investment decisions before any potential social factor or benefit is considered.  

It is necessary as a plan sponsor and fiduciary to be aware of new DC trends and to discuss them at least annually so you can be prepared to address any that become mainstream plan offerings, and that make sense to offer in a timeframe that fits you and your employees. 

Designing and operating a plan requires ongoing fiduciary diligence. Keeping it simple for your members can add value above what you’ll achieve by attempting to position the plan as a solution that has everything for all investors. A lack of employee knowledge and data overload can only add to poor choice and retirement results. Keeping the points above in mind should result in:

• Better membership participation.
• More engaged employees (both in the plan, and in their job because they are less distracted by financial wellness issues).
• Better savings behaviors and retirement outcomes (leading to better workforce management results).
• Better investment choices.
• Lower investment fees.
• Less operational and fiduciary risk as a sponsor.

Carl Gagnon, AVP, Global Financial Wellbeing and Retirement Programs at Unum Group, is responsible for the day-to-day operations, regulatory oversight and compliance of the Unum global retirement programs which include their Defined Benefit, Defined Contribution and Non-Qualified retirement plans and various flex benefit programs within its international operations. Unum employs approximately 11,000 employees worldwide with key U.S. locations in Chattanooga, Tenn., Columbia, S.C., Portland, Me., and Worcester, Mass. Globally, Unum has operations in England, Ireland, and Poland. Gagnon is also involved in developing, implementing, and aligning these global retirement program designs with the overall business objectives of Unum, and serves as a key partner in the implementation of the strategy, design, and investment structure for these financial benefit programs. He has 25 years of experience in various HR and benefit positions, including benefit strategy, managing corporate benefit programs, and implementing administrative systems to manage plans. Prior to joining Unum in 2005, Carl worked in similar roles with Apogent Technologies, Thermo Fisher Scientific, and in the Taft Hartley benefit field. He holds a CEBS certification, is a Fellow in the American College of Healthcare Administrators, and is a member of Society for Human Resources Management and the International Foundation of Employee Benefit Plans.