In this episode of Plan Talk, Retirement Director Ben Rizzuto recaps highlights from 2021, including plan design and investment best practices, legislative and regulatory developments, and global headlines from the world of defined contribution.

View Transcript Expand

Ben Rizzuto: Welcome to Plan Talk from Janus Henderson Investors. I’m Ben Rizzuto.

At this point, we’ve all received and traded our Spotify 2021 Wrapped playlists. More specifically, you know what songs and genres you listened to the most. Turns out, that for me, this year I had a certain proclivity for Russian choirs and alternative hip hop.

So, on this episode, and with that in mind, I wanted to share with you, not my favorite Russian hymns, but the stories from the DC market that were my favorites over the last year. As you may remember, we curate these stories every quarter in our Top DC Trends and Developments Guide. It allows plan advisors, plans sponsors and those who work in the retirement plan industry to keep their finger on the pulse of that which is going on at the plan, participant, legal and regulatory levels. It’s a great way to stay educated but also a great source of ideas and best practices.

So, over the next 20 minutes, I want to review the ideas over the past year that I have discussed the most with advisors and plan sponsors. These are not only the ideas that I thought important, but those that I have been asked about the most.

So, I’d like to start with stories about two companies that I feel provide a couple great ideas that can be used by companies and plans of any size. That’s an important thing to note here: Many times, it’s the large companies with the billion-dollar plans that get the notoriety for the changes they make to their plan. And many times, folks will say, “Sure they have all the money in the world to do this sort of thing… we’re a small company we don’t have the money for this sort of initiative.” Well, here are two that I think anyone can pull off.

The first is Knight Swift Transportation. And as you’d guess, a large percentage – 80% in fact – of the company’s employees are truck drivers. They eat, sleep, and effectively live in their vehicle for approximately three weeks at a time. It can be very difficult to attract people to these jobs, so the company works hard to support their employees because of this. In addition, the drivers are tough to reach. They are not “wired at work,” with a computer in front of them, at a desk all day, and they lack a company-provided email.

Plan participation had been stagnant for many years, with only 26% of the truck driving workforce deferring into the plan. To improve this, the company added automatic enrollment, which helped get participation to 57%. Along with that, it implemented automatic escalation features for all new hires and employees who terminated and were rehired.

In addition, the company worked with its recordkeeper to develop a new approach to branding and to design communications that stressed the critically important concept of account security. The “Secure Your Account” communication campaign used humor – a close-up image of a cow, with a tagline that said, “High Steaks! Take steps to help protect your 401(k).”  The goal of the six-month, multichannel campaign was to increase the number of participants who have secured access to their account using two-factor authentication, while also driving engagement with their retirement savings account online. As an incentive to secure their account access, Knight-Swift purchased several Ring video doorbells that were raffled off in a sweepstakes.

At the end of the campaign, approximately 800 accounts had their access secured and participants used at least one website tool based on this campaign.

So, what’s the lesson here. One, know where your employees are. If they’re not at a desk, then taking a more mobile-friendly approach is necessary. Two, participants are part of the cybersecurity equation too. Everyone up and down a company plays a role in implementing a solid cybersecurity program. And three, think about what people want and need as far as incentives go. I had glossed over the fact that the company gave out Ring Doorbells as prizes for months. Then it clicked. If you were away from home in a semi-truck, wouldn’t you like to be able to see what was going on at your house?

Next, let’s talk about the City of Austin. Like many municipalities, the city sponsors a 457 plan. These tend to be supplemental to a defined benefit plan, they may not have a match, and depending upon state law, you may not be able to implement auto-enrolment, so engagement can be lacking.

What did the city of Austin do? Well, they did something that’s extraordinarily simple yet powerful. We know that every October or November, companies go through an open enrolment period. That open enrolment period is typically reserved for things such as health insurance, dental insurance, vision, and disability. What city officials did is they collaborated with their other benefits professionals and included the 457 plans as part of that open enrolment period. In fact, a tab specific to the retirement plan was added to the website participants used to select their benefits for the upcoming year.

Why not? At that time people are attuned to what’s happening relative to their benefits, so it’s a great opportunity to reach them. And not only did they take advantage of that window, but they also saw some pretty good results. The participation rate increased 5%, and among those who were already participating, they increased their deferrals.

The thing that is important to figure out, and try to leverage is when you have people’s attention. Whether it’s open enrollment, your national sales meeting, annual reviews, or some other corporate event, these are all times when many, if not all, employees are engaged. Make sure you remind them of the retirement plan when you have that engagement.

Next, I want to highlight two pieces that provided some good plan design and investment best practices for plan sponsors.

One of the most important investment decisions a plan sponsor makes is what will serve as the plan’s QDIA option. Over the years, TDFs [target-date funds] have served this role for the most part, but over the past few years we have seen other types of products fill this space. Managed accounts, customized TDFs and now we see some using dynamic QDIAs. There was a very helpful paper that DCIIA [Defined Contribution Institutional Investment Association] put out regarding this type of option and provided the thoughts of plan sponsors who had started using them.

First, remember a dynamic QDIA [Qualified Default Investment Alternative] can be defined as an investment option that starts a participant off in one investment product such as a target date fund, managed account, or target risk fund and, upon reaching a certain threshold such as account balance or age, it will automatically transition the participant into a second, more retirement-focused product such as annuities, a managed account, or a managed payout fund. Typically, a dynamic QDIA is structured as a target date fund with a reallocation of participants’ balances into a managed account at a transition age, usually around 50 years old.

One of the main points that I wanted to share with you from the paper was why plan sponsors chose to use dynamic QDIAs.

Plan sponsors adopted the dynamic QDIA primarily because, from a paternalistic point of view, it would provide participants the age-appropriate service and advice they needed to optimize their retirement outcomes. In some cases, participants’ investment sophistication, or lack thereof, helped drive the plan sponsors’ decision to adopt these types of funds. In other cases, the specific demographics of the plan’s participants, with a significant population reaching retirement in the next 10 to 15 years, drove adoption. But overall, plan sponsors wanted to provide this extra layer of advice and other services that come with a dynamic QDIA to help those nearing retirement. Finally, one thing to note, the dynamic QDIA also helped plan participants understand they can leave their assets in the plan to receive more and more plans participants focus on.

Another paper which was put out by VOYA provided several plan design ideas. I would consider these second-generation plan design ideas, as they improve upon features that have been used in the past.

The main reason we need to consider new and different plan design features is due to a stat the paper highlighted: The fact that, according to Voya surveys of plan participants, the percentage of participants with a positive retirement sentiment fell by 13% in March 2021 from 74% to 61%.

Along with that, surveys of companies reflected a similar trendline, as approximately 20% of plans with a match said they were considering eliminating or suspending their match to cut costs.

Because of this VOYA provided seven plan design ideas for these challenging times. Three that I thought were interesting were boosting the auto-enrollment deferral rate to 7%, boosting the annual auto-escalation rate to 2% and rethinking the online enrollment architecture.

Many folks would hear an idea like increasing the auto deferral rate to 7% and hit the ceiling, but according to research it is actually possible to significantly increase the suggested savings rates without increasing the number of participants opting out of the retirement plan. Specifically, suggesting rates between 7 and 10% did not result in lower enrollment when compared to a 6% control rate.

What I think is important to note is that, if nothing else, these are ideas to consider. Sure, some of them may not make sense for your company, but there is nothing wrong with asking yourself and your investment committee colleagues what if … because it’s when we have those “what if” conversations that interesting things happen, which can help our plans improve and help get our participants more engaged.

Moving on. Plan sponsors should also be aware of pending legislation. These bills and proposals have the possibility of drastically changing the retirement plan landscape and I’ve talked with a number of advisors this year that like to include these in their quarterly reviews.

There are massive bills like Secure 2.0 that you’ve probably talked about, but another bill that I thought was quite interesting was the Financial Factors in Selecting Retirement Plan Investments Act. This is a bill that was introduced by U.S. Senators Tina Smith and Patty Murray, and U.S. Representative Suzan Del Bene. They said that this bill would provide legal certainty to workplace retirement plans that choose to consider environmental, social and governance (ESG) factors in their investment decisions or offer ESG investment options.

The bill would amend ERISA to make it clear that plans may consider ESG factors in their investment decisions, provided they consider such investments in a prudent manner consistent with their fiduciary obligations. The legislators noted that this is the same legal standard that ERISA already applies to non-ESG investment factors. The bill would also amend ERISA to codify the longstanding principle that plans may consider ESG factors as tiebreakers when deciding between comparable options.

Now, ESG in retirement plans is still in its infancy, but you’re probably fielding more and more questions about it, and I think interest and investment in these strategies will only continue to grow.

So, whether it’s something like this bill or Secure 2.0, I hope you can see how helpful it would be for plan sponsors to understand the proposals and be prepared for the ramifications.

Not only do plan sponsors need to be aware of how proposed legislation might change retirement plans, but they also need to stay aware of what the DOL and IRS are focused on. One of the main conversation topics this year has been cybersecurity. We’ve seen a growing number of lawsuits, and as we talked about earlier in the episode, plan sponsors are emphasizing the importance of account security with participants more. So, with that said, I feel that the cybersecurity guidance provided by the DOL earlier this year is one of the most important things to review.

You may remember that there were three parts to this package:

1) Tips for Hiring a Service Provider: Helps plan sponsors and fiduciaries prudently select a service provider with strong cybersecurity practices and monitor their activities, as ERISA requires.

2) Cybersecurity Program Best Practices: helps plan fiduciaries and recordkeepers in their responsibilities to manage cybersecurity risks.

3) Online Security Tips: Offers plan participants and beneficiaries who check their retirement accounts online basic rules to reduce the risk of fraud and loss.

I think the best practices provide some good ideas to discuss and consider implementing. These included: Having a formal, well documented cybersecurity program, conducting prudent annual risk assessments, and conducting periodic cybersecurity awareness training, which is something that should happen at the investment committee and participant level.

Now, these best practices don’t resolve all the questions that some may have around cybersecurity, questions like what sorts of personal information or confidential information must be safeguarded by plan administrators and other plan fiduciaries. Or the question of what is a plan administrator’s responsibility to communicate with participants when there has been an unauthorized appropriation of personal information?

But, even though that’s the case, if nothing else, this does help create a cybersecurity plan and process, so if you haven’t taken a look at these, I would highly recommend it.

As usual 2021 was no different, there were no shortage of lawsuits that I could talk about, but there was one that I talked about a lot in the early part of the year that I think brings up some interesting questions.

The case involved a supermarket chain which has an old-fashioned profit-sharing money purchase plan that is trustee-directed. So in this type of plan, participants aren’t deciding how they want to invest their balance, the trustees are making decisions on behalf of all their employees within the pooled account. In this case, trustees decided to create an allocation within the plan that was 70% fixed income, and the allegation was that because of this allocation, participants missed out on the bull market and significant growth opportunities. Now, I don’t know much about the demographics of this supermarket, but it strikes me that if I’m managing a pooled profit-sharing plan on behalf of several hundred or several thousand employees, 70% fixed income is relatively conservative. So, without admitting any wrongdoing, there was a $17.5 million settlement and the plan decided to cap the amount of assets that can be held in cash as well as increase the risk profile of this particular plan.

The questions that I think this raises is, when considering a plan’s core menu, does it offer participants growth potential, but then also in the latter part of their career, does it allow them to de-risk and possibly generate sufficient income in retirement? Along with that, I’ve noticed more cases looking at the investments offered to participants, so it may be a good time to review the overall makeup of the plan menu and make changes.

One final story which we highlighted in the global headlines section of the guide came to us from Australia.

You may have heard that an AUS$41 billion pension fund was sued over its disclosure of climate change risks or lack thereof in 2018. This case involved the Retail Employees Superannuation Trust, or REST, and claimed that it wasn’t doing enough to protect participant retirement savings against the impact of rising world temperatures.

Well, the case was settled. In announcing the settlement, REST acknowledged that climate change is a material and financial risk to the fund and “it is important to actively identify and manage these issues.” It has pledged to better consider how climate-related issues will affect its investments. It also committed to net zero emissions in its portfolio by 2050.

Along with that, REST publicly acknowledged that, “climate change could lead to catastrophic economic and social consequences and is an important concern of REST’s members.”

While the agreement doesn’t set a legal precedent, it will set a new benchmark for how to mitigate climate risk in Australia and could spur more litigation around the world.

So, there you have it. A few of the stories that I found myself going back to again and again. Of course, these are just a few of my favorites. There are so many other topics and ideas that we’ve covered this year, but my hope is that these ideas help you connect with those that you work with whether it be plan sponsors, investment committee or participants.

Remember that all of these stories and others are available in our Top DC Trends and Developments guide, so if you’d like to get a copy of the guide or have questions on the specific items I covered today, please feel free to reach out to me.

In 2022, we’ll continue to provide these updates, ideas and best practices in our Top DC Trends and Developments Guide and through this podcast, so be sure to subscribe. And if you’d like to discuss these topics or anything else, feel free to reach out … I’d love to hear from you.

So until next time, I’m Ben Rizzuto and you’ve been listening to Plan Talk from Janus Henderson Investors.

Janus Henderson Podcasts

Explore our podcasts featuring professional development coaching, retirement perspectives and market insights.

Subscribe on Apple Podcasts Listen on Spotify