When we think about making improvements, we often feel we need to make major, wholesale changes. The thinking may be that large changes lead to large improvements, and that those large improvements mean our responsibilities for such projects can be done that much sooner. The problem is, when we swing for the fences on something, it can lead to big misses. Picture Casey at the bat and how there was no joy in Mudville as Mighty Casey, with his prodigious swing, struck out.¹ Change – especially meaningful change – happens at the margins, through incremental adjustments over time. Below, I’ve highlighted a few stories from our most recent Top DC Trends and Developments report that may seem small but could lead to larger, meaningful changes. These stories provide ideas for participant engagement but also highlight some items to be aware of that could lead to administrative or fiduciary headaches.

Defined contribution trends and developments

Download full report

Finding easy targets for participant engagement

The first example comes from a company we highlighted in our Best Practices section. Many times, these “best practices” can be the small things that plan sponsors change at the margins. In past editions, we’ve talked about how plan sponsors have done intricate analysis on their plan participant populations to create groups or cohorts that have a similar issue or characteristic. For example, in our fourth quarter 2022 edition, we featured a plan sponsor that targeted participants who were under 50 years old but had equity allocations of less than 25%. This is a great approach, and very targeted, but it requires a significant amount of time and data. Many plan sponsors won’t have that time and or easily accessible data, but IMT Insurance provides an example that would be easy for any plan to implement. They simply created age bands and developed educational information that would be most pertinent for those in their 30s, 40s, 50s, and 60s. While it wasn’t quite as targeted as the more data-intensive example above, it proved to be a small yet meaningful change that allowed the company to engage with participants quickly and easily, and to make sure they received more relevant information.

Improved allocations for improved outcomes

It also turns out that small adjustments in asset allocation can lead to significant changes for participants. A research paper from Georgetown University made the case for including alternatives within target-date funds (TDFs). To do this, they modeled the performance of three types of TDFs: One that was stock and bond only, one that had an allocation to modest amounts of real assets and private credit, and finally an expanded portfolio that included private equity while increasing the allocation to real assets and private credit. The analysis found a small improvement for the TDF with only a modest allocation to real assets and private credit; however, the expanded portfolio increased expected annual retirement income by 6% and worst-case annual retirement income by 8%, net of fees.² The overall allocation to these asset classes changed based on the glide path of the TDF allocation researchers created. The allocations were 15% (40 years to retirement), 20% (20 years to retirement), 17.5% (at retirement), and 10% (10 years after retirement). While this may seem like a fringe idea, there is a growing body of research that has shown similar findings, so it may be worth considering how a similar change might help participants reach their goals.

SECURE 2.0 errors

The SECURE 2.0 Act has been one of the main topics of conversation in the retirement planning space over the past few months. And based on the number of provisions and pages to this legislation, there isn’t anything marginal about it.  Still, as more and more people have gone through the text with a fine-tooth comb, some small but significant technical errors have been found. The main error is that, as written, the bill would effectively prohibit all catch-up contributions beginning in 2024. Specifically, according to the wording in the current legislation, effective January 1, 2024, no participants will be able to make catch-up contributions (pre-tax or Roth). This is the result of the elimination of a subparagraph in the body of the legislation to allow for a conforming amendment.³ Also, while not a technical error, a common misreading of the legislation concerns collective investment trusts (CITs) – specifically, CITs and their use in 403(b) plans. At the time of this writing, CITs are still not available in 403(b) plans, and won’t be available until Congress passes additional securities laws and legislation, even though many headlines over the past several weeks have mistakenly said they are.⁴ These items will eventually get sorted out, but the confusion and possible administrative issues they have created for plan sponsors and participants are important to be aware of.

What changes will small plan lawsuits bring?

Finally, lawsuits against small plan sponsors for alleged fiduciary breaches are rare. But while these may only happen on the margins of the industry, they should serve as bold reminders of the duties all fiduciaries have to their plan and participants. The case in question is a civil lawsuit brought by the Department of Labor (DOL) against the co-owner of Professional Sports Planning Inc. The company provides representation and negotiation services for professional athletes and had assets within its 401(k)-profit sharing plan between $388K and $786K at points during the period in question. The allegations include failing to operate the plan in participants’ best interests, engaging in transactions that fiduciaries knew – or should have known – were in violation of ERISA, and dealing with assets of the plan in the plan sponsor’s own interests, among others.⁵ The DOL is seeking reimbursement to the plan of $76,769, plus lost opportunity costs. While the amount may seem small compared to other settlements we’ve seen over the past several years, it illustrates that those same duties and responsibilities that have led to multi-million-dollar settlements against mega-plans must be adhered to by smaller plans as well. Unfortunately, the Professional Sports Planning case may lead to other lawsuits against small plans – likely brought by less savory characters than the DOL who are only seeking a quick settlement. While many may think “that won’t affect that many people,” or “we’re too small to be on anyone’s radar,” or “how could such a small change make a difference?”, remember that it can be precisely those little things that lead to big impacts that affect a lot of people. Don’t be fooled by their seemingly small size or relative ease, and don’t feel as if change can only be reached through some massive effort. As more and more of those small effects add up, we will undoubtedly see larger and larger changes to our industry. If you’d like to receive more ideas like this, please sign up for our Defined Contribution subscription.

IMPORTANT INFORMATION

The information contained herein is for educational purposes only and should not be construed as financial, legal or tax advice. Circumstances may change over time so it may be appropriate to evaluate strategy with the assistance of a financial professional. Federal and state laws and regulations are complex and subject to change. Laws of a particular state or laws that may be applicable to a particular situation may have an impact on the applicability, accuracy, or completeness of the information provided. Janus Henderson does not have information related to and does not review or verify particular financial or tax situations, and is not liable for use of, or any position taken in reliance on, such information.

In preparing this document, Janus Henderson has relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources.

This information is not intended to be legal or fiduciary advice or a full representation of all responsibilities of plan sponsors and financial professionals.

This material is for information purposes only. There is no guarantee that the information supplied is accurate, complete or timely, nor is there any warranty with regards to the results obtained from its use.