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Top 401k Trends in 2023

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As 2023 continues to unfold, shifts in the 401k landscape are redefining how we plan for retirement. Today, we delve into the top 4 trends that are shaping fiduciary governance for 401k Trends in 2023: Retirement Income Solutions, SECURE Act 2.0 updates, Fallout from the Supreme Court ruling in Hughes v. Northwestern, and the rising importance of data privacy.

1. Retirement Income Solutions:

Guaranteed income solutions are gaining traction as participants seek the comfort of predictable payouts in their golden years. Employers are increasingly integrating these solutions into their 401k plans, leveraging innovative annuity products and bond ladders. The trend recognizes that a secure retirement isn’t just about accumulating wealth; it’s about ensuring that wealth translates into a stable income. However, with the rise of such solutions, plan fiduciaries must consider the added complexity and work to ensure these options are in the best interest of the participants.

2. Secure Act 2.0 Updates:

 The Secure Act 2.0 was signed into law in December 2022 and includes several updates that plan sponsors should be aware of. One of the most significant updates is the increase in the age for required minimum distributions (RMDs) from 72 to 73 starting on January 1, 2023, and then further to 75 starting on January 1, 2033. It is important to note that recordkeepers must make changs to their systems to accommodate these new regulations.

3. Active Funds: Are They Worth the Premium?

Despite the trend towards low-cost passive funds, active funds maintain a substantial presence in 401k plans. These funds, characterized by hands-on management and potentially higher returns, often come with higher fees. As fiduciaries, it’s essential to scrutinize these options thoroughly. Are the potential returns justifying the cost? Regularly benchmarking fund performance and fees is crucial to ensure participants are receiving value for the fees they are paying.  It is also important to note that all investments must be appropriate for the plan’s participants, as determined by the recent Northwestern Supreme Court case. 

4. Data Sharing and Participant Privacy:

As digital transformations permeate the financial sector, participant data privacy is paramount. Increased data sharing between plan administrators, payroll providers, and third-party service providers can enhance the participant experience. But it also necessitates robust safeguards to protect sensitive information. Fiduciaries must ensure data privacy policies are in place and enforced. In 2023, striking a balance between personalized services and data security is a challenge that every plan sponsor needs to meet.

In conclusion, 2023 is proving to be a dynamic year for 401k plans. These 401k trends in 2023 underscore the need for fiduciaries to stay informed and adaptable, continually working to ensure plans meet the evolving needs of their participants while protecting their interests. Staying ahead of these developments is key to providing a retirement plan that is not just compliant, but also helps provide better outcomes for your employees. 

Fiduciary Governance for CFO’s

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Fiduciary governance plays a crucial role in ensuring that 401k plans comply with the Employee Retirement Income Security Act (ERISA) regulations. By establishing strong fiduciary governance, CFOs can mitigate the risk of potential liabilities and safeguard the interests of their employees.

ERISA requires that plan fiduciaries, including CFOs, act solely in the best interests of plan participants and beneficiaries. Failure to fulfill this obligation can result in serious consequences, including potential lawsuits, regulatory penalties, and reputational damage. Therefore, it is essential for CFOs to understand how fiduciary governance can help them fulfill their fiduciary duties and avoid potential liability under ERISA.

Fiduciary governance involves establishing and implementing a set of procedures and processes that enable plan fiduciaries to manage their responsibilities effectively. This includes defining the roles and responsibilities of plan fiduciaries, establishing investment policies and procedures, monitoring plan performance, and conducting regular fiduciary training and education. By implementing a robust fiduciary governance framework, CFOs can ensure that they are fulfilling their fiduciary obligations and reducing their liability under ERISA.

  1. Minimizing Conflicts of Interest: A strong fiduciary governance framework includes policies and procedures that help minimize conflicts of interest. This includes establishing clear guidelines for selecting and monitoring plan investments and service providers. By doing so, CFOs can reduce the risk of potential conflicts of interest and ensure that their decisions are made solely in the best interests of plan participants and beneficiaries.
  2. Ensuring Investment Diversification: ERISA requires that plan fiduciaries ensure that plan investments are diversified to minimize the risk of large losses. Fiduciary governance can help ensure that the plan’s investment portfolio is well-diversified and aligned with the plan’s investment objectives. This can help protect plan participants and beneficiaries from undue investment risk, reducing the risk of potential liability for plan fiduciaries.
  3. Conducting Regular Plan Reviews: Fiduciary governance requires that plan fiduciaries conduct regular reviews of plan investments, fees, and service providers. By conducting regular reviews, CFOs can identify and address potential issues before they become major problems, reducing the risk of potential liability for plan fiduciaries.
  4. Documenting Fiduciary Decisions: A robust fiduciary governance framework includes documenting all fiduciary decisions made by plan fiduciaries. This documentation serves as evidence that the plan fiduciaries acted prudently and in the best interests of plan participants and beneficiaries. In the event of a lawsuit or regulatory audit, this documentation can help reduce the risk of potential liability for plan fiduciaries.

In conclusion, fiduciary governance is a key aspect of managing a 401k plan, and it can significantly reduce liability under ERISA for CFOs. As a CFO, it is your responsibility to ensure that your 401k plan is managed with the highest standards of fiduciary governance. By implementing a robust fiduciary governance framework, you can fulfill your fiduciary obligations, protect the interests of plan participants and beneficiaries, and mitigate the risk of potential liability. So, take action today and establish a strong fiduciary governance framework for your 401k plan to safeguard your company’s reputation and protect your employees’ financial futures.

Utilizing ESG in your Retirement Plan

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Recently the EBSA division of the Department of Labor (DOL) released a proposal that was largely viewed as discouraging the use of Environmental, Social or Governance (ESG, or Socially Responsible Investing) factors as due diligence in ERISA based defined contribution retirement plans.

In the DOL’s proposal Secretary of Labor Eugene Scalia said “Private employer-sponsored retirement plans are not vehicles for furthering social goals or policy objectives that are not in the financial interest of the plan. Rather, ERISA plans should be managed with unwavering focus on a single, very important social goal: providing for the retirement security of American workers.”

How did we get here?

ESG investing has been a hot topic of late and more plan fiduciaries that we speak with are considering utilizing ESG considerations in their due diligence process.  We feel that there is a place for ESG but selecting funds based on ESG factors must not be taken lightly.  In recent years there have been several interpretive bulletins and one Field Assistance Bulletin (FAB 2018-01) outlining the DOL’s guidance around selecting and monitoring plan investments as they relate to ESG factors: 

FAB 2018-01 consolidated past guidance that said that ERISA fiduciaries may not sacrifice investment returns or assume greater investment risks as a means of promoting collateral social policy goals. 

  • IB 2015-01[1]
    • Fiduciaries can not sacrifice investment return or take additional risk for collateral Social Policy Goals
    • Fiduciaries can use ESG as a tie-breaker for investment choice.
    • Adding an ESG alternative to the lineup as an additional asset class is acceptable if it doesn’t forgo adding other non-ESG themed investment options to the platform.
    • Nothing in the QDIA regulation suggests that fiduciaries should choose QDIAs based on collateral public policy goals.
      • For example, the selection of a ESG-themed target date fund as a QDIA would not be prudent if the fund would provide a lower expected rate of return than available non-ESG alternative target date funds with commensurate degrees of risk, or if the fund would be riskier than non-ESG alternative available target date funds with commensurate rates of return.
    • IB 2016-01[2]
      • Investment Policy Statements are permitted but not required to include policies concerning the use of ESG factors to evaluate investments.
      • If an IPS contains language for evaluating funds based on ESG factors, there is nothing stating that fiduciaries must always adhere to them.
      • Plan fiduciaries should not incur substantial expenditure of plan assets to actively engage with management on environmental or social factors, either directly or through the plan’s investment managers.

DOL new proposed rules

The new DOL proposal goes further to add five core new additions to the regulations[3]:

  • New regulatory text to codify the Department’s longstanding position that ERISA requires plan fiduciaries to select investments and investment courses of action based on financial considerations relevant to the risk-adjusted economic value of a particular investment or investment course of action.
  • An express regulatory provision stating that compliance with the exclusive-purpose (i.e., loyalty) duty in ERISA section 404(a)(1)(A) prohibits fiduciaries from subordinating the interests of plan participants and beneficiaries in retirement income and financial benefits under the plan to non-pecuniary goals.
  • A new provision that requires fiduciaries to consider other available investments to meet their prudence and loyalty duties under ERISA.
  • The proposal acknowledges that ESG factors can be pecuniary factors, but only if they present economic risks or opportunities that qualified investment professionals would treat as material economic considerations under generally accepted investment theories. The proposal adds new regulatory text on required investment analysis and documentation requirements in the rare circumstances when fiduciaries are choosing among truly economically “indistinguishable” investments.
  • A new provision on selecting designated investment alternatives for 401(k)-type plans. The proposal reiterates the Department’s view that the prudence and loyalty standards set forth in ERISA apply to a fiduciary’s selection of an investment alternative to be offered to plan participants and beneficiaries in an individual account plan (commonly referred to as a 401(k)-type plan). The proposal describes the requirements for selecting investment alternatives for such plans that purport to pursue one or more environmental, social, and corporate governance-oriented objectives in their investment mandates or that include such parameters in the fund name.

Exclusive Purpose Rule

It is important to always remember that ERISA requires that fiduciaries operate the plan for the exclusive purpose of providing benefits to participants and paying reasonable plan expenses. If a plan committee is going to use ESG as a criteria for it’s selection and monitoring of funds it is important to keep a few rules in mind:

  • Your process must always start with a prudent review of performance, risk and cost factors to select suitable investment options.
  • ESG factors that are pecuniary in nature can be taken into account to the extent that they present economic risks or opportunities that qualified investment professionals would treat as material economic considerations under generally accepted investment theories. ESG factors can not be weighted more heavily than non-ESG factors. 
  • ESG may be used as a tie-breaker in the event that two investments are “economically indistinguishable”.
    • Keep in mind that the proposed regulation requires new investment analysis and documentation requirements in the rare instance when fiduciaries are choosing among truly economically indistinguishable investments.
  • ESG criteria should not be a consideration in the selection of a QDIA investment.

Where do we go from here?

The new rule proposed by the EBSA is just that, a proposed rule.  There is still a long way to go before it becomes a regulation and these issues tend to be political and can change under different administrations. However, a solid foundation of procedural prudence and keeping the focus on participants’ successful retirement outcomes can be achieved by thoughtful integration of ESG factors into your investment selection process.  Remember to document your decisions and always ensure that first and foremost that the investment selection that you are making does not sacrifice investment return, increase costs or assume additional risk.  

Have questions about your process relating to ESG in your retirement plan?  Email Elazzari@401kimpact.com for an online consultation.

[1] Source: DOL, IB 2015-01,  accessed July 9, 2020,
https://www.federalregister.gov/documents/2015/10/26/2015-27146/interpretive-bulletin-relating-to-the-fiduciary-standard-under-erisa-in-considering-economically,

[2] Source: DOL, IB 2016-01, accessed July 9, 2020.
https://www.dol.gov/sites/dolgov/files/legacy-files/ebsa/2016-31515.pdf

[3] Source: DOL, “U.S. Department of Labor Proposes New Investment Duties Rule,” accessed July 9, 2020,

https://www.dol.gov/newsroom/releases/ebsa/ebsa20200623

This information is not intended as authoritative guidance or tax or legal advice. You should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations. An Environmental, Social and Governance (ESG) fund’s policy could cause it to perform differently compared to funds that do not have such a policy

Why Benchmark your 401k

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What is 401(k) benchmarking and why should you do it?

Simply stated, 401k benchmarking is the process of reviewing and evaluating your company retirement plan. It involves taking a look at what you are offering your employees today and deciding if it’s appropriate or needs some updating. There are four main areas to focus on when assessing your retirement plan: 

  1. Plan Design
  2. Service Providers
  3. Funds
  4. Fees

Each aspect of your plan requires a slightly different set of questions and documented responses. To go into detail about each section, we will break this into a two-part series, beginning with Plan Design and Service Providers; but don’t worry, we will discuss Funds and Fees in a separate article. Below we are going to share some best practice questions to help you get started on your benchmarking analysis.

Plan design

When you think about it, plan design is your plan’s framework; it is like the chassis of the vehicle.  Do you think all car frames are the same? Probably not. They vary depending on the type of the vehicle (pickup truck, SUV, cargo van, 18-wheeler, or sports car). The same is true for your retirement plan, the frame (or plan design) must be able to support your end goal. When it comes to 401(k) plan design, some important considerations include:

  • Who is eligible to join the plan?
    • Age?
    • Length of employment?
    • Are employees automatically enrolled?
  • What type of accounts can employees use for savings?
    • Pre-tax
    • Roth
  • Is there a company contribution to employees?
    • Which employees?
    • How is the company sharing the money?
      • Required?
      • Not required?
      • Encouraged, based on employee savings?
    • If an employee leaves, what happens to their account?
      • What is the vesting schedule?
      • If their account is under a $1,000, does the employee receive an automatic distribution?
      • If their account is between $1 – 5k, is it automatically rolled into an IRA?
      • If the account is over $5k, what procedures are in place to keep track of the former employee?
    • What about the required Form 5500 tests?
      • Did we pass?
        • Great! But, could we be more efficient?
      • Did we fail?
        • Next time, how can we avoid corrective distributions?
      • How can use the 401(k) plan be used to reward, retain, and recruit top employee talent?

Once the plan design is aligned to meet the needs of the company and provide a competitive offering to employees, the chassis is set.  But don’t worry, no matter what your plan design framework is like today, it can always be updated – it just may take some professional retooling.

Service providers

Staying with the car analogy, your recordkeeper is like the make or name brand of the car.  Is it a Honda, BMW, Lexus, Toyota, Ford, Audi, Chevy, Porsche, or another vehicle brand?  We are saying it’s the brand because most of the time when an employer is asked, “where is your plan?” they respond with the name of the recordkeeper.  For example, “where is your plan?” “It’s at John Hancock.”  “It’s at Voya.”  “It’s at Fidelity” just to name a few recordkeeper examples.

Just as car manufacturers produce different models of vehicles, the same is true of recordkeepers.  Just because two employers have two retirement plans with John Hancock does not mean that they are the same.  Instead, they could have different platforms, investments, costs, service models, advisors, plan design and more.  The same recordkeeper name does not mean the same plan.  Which is why, it is important for employers to ask questions and find out more information about what is available.

Questions to ask:

  • What products and platforms do you offer?
  • Are there price breaks or concessions based on our plan size?
  • What services are we paying for? Could you provide a list?
  • Have you made any technological enhancements to your service?
    • Uploading contribution files
    • Seamless payroll integration
    • Online account access
    • Cybersecurity, encryption, and fraud prevention
  • What other interesting advancements has your firm made that we should be aware of?

This is not a complete list of questions to ask your recordkeeper; however, it is a start.  The important thing to remember is that if you don’t like the responses – just like shopping for a new car – you can always walk down to the next lot and see what else is available.

Overall, the goal of an employer-sponsored retirement vehicle is to get your employees into a suitable car with appropriate features that give them the gas and ability to drive towards a successful retirement destination.

This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance or tax/legal advice. Each plan has unique requirements and you should consult your attorney or tax advisor for guidance on your specific situation.

Evaluating Your Fiduciary Process

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Evaluating Your Fiduciary Process

Believe it or not, an efficient retirement plan committee does not happen by chance. The “best practices” your committee upholds form the foundation for a prudent fiduciary process creating an opportunity for employees to pursue their retirement goals. Companies of any size can benefit from a consistent process and should consider implementing a few of the tips below.

Evaluate What’s Established

If you have a company 401k plan and you are on the retirement committee, then you are a plan fiduciary. As such, you have many duties and responsibilities to uphold to help support plan compliance to the benefit of your company and the plan participants.  This is a great opportunity. However, is there more you can do to help limit liability and create a track for retirement readiness?

It’s more than likely you have a process in place to monitor and manage the company retirement plan; but with this process in place, have you been able to:

  • Measure the success of your plan?
  • Evaluate provider relationships and plan services and fees?
  • Limit liability?

If this doesn’t evoke a confident answer, let’s take a step back and review how you can create a repeatable process.

Process, Process, Process

Creating a repeatable process can help limit liability by demonstrating that you have carried out your responsibilities properly by documenting the procedures used and the thought process involved to fulfill your fiduciary duties.[1] Additionally, a well put together and effective retirement plan committee is the foundation of successful fiduciary decision-making and organizational risk management for plans of all sizes.[2]

Choosing the right team

First things first, who is on your team? If you’ve assembled a committee team, it may include a business owner, CEO, CFO, President, Human Resources Managers, and/or other professional colleagues. Surprisingly, members of your retirement plan committee don’t need to be experts in retirement or investing; however, they should be committed to the task and have a reputation for making good decisions.2

Documenting

Within your team, you must delegate roles and begin documenting all plan actions and why they are prudent. Proper documentation serves as proof that the committee’s responsibilities are being prudently executed.[3]

Here are some of what the retirement plan committee’s minutes should include:3

  • List of all party’s present with identification of roles
  • Description of all issues considered at the meeting
  • Documentation of all materials reviewed during the meeting
  • Documentation of all decisions made and the analysis and logic supporting each

Identification of any topics to

The Prudent On-going Process

Once your committee is in motion, it’s time to start the on-going process of monitoring, reviewing, and evaluating information. When you review your company retirement plan, create a checklist of the following:

  • Gather all plan related documents
  • Create folders
  • Read through and understand the information
  • Ask team members to assist if needed

Once the delegated committee member has reviewed the plan, it’s time to evaluate provider relationships and plan services. Consider evaluating retirement readiness, plan administration, costs, investments, and service providers.

As your committee monitors the plan, ask yourself and the team members one important question: How could you make your company’s retirement plan offering better? Some suggestions could be fiduciary advisor investment review, fee benchmarking, auto enrollment, and auto escalation.

Maintenance within the Retirement Committee

Providing Fiduciary Training

As mentioned, your committee isn’t required to have retirement and investment experts. That being said, it is crucial to provide fiduciary training so they can be educated and fully equipped to serve on the retirement plan committee. Key areas to cover should include the definition of a fiduciary under ERISA, the basic duties and responsibilities required, fiduciary best practices, investment considerations and prudent process, and an overview of current legal and regulatory trends.[4]

How Often Should a Committee Meet per Year?

Industry experts suggest meeting 2-4 times per year: formal meetings should occur on a regular basis and should not take more than 1-2 hours if well-organized.4 Scheduling meeting at the beginning of the year tends to be effective for all parties.  One idea is to pre-schedule and put the placeholder dates on their calendars so you have the meetings calendared and set for the year.

Looking Forward

Why should you evaluate your fiduciary process? As retirement plan committee members, you want your employees to reach a successful retirement, so always focus on the outcomes. Additionally, having a compliant plan can limit your liability as a plan sponsor. Lastly, ERISA is about process! The committee needs to keep repeating, refining, and improving the company’s retirement plan; because at the end of the day, you want all of your employees to win at retirement.

 

[1] Department of Labor. “Meeting Your Fiduciary Responsibilities.”  DOL.gov, Feb. 2012.

[2] Green Spring Wealth. “8 Simple Steps to a Great Retirement Plan Committee.”  Green Spring Wealth, 2013. Web. 8 Aug. 2017.

[3] Powers, Tony. “Documenting Retirement Plan Committee Meetings.” KerberRose Wealth Management, LLC, 11 July 2016. Web. 08 Aug. 2017.

[4] Green Spring Wealth. “8 Simple Steps to a Great Retirement Plan Committee.”  Green Spring Wealth, 2013. Web. 8 Aug. 2017.

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