As we head into the fall and prepare for the 2022 plan year, here is a list of our 4 top retirement plan trends that we are implementing with our clients.
1. Inflation
Over the past several months, we have seen an increase in inflation in many sectors of the economy. While the Federal Reserve has said that the inflation we are experiencing now is temporary, there is no hiding the fact that we are near a 40 year low in interest rates.
Bonds are typically held in a portfolio with the goal to reduce volatility and provide a baseline income level in a proper asset allocation strategy. However, bond prices move in an adverse relationship to their yield. As a result, bond prices go down as yields rise, resulting in potential losses in an investor’s portfolio.
Not all Bonds have the same sensitivity to rising rates
There are many reasons why bond yields may rise, but not all bond prices will react the same to a rise in interest rates. Some bonds, such as inflation-indexed bonds, will increase their coupon rate as inflation rises, reducing pressure on the bond’s price to go down. Traditional bonds typically used in retirement plans tend to be more sensitive to rising rates, such as intermediate corporate bonds.
What you can do to help your participants
We have been adding in additional exposure to our lineups that include less traditional bond funds for some time. Funds such as inflation-protected and multi-sector bond funds may offer your participants flexibility to adapt to rising rates.
2. Taking Control of Plan Data
This year there have been several high-profile data breaches in the news. As more and more of your plan data gets placed online, Plan sponsors need to be aware of their exposure to potential data breach liability through internal systems and vendors.
In February of this year, the Government Accountability Office (GAO) recommended that the DOL formally state whether it is a fiduciary’s responsibility to mitigate cybersecurity risks in DC plans and establish minimum expectations for addressing cybersecurity risks in DC plans.
For its part, the DOL Addressed the second part of the request by releasing three pieces of guidance relating to best practices concerning: Hiring a Service Provider, Cybersecurity, and Online Security tips.
Plan Sponsors in their role as fiduciaries should begin to adopt cybersecurity best practices in anticipation of the DOL guidance that may make a failure to secure participant data a fiduciary breach.
Participant data may be a liability even if it is not "stolen"
We have seen a rising number of court filings and lawsuits alleging that service providers that utilize plan and participant data to sell other products are doing so in breach of fiduciary duty. In most cases, including the high-profile NYU case, the plaintiffs typically claim that recordkeepers were using their access to participant demographic data to sell lucrative financial instruments without compensating the plan for that use. To date, we have not seen any of these allegations be successful. However, not all the lawsuits in question have worked their way through the appeals process.
Plan Sponsors would be wise to take heed and start asking better questions of their service providers and their use of participant data to sell ancillary products to their participants.
3. Personalized Education and Advice
When used correctly by the plan, Participant data can be a valuable tool to identify and communicate with plan participants actions and advice independent of the services available from their recordkeeper.
Plans of all sizes utilize participant data to identify underperforming demographic cohorts to customize advice at scale in their retirement plans. Some of the programs we are seeing plan data participant data include:
- Financial Wellness Programs
- Financial Coaching
- Managed Accounts/Personalized recommendations
- Plan Health Reports
As discussed earlier, it is vital to have a formal plan whenever sharing participant data and ensuring that the data is used in the best interest of plan participants. However, as software and third-party services become more sophisticated and available, it may make sense to use participant data beyond the off-the-shelf services provided by some recordkeepers.
4. Missing and Low Balance Participants
Missing participants continues to be a topic of emphasis for IRS, DOL, and EBSA regulators. The primary duty of any fiduciary is to provide benefits to plan participants when due. Integral to that responsibility is for plan sponsors to know whom they owe benefits to and how to reach them for communicating vital Plan information.
Before 2014 the IRS had a program that you could use to forward mail to missing participants. However, since that program has terminated, there is no easy solution to finding missing participants. The DOL has issued guidance in January providing best practices for Plan Fiduciaries, including:
- Maintaining accurate census information for the plan’s participant population
- Implementing effective communication strategies
- Missing participant searches
- Documenting procedures and actions
Examples of participant searches include:
- Checking related Plan and employer records
- Checking with designated Plan beneficiaries
- Using free online searches
- Using a commercial locator service
- USPS certified mail features
- Death and social security searches
- Reaching out to colleagues who worked with the person in the past.
Use force-out provision to remove low balance participants annually
One way to reduce your burden on locating missing participants is to regularly force out terminated participants with low balances while you are still in contact with them. Most plan documents have a provision that allows them to force out low-balance participants through a systematic process if their balance is below $5,000.
Most recordkeepers can automatically force out low-balance participants regularly through an automatic IRA provider and are more than happy to do that. However, we have found that few plans that come to us are taking advantage of this service. If your provider does offer this service, sign up or consider using one of the third-party providers who can provide that service free of charge.
If your provider doesn’t have a solid process for finding missing participants or forcing out low-balance participants, there are several third-party providers that we have worked with who can do a great job.
Remember to keep good documentation when forcing low-balance participants out of the plan. Often, the participant can easily miss the required notices alerting them to the forced-out distribution. As a result, the participant may be unaware that the plan transferred their account. Your responsibility is to keep a copy of any communications sent in their employee file or other safe location that can easily be referenced years into the future.
Conclusion
If you’d like to talk about any of these trends for your plan, please call us today.
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, plan sponsor will be in compliance with ERISA regulations.
