Plan Sponsors Q&A

A: Updated research released last March from the Investment Company Institute (ICI) details just how far fees and expense ratios have fallen over the past 25 years. For example, it found that equity mutual fund expense ratios averaged 0.47% in 2021, compared with 1.04% in 1996; bond mutual fund expense ratios averaged 0.84% in 1996 and fell to 0.39% in 2021. ICI’s report also shows that in 2021, the average expense ratio of actively managed equity mutual funds was 0.68%, down from 1.08% in 1996. Average index equity mutual fund expense ratios were 0.06%, compared with 0.27% in 1996.

A: The Employee Benefit Research Institute issue brief, “Field of Dreams? Measuring the Impact of Financial Wellbeing Initiatives on 401(k) Plan Utilization” summarizes the extent to which the attendance of financial wellness webinars affected 401(k) plan participant behaviors. According to the report, participants’ estimated increase in 401(k) contributions after attending any financial wellbeing webinar was between $649 and $988, depending on age and initial contribution level.

Use of a budgeting webinar was positively related to increased employee 401(k) contributions for all participants. And for younger and lower contributing workers who attended a budgeting webinar, average contributions went up $3,284. In addition, participants’ contribution levels increased after workers used nine of 10 of the webinars.

A: Selecting a higher default rate has the largest impact on employee savings rates for new employees, according to a new research paper, “The Impact of Employer Defaults and Match Rates on Retirement Savings,” published by the Social Science Research Network. The research found that when employees are defaulted in at a higher rate, fewer move away from the default savings rate, which results in higher and more equal savings rates among employees at all income levels. In addition, the researchers note that lower-income workers can benefit from remaining in the default plan investment by taking advantage of institutionally priced diversified funds. You can download the paper at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3992899.

A: From a plan sponsor perspective, the act of hiring a fiduciary advisor is a fiduciary act, and one the sponsor should conduct thoughtfully. While fiduciary services vary by advisor firm, here are the types that plans commonly use:

An advisor acting as a 3(21) fiduciary provides investment guidance and recommendations to the plan sponsor, but the sponsor makes the ultimate decision as to whether to change the investment lineup. Because the sponsor has the final say, it also assumes the fiduciary responsibility for that decision (though it can document that the process included guidance from a professional advisor). An advisor who acts as an investment manager 3(38) fiduciary also provides guidance and recommendations but makes the final decision on investments. This typically costs more and reduces the plan sponsor’s involvement. Hiring a 3(38) advisor is a deeper level of fiduciary outsourcing and fiduciary protection; they have the discretionary authority to make, vet and implement investment recommendations.

A: As you probably know, workers are becoming increasingly interested in financial wellness education that can help reduce financial stress and prepare them for economic uncertainty. In fact, a recent survey by Brightplan revealed that when employees ranked employer-sponsored benefits, “financial wellness” was consistently ranked higher than workplace standards like healthcare and vacation time — and was only surpassed by “salary.”

Here are two activities to consider before launching a financial wellness education program in the workplace:

Conduct an employee survey. Employees should be formally surveyed to get a sense of what they need to feel supported as they continue to return to their pre-pandemic lives. Employees should be specifically asked in which areas of their personal finances they would most value employer support — such as building an emergency savings account or reducing debt.

Quantify your numbers to justify funding the program. Employers should consider quantifying how financial stress impacts their bottom line through factors such as lower productivity, absenteeism or medical costs. They may also want to consider identifying and targeting groups of employees who need the most help and focus initial financial wellness education efforts on them.

A: The fidelity bond required under the Employee Retirement Income Security Act of 1974 (ERISA) specifically insures a plan against losses due to fraud or dishonesty (e.g., theft) by persons who handle plan funds or property. Fiduciary liability insurance, on the other hand, is insurance plan fiduciaries purchase to protect themselves in the event they breach their fiduciary responsibilities with respect to the plan. Please note that courts can hold plan fiduciaries personally liable for losses incurred by a plan as a result of their fiduciary failures. Fiduciary liability insurance — while not required — could be an important financial safety net for plan fiduciaries. Although obtaining ERISA fiduciary insurance is considered prudent, it does not satisfy the fidelity bonding required by ERISA.

A: A recent GOBankingRates survey found that nearly three-quarters (73.5%) of respondents say inflation is affecting their retirement planning in some way. Thirty percent say that they are trying to put more money away in retirement accounts to cope with inflation. This was particularly common among younger respondents, with 41% of those ages 18-24 and 33% of those ages 25-34 saying they are now trying to save more for retirement. To review more ways people are coping with inflation through their retirement planning, check out the survey at:

https://www.gobankingrates.com/retirement/planning/inflation-2022-americans-retirement-planning-is-impacted-new-study/.

A: Many employers share your concerns, because financial decisions today will undoubtedly have considerable impact on future retirements. Your desire to help is commendable. But it’s important that you know the difference between providing financial education and financial advice, and that your service provider does, too. Generally speaking, you or your service providers can provide investment education without fear of triggering a prohibited transaction — an event with serious plan qualification implications. Such education is general in nature. For example, you can explain asset allocation, diversification, and dollar-cost averaging. Investment advice is more specific to an individual. Avoid telling a participant what they “should” invest in, even if it’s something you personally do. For more information about this important topic, read the article, “The Difference Between Investment Education and Advice,” from Financial Finesse and published on 401khelpcenter.com: http://www.401khelpcenter.com/ff/ff_ed&advice.html#.YVypFZrMKM9.