Tips to Keep Your 401(k) Plan on Track

Wednesday, May 20,2009, 11:29:07 AM Click:

Copyright 2009 Institute of Management & AdministrationAll Rights Reserved Managing Benefits Plans

June 2009

HUMAN RESOURCES Vol. 2009 No. 6

718 words

Tips to Keep Your 401(k) Plan on Track

Main article

401(k) plans took a beating in 2008, and 2009 is proving that the bad times aren't over yet. Looking forward, there are several issues plan sponsors need to address in reviewing their plans, from the plan's governance to the choices of a low-risk investment option.

"Plan sponsors face many challenges in developing a well-structured DC plan to help meet the retirement requirements of their participants, while minimizing the fiduciary risk of managing the plan and its investment lineup," said Barbara Marder, global leader of Mercer's defined contribution consulting business. "The significant decline in the capital markets has ramifications for recordkeepers, trustees, and investment managers."

10 Issues to Investigate

To keep their plans on sound footing, Mercer suggests that plan sponsors investigate 10 key issues:

Determine how much participants are paying in investment and plan administration fees. "If you haven't benchmarked these fees in over a year, it is time for an update," Mercer advises. "Consider whether the market decline has jeopardized the fee guarantees under your contract, thus reducing your leverage in enforcing service-level agreements."

Confirm that all investment funds in the lineup are appropriate. Mercer advises sponsors to look at active funds to see if there is more risk than is appropriate. In turn, index funds should be investigated for use of securities lending. "Review each fund in the plan, including conducting an up-to-date evaluation of performance, style, and risks (tracking error)," Mercer advises. "Additionally, determine what fund should be the low-risk investment option--stable value or money market."

Review the effectiveness in managing your DC plan employer contributions. In an effort to cut benefits costs, many plan sponsors are cutting back on their matches to 401(k) plans. A better approach might be to consider alternative designs that maximize value to participants while managing total cost.

Determine whether your target maturity funds are appropriate for your current participant population. Some plan sponsors simply selected target date funds from their recordkeeper's offerings. But Mercer suggests that sponsors actively screen a broader group of funds and choose the series that is "appropriate for your plans." In addition, it advises that some sponsors should consider customized life cycle funds based on their participant demographics.

Determine how effective your communications strategies are with participants. The market turbulence and economic uncertainty of 2008 and 2009 have left many participants wondering what to do next. "This is a good time to revisit financial and investment education," Mercer suggests. Also "consider whether to begin providing access to investment advice."

Confirm that you are ready to comply with the U.S. Department of Labor (DOL) disclosure regulations once they are finalized. "Evaluate pending DOL regulations regarding disclosures and ensure appropriate information will be available to comply with regulations once finalized," the consulting company urges.

Review and revise your plan's Investment Policy Statement (IPS). The economic turmoil has increased fiduciary risk, and plan sponsors that update their IPS can help minimize this risk.

Determine whether your plan governance structure creates unnecessary risk for the company, the board members, and senior executives. Ask yourself if your oversight processes would pass the prudent due-diligence test in court.

Review administrative procedures to ensure compliance. With all the downsizing that's gone on due to the economic crisis, HR departments, like others in the company, have seen layoffs. If your company has seen HR layoffs, you need to be particularly careful that compliance oversight still occurs. "Review administrative procedures to minimize compliance issues since noncompliance can be potentially costly. For example, with the composition of the workforce and savings behaviors changing--could your plan be in danger of failing discrimination testing?"

Consider plan options in order to provide participants with an opportunity to manage their retirement income. Now is the time to educate the investment committee on post-retirement "spend-down" products that can help plan participants manage longevity risks.