Plan sponsors changed retirement plans in anticipation of fiduciary rule

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Anticipation of the Department of Labor’s fiduciary rule, which went into effect in June, prompted many plan sponsors over the past few years to reevaluate their 401(k) plans for investment menu and plan design changes and to shop around for new plan advisers.

Because of the fiduciary rule and numerous lawsuits accusing plan sponsors of breaching their fiduciary duty, employers who sponsor plans have become more aware of their fiduciary responsibilities and have moved to make changes that will ensure they are meeting those obligations.

Over the past two years, 93% of plan sponsors surveyed made an investment menu change and 92% made plan design changes, according to Fidelity’s Plan Sponsor Attitudes 8th Edition Survey. Those are the highest levels of change recorded in the eight years of the survey, up from 70% of plan sponsors making plan design changes and 62% of plan sponsors making investment menu changes in 2013.

The fiduciary rule also opened the door for a new group of specialist plan advisers who are “doing a good job of educating plan sponsors about the importance of plan design and getting them to take a look at things that can help structure the plans for success in terms of improving participant outcomes,” says Jordan Burgess, head of specialist field sales at Fidelity Institutional Asset Management.

Of those plan sponsors who made plan design changes, 42% added automatic enrollment; 32% added a qualified default investment alternative; 30% enrolled or re-enrolled into a target-date fund; 29% added a Roth 401(k); 28% implemented an annual increase program; and 14% increased the plan’s default deferral rate.

The top three reasons cited for changing their plan design were to improve coverage, increase participant savings rates and to better manage expenses, Fidelity finds. Nearly 80% of plan sponsors say their participants responded positively to their plan design changes.

Of those who changed their investment menus, 43% added a lifecycle or a target-date default option; 36% replaced an underperforming fund; 28% added an index fund; and 14% added a new asset class. These plan sponsors say they made investment menu changes to resolve performance issues, reduce fees or to change their plan investment strategy.

Switching to a new adviser
Plan sponsor satisfaction with their advisers is high and yet, according to Fidelity, 38% of plan sponsors say they are actively thinking about switching advisers.

“I think that is an interesting data point but not completely surprising,” says Burgess. “The fiduciary rule has heightened their focus on benchmarking their adviser.”

This is a “great opportunity” for specialist advisers, he adds, many of whom are out aggressively marketing their services to plan sponsors.

Seventy percent of plan sponsors say they were contacted by specialist advisers in the past year, with 55% of them saying the calls piqued their interest about switching advisers.

A large percentage of plan sponsors — 71% — say they have an income replacement goal for their plan participants, which is a good sign, says Burgess. But plans should be targeting a 45% income replacement rate in the retirement years and only 25% of respondents who say they have a goal, set their goal high enough. The rest set theirs too low or, on occasion, too high, he says.

That income replacement goal doesn’t include personal savings or Social Security.

Burgess, who has been involved with Fidelity’s Plan Sponsor Attitudes survey since its inception says that the bottom line is that plan sponsors continue to make progress in plan design, investment menu changes, income replacement goals and thinking about employee savings rates plus default investment opportunities.

“Those are great signs of progress but there is still work to do and that’s where some specialist advisers can really play an important role,” Burgess says.

The price of delaying retirement
The cost of healthcare in retirement is one of the big reasons employees are delaying retirement, he adds. Fidelity asked respondents this year about how plan sponsors looked at their benefits packages holistically and where they ranked different benefits. Healthcare was first, followed closely by the company retirement plan.

“Healthcare is emerging as a big national topic but also as a topic as part of the retirement planning conversation,” Burgess says.

Almost three-quarters of those surveyed say that healthcare, retirement and dental benefits are all competing for funding and 67% say that increased health care costs result in them spending less on their other workplace benefits.

Employers want employees to retire on time, otherwise their benefits costs go up, he adds. That’s why it is important to work with an adviser who can take a holistic approach to all of a company’s benefits.

For its survey, Fidelity surveyed 1,106 plan sponsors in February and March 2017. Respondents had to have at least 25 plan participants and $10 million in plan assets to participate. It focused on those plan sponsors who use the services of a financial adviser or plan consultant, about 80%.

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