InsightsDEFINED CONTRIBUTION

The Solution Source for Plan Sponsors

Winter 2018 • Vol. 66, No. 4

Education and Communication

2 Crafting a Participant Education CampaignEight steps for creating, implement-ing, and measuring the success of a plan education and communication campaign.By Jillian Perkins

Research 5 Employers and Participants

are Contributing to Plans at Record LevelsIncreases in employer contributions, and plan design enhancements are building a better retirement foundation for workers.By Hattie Greenan

Investments 8 Fiduciaries Beware —

There’s No Such Thing as a Free FundNothing is free, or is it? What is the impact of “free” funds on your bottom line?By Chris Carosa

NQDC Plans 10 How Tax Reform Changed

the Funding of NQDC PlansThe pros and cons of using COLI to fund NQDC plans in light of tax reform.By Benjamin R. Eisler and David J. Marshall

Compliance Watch 14 Primum non nocere.

First do no harm!Will state-mandated IRAs increase workers’ retirement preparedness?By Jack Towarnicky

403(b) Research 16 Fiduciary Awareness by

403(b) Plan Sponsors403(b) plan sponsors are making changes to strengthen their plans.By Hattie Greenan

HSAs 18 Health Savings Account

(HSA) HeadachesSolutions to common HSA pain points including education, participation, and administrative hurdles.By Karin Rettger and Jack Towarnicky

IN EVERY ISSUE

Leadership Letter — page 1New DOL rules under consideration are aimed at reducing leakage from retire-ment accounts — but there are things you can do now to reduce leakage and improve outcomes for employees.

Retirement Read(y) — page 13Common average account balance measurements include widely diverse populations, making them mostly meaningless in describing the retirement readiness of any one group.

Washington Watch — page 21The mid-term election results shifted the retirement policy dynamic in Washington in ways that make it likely that action is taken on retirement legislation in 2019.

New MembersAlexander & Company291 Heritage Walk Woodstock, GA 30188 Industry: Insurance Services Contact: Donny Cole

Atrium HealthP.O. Box 32861 Charlotte, NC 28232 Industry: Healthcare Contact: Mercedes Ikard

Bridgewater Bank3800 American Blvd West, Suite 100 Bloomington, MN 55431 Industry: Banking Contact: Susan Lindmeier

CliftonLarsonAllen10700 Research Drive, Suite 200 Milwaukee, WI 53226 Industry: Accounting Services Contact: Reshma McHale

Fiduciary Wise, LLC2487 S. Gilbert Road, Suite 106-454 Gilbert, AZ 85295 Industry: Fiduciary Services Contact: Dick Billings

Jude & Jude, PLLC6424 U.S. Hwy 98 West, Suite 50 Hattiesburg, MS 39402 Industry: Legal Services Contact: Marc DePree

National Benefit Services, Inc.300 West Adams Street, Suite 415 Chicago, IL 60606 Industry: Benefit Plan Administration/Management Contact: Jerry Kalish

PayFlex13511 Label Lane, Suite 201 Hagerstown, MD 21740 Industry: Administration Contact: Cherie Moser

PriceKubecka16775 Addison Rd, Suite 500 Addison, TX 75001 Industry: Accounting Services Contact: Amber Balous

Sable Permian Resources700 Milam Street Houston, TX 77002 Industry: Natural Resources Processing and Retail Contact: Amy Lee

Santa Fe Christian Schools838 Academy Drive Solana Beach, CA 92075 Industry: Education Contact: Marni Blakely

Strategic Investment Solutions, Inc.9501 W 144th Pl, Suite 100 Orland Park, IL 60462 Industry: Financial Services Contact: Ayman Saidi

Changes in member contacts should be faxed to PSCA at (703) 516-9308 or sent to psca@psca.org.

Officers

ChairpersonKenneth A. Raskin* King & Spalding

1st Vice ChairMarjorie F. Mann* NextEra Energy, Inc.

2nd Vice ChairShirley Zabiegala* Nestle USA, Inc.

Immediate Past ChairStephen W. McCaffrey* National Grid USA Service Co., Inc.

TreasurerRobert Love* Custom Air Products and Service Co.

PSCA Board of Directors and Staff

Directors

Monica Chen* Exxon Mobil Corporation

Brandon M. Diersch Microsoft Corporation

Ira Finn Heidrick & Struggles

Tom Gordon

Annette Grabow Sonepar USA

Robin Hope Landmark Structures

Peter M. Kelly Blue Cross and Blue Shield Association

Tim Kohn Dimensional Fund Advisors

Bruce McNeil Wagner Law Group

Ted Moss Roscoe Moss Company

Karin Rettger Principal Resource Group

Michael A. Sasso* Portfolio Evaluations, Inc.

William Shaw Charles Schwab, Inc.

Tony Verheyen The Richfield Companies

Ann Zeibarth Gallup, Inc.

PSCA Staff

200 S. Wacker Dr., Suite 3100 Chicago, IL 60606 312-419-1863

Jack Towarnicky* Executive Director jack.towarnicky@psca.org

Hattie Greenan Director of Research and Communications hattie@psca.org

Tobi Davis Director of Operations tobi.davis@psca.org

PSCA Washington Counsel

David N. Levine Principal Groom Law Group, Chartered 1701 Pennsylvania Ave. NW Suite 1200 Washington, DC 20006 202.861.5436 DLevine@groom.com

Brigen L. Winters Principal Groom Law Group, Chartered 1701 Pennsylvania Ave. NW Suite 1200 Washington, DC 20006 202.861.6618 BWinters@groom.com

*Executive Committee Member

PSCA publishes articles by its members in Defined Contribution Insights magazine. If you have an idea for an article of 1,000 to 3,000 words in length, please contact hattie@psca.org.

Subscriptions to Defined Contribution Insights magazine are part of PSCA membership, and are also available to non-members for $75.00 per year. Contact PSCA at 312-419-1863 for subscription or membership questions.

Defined Contribution Insights is published by the Plan Sponsor Council of America, 200 South Wacker Drive, Suite 3100, Chicago, IL 60606 . Subscriptions are part of PSCA membership. Opinions expressed are those of the authors. Nothing may be reprinted without the publisher’s permission. Information contained in Defined Contribution Insights is for general education purposes only and should not be relied upon as legal advice. Contact your legal advisor for advice specific to your plan. Copyright ©2018 by the Plan Sponsor Council of America.

Plan Sponsor Council of America — Voice of the Plan Sponsor Since 1947

PSCA Competition Law StatementThe Plan Sponsor Council of America (PSCA) is committed to fostering a best practices environ-ment for profit sharing, 401(k), and other employer-sponsored defined contribution retirement programs. PSCA adheres to all applicable laws which regulate its activities. These laws include the anti-trust /competition laws which the United States has adopted to preserve the free enterprise system, promote competition, and protect the public from monopolistic and other restrictive trade practices.

Plan Sponsor Council of America • PSCA.org Winter 2018 1

Did you know that bloodletting was once America’s medical treatment of choice? In 1793, Benjamin Rush, a physician

who signed the Declaration of Indepen-dence, treated Philadelphia’s yellow fever victims with bloodletting. When George Washington fell ill with laryngi-tis, his physicians bled him heavily and he died a day later.

The Department of Labor (DOL) is considering rules to encourage and facil-itate rollovers to IRAs, and potentially to a new employer’s plan — starting with balances less than $5,000 to help reduce leakage of retirement assets. Many expect the process will be expanded to voluntary transfers/rollovers of larger accounts. However, facilitating rollovers may not be the right answer for your participants, or your plan.

Plan sponsors have significantly improved worker financial wellness and retirement preparation. Assets have increased significantly following adoption of automatic features and changes to encourage workers to retain assets in the plan after separation. PSCA’s 61st Annual Survey, just released, shows that 61.2 percent adopted automatic enrollment with sixty percent of those plans using a default percentage greater than 3 percent, and 20.7 percent of plans encourage participants to retain assets in the plan. Automatic features usually come at a cost — higher employer contributions and administrative

expenses. However, retaining assets and participants often lowers the fees paid by participants and the plan. The Callan DC Index confirms fees decline as assets under management increase. NEPC surveys show investment and recordkeeping fees decline substantially as the number of participants increase.

You Need More Than a TourniquetSimply encouraging retention of small balances probably isn’t enough to reduce leakage. To stop the bleeding, consider broadening your focus beyond the existing account balance. Today’s terminated vested participants with account balances of less than $5,000 are tomorrow’s retirees with a lifetime of savings. In competing for assets, you already have a competitive advantage — your plan already has the participant and her account, and she has already made an investment election. Other steps some plan sponsors have taken to retain assets and aggregate/consolidate accounts include:Changing Your Plan Into an Asset Magnet

• Adopt deemed IRA provisions to:w Allow rollover of all IRA monies,

including Roth IRA assets (ensure your service provider is adept at rollover/direct transfer process-ing and maintaining contact with separated participants).w Allow contributions to the plan

after separation.

w Leverage “stretch” IRA and Roth IRA distribution advantages.

• Regularly solicit active and sepa-rated participants to rollover assets from IRAs or other plans.

• To compete with IRAs, add:w A directed brokerage accountw Ad-hoc and installment payout

capability• As needed, differentiate fees for

separated participants.

Reducing Leakage While Improving Liquidity

• Change separation processing so the “default” becomes continuing the account.

• Eliminate hardship withdrawals.• Adopt 21st Century plan loan

functionality (electronic banking) so separated participants can continue loan repayments and initiate a loan after separation.

• Add pre-55 distributions in the form of a series of substantially equal periodic payments for the life of the participant (IRC §72(T)(2)(a)(iv)) to avoid the 10 percent penalty tax.

You don’t need the new DOL rules if your goal is to reduce leakage — you can take steps now to improve retire-ment readiness for employees.

Jack Towarnicky is the Executive Director of PSCA.

Stop the BleedingThe next step in helping workers achieve financial wellness and retirement preparation? Reducing leakage.By Jack Towarnicky

Leadership Letter

DEFINED CONTRIBUTIONS INSIGHTS2 Winter 2018

Crafting a Participant Education CampaignA step-by-step guide to implementing a successful 401(k) education campaign.By Jillian Perkins

Education and Communication

ou’ve put together a great plan designed to guide your partic-ipants to successful outcomes. You’ve worked hard to select

investment options and craft the menu. But one of the most important steps is making sure your participants are aware of, understand, and know how to use the plan to meet their needs. The crucial final step is understanding how to build a successful participant edu-cation program to ensure that the plan you carefully constructed is used to its greatest advantage.

Why Participant EducationThe defined contribution retirement system has been continually refined throughout the last 30–40 years as the industry and plan sponsors work to improve retirement outcomes by providing participants with high-qual-ity investment choices. But as those options become more numerous and complex, participants want and need help navigating through this maze of

information and choices, which can be intimidating and overwhelming.

A participant education program can benefit the company as well, improving their investment in spon-soring the plan. Participants who are aware of the full value of the benefit they are receiving from the plan and all of its options will have a much deeper appreciation for their employer and the plan. A good education program can strengthen the ability of the retirement plan to improve employee satisfaction and reduce turnover.

Diagnostic ReviewThe first step is to take stock and perform a diagnostic review, including a review of your existing educational services and tools, a look at what your objectives and goals are, and identify any problem areas in the plan or among participants.

Consider what success would look like for you. Work with your provider and consultant to examine plan statis-tics to determine where participants

are on track and meeting goals, where they are using plan features, or where there are gaps. Think about what makes your participants unique, as well as any common traits that may help you tailor education to them. Consider conducting a participant survey to provide direct feedback on what participants think and want; a survey can also provide a metric against which to measure your program later. This diagnostic analy-sis can affect how you structure your participant education, what channels you use, and how best to direct your educational resources.

From this information, you can build a set of goals and objectives to drive the development of education. Some possible long-term objectives of a participant education program or campaign you might consider include:

• Increasing participation in the plan,• Improving general awareness of

and understanding of the plan,• Increasing participant deferral rates,• Improve participants’ asset allocations

and use of plan investment options,

Y

Outcomes of a Successful Education ProgramFor the Plan Sponsor

• Improve visibility of the plan, resulting in greater appreciation by participants.

• Improved employee attraction and retention.

• Meet your ERISA 404(c) safe harbor requirements

• Reap the value of your contributions to the plan

• Improve employee productivity

For the Participant

• Improve long-term retirement security outcomes

• Increase participation and savings rates

• Reduce financial stress and increase happiness and wellbeing

• Improve financial literacy

• Improve long-term financial decision-making

Winter 2018 3Plan Sponsor Council of America • PSCA.org

Education and Communication | Crafting a Participant Education Campaign

• Reducing financial stress among employees and increase productivity,

• Meeting non-discrimination testing requirements,

• Improving employee satisfaction, and/or

• Helping employees plan for long-term retirement security.

This information lays the foundation for you to build a program to meet the needs of your plan that is tailored to your employees and your objectives. The following sections will identify some of the elements to consider as you move forward.

Channels of CommunicationPeople learn differently. Some people are visual learners, who learn best with images, while others learn better by listening, and for some people, learning is a physical activity. Some learners would prefer to read an article on paper, whereas others might be more likely to watch a quick online video instead. If you utilize a variety of different methods of communica-tion, employees are able to choose the ones that work best for them, and the

more of them that you incorporate, the more participants you are likely to reach effectively.

While preferences for different methods of communication and differ-ent learning styles are generally spread out among a population, there are some generational differences to note. Younger generations, such as millenni-als, are more likely to be comfortable with a variety of online interactive tools or webinars, whereas baby boomers tend to prefer the familiarity of paper and printed materials or in-person meetings. Similarly, younger genera-tions grew up with a more on-demand culture, and expect information to be at their fingertips and at their conve-nience, while older employees have more patience for scheduled events.

There are other factors to consider in selecting your communication channels, such as cost and facility of use. If most of your employees work on the factory or retail floor without access to computers, online/electronic education tools probably won’t be the most effective. Or, if you have a large number of employees, finding ways to reduce the need for printed materials can help manage costs. Balance cost

and effectiveness to focus your efforts efficiently. Use your diagnostic review to help guide the direction you take.

Make Education FriendlyFinances can be overwhelming and intimidating. People have very mixed feelings about money, and the subject is tied in deeply to emotions like self esteem and feelings of success. Addi-tionally, there is a cultural taboo against talking about money. What all of this adds up to is a profound reluctance to dive into financial matters and discuss money openly and objectively. This is a hurdle that an education program will have to overcome in order to help people develop financial wellness. This is no small task, and requires an ability to view things from the employees’ perspectives.

Nobody likes to read long, com-plex tracts full of impenetrable lingo. Engaging participants and getting them to interact with financial informa-tion requires a friendlier approach. The best educational materials and services are approachable, visual, easy-to-read, and even entertaining. People engage with stories, characters, graphics,

VisualPreference for pictures

and images

IntrapersonalPreference for working alone, self-study

AuditoryPreference for sound

and music

InterpersonalPreference for learning in groups or with other people

LinguisticPreference for words,

whether in speech or writing

MathematicalPreference for logic and reasoning

KinestheticPreference for using the body,

hands, and sense of touch

DEFINED CONTRIBUTIONS INSIGHTS4 Winter 2018

Education and Communication | Crafting a Participant Education Campaign

anecdotes, and real-world examples. Developing a successful education program requires a creative touch and an understanding of storytelling and communication techniques.

You can help make your campaign engaging and approachable by gen-erating interesting themes and using characters and stories to give partic-ipants something relatable. Don’t be afraid to be colorful — visually appeal-ing materials are also easier to read and absorb. Create interactive moments like games, exercises, fillable forms and calculators, or even just phrasing ideas as questions. Lastly, use down-to-earth language — keep yourself in partici-pants’ shoes and avoid confusing or intimidating language.

Put It All TogetherWhether you partner with an education provider to help develop your partic-ipant education or have the internal resources to do it yourself, use the following steps as a roadmap, marking the major milestones of the process:

Step 1: Diagnostic reviewStep 2: Establish goals/objectivesStep 3: Determine budget/resourcesStep 4: Identify channel(s)

of communicationStep 5: Brainstorm: how to target,

themes, creative approachesStep 6: Building/designing the

program/campaignStep 7: ImplementationStep 8: Measurement

Measuring SuccessOnce you have rolled out your edu-cation campaign, it’s important to measure its impact and success. Examining participant data and comparing it against a pre-campaign baseline provides measurable statistics about the effects of the campaign. Did participation increase? Did allocations change? Did usage of particular fea-

tures change? Most specifically, did the campaign achieve its goals?

There are also numerous digital tools for measuring any online aspects of your campaign. You can generally find out how many participants clicked on an email campaign, watched a video, or visited a web page.

A participant survey can measure those aspects that are less data-driven and more subjective or anecdotal. Did participants find the education valuable? Did it prompt them to take action? Did they find it relevant? Did the campaign change how they view the plan or their retirement planning process? This information can be just as useful and valuable as statistical infor-mation, highlighting the aspects of the program that were most impactful and pointing out where the campaign may have missed the mark.

Following are topic suggestions for a post-campaign participant survey. When developing the survey, keep in mind that inviting open-ended answers may give you more detailed and rele-vant information, but will also be more cumbersome to collate and review. If you have a very large number of employees, utilize multiple choice and rating questions to the extent possible.

Post-Campaign Participant Survey — Suggested Question Topics

• Rating of overall experience• Rating of specific materials, video,

presenter, article, etc.• Rating of the ease of understanding

the material• Rating of participants’ confidence

in their decisions — before and after the campaign

• Rating of participants’ sense of financial wellness — before and after the campaign

• What action, if any, participants took as a result of the campaign

• What parts of the campaign were particularly appealing or impactful

• What parts of the campaign, if any, were unclear/difficult to understand

• What topics they would like to learn more about in the future

If your program or campaign was par-ticularly successful and/or unique, you may want to consider entering it for a PSCA Signature Award!

Jillian Perkins is the Director of Communications for Arnerich Massena, Inc.

Bonus: An Education ChecklistGetting started

o Develop education objectives and strategic goals.

o Perform a diagnostic review of existing services, tools, and materials available.

o Identify gaps and areas of focus (such as increasing participation, raising the profile of the plan, and improving understanding of the plan’s investment options).

o Conduct a participant survey to evaluate participant experiences and preferences (optional).

Program planning and design

o What delivery methods do you want to use to reach participants?

o Set a timeline for developing educational materials and implementing campaigns.

o What topics will be addressed?

Implementation tools

o One-on-one in-person sessions

o In-person group workshops

o Printed materials

o Online materials

o Video/animation

o Email campaigns/targeted messaging

o Other

Evaluation

o Participant surveys/feedback forms

o Annual program assessment

o Participant data review

Plan Sponsor Council of America • PSCA.org Winter 2018 5

PSCA’s 61st Annual Survey found that employers con-tributed a record amount to employees’ 401(k) accounts in

2017 — 5.1 percent of pay. This rate of contribution combined with an average savings rate by participants of 7.1 per-cent, gives a total savings rate of more than 12 percent — an amount most experts believe will allow workers to retire comfortably.

The survey found that this is no accident — plan sponsors are adding design features intended to increase participation and savings rates, such as automatically enrolling employees at higher default rates, increasing savings rates over time, making more generous matching contributions, and giving par-ticipants more choice with the increased availability of Roth contributions.

Top Ten Survey Highlights1. Roth is now available at 70 percent

of companies.2. Participants saved an average of 7.1

percent of pay in 2017 — up from 6.8 percent the previous two years.

3. The average company contribution increased to above five percent of

pay for the first time. The average company contribution increased from 4.8 percent of participants’ pay in 2016 to 5.1 percent in 2017.

4. The use of dollar-per-dollar match-ing above three percent of pay increased by nearly fifty percent from 24.1 percent in 2016 to 35.8 percent in 2017.

5. Ninety percent of plans now have an Investment Policy Statement (IPS) — though they are still less prevalent among the smallest plans.

6. More than 60 percent of plans now use automatic enrollment to boost participation.

7. Sixty percent of automatic enroll-ment plans use a default deferral rate of more than three percent — up more from less then 30 percent of plans ten years ago.

8. The use of mobile technology to provide plan services to participants continues to increase rapidly — its use has doubled since 2014 and is now used by 43.6 percent of companies.

9. Nearly a third of plans provide a suggested savings rate for partici-pants — more than four-in-ten companies suggest a rate of 10 percent or more.

10. One-in-five employers actively encouraged participants to keep assets in the plan at retirement.

Summary of ResultsEmployee EligibilityNinety percent of U.S. employees at respondent companies are eligible to participate in their employer’s DC plan. Nearly all plans permit full-time sala-ried and full-time hourly employees to participate in the plan, and about two-thirds of plans allow part-time salaried and hourly employees to participate.

Participant ContributionsThe average percentage of eligible employees who have a balance in the plan is 88.9 percent. An average of 84.9 percent of eligible employees made contributions to the plan in 2017, the same as in 2016. The average percentage of salary deferred (pre- and after-tax) for all eligible participants in this survey was 7.1 percent, up from 6.8 percent in last year’s survey.

Non-highly compensated partici-pants (as defined by the Average Defer-ral Percentage (ADP) tests) contributed an average of 6.0 percent of pre-tax

Employers and Participants are Contributing to Plans at Record LevelsPSCA’s 61st Annual Survey results shows that participants are saving enough to be retirement-ready.By Hattie Greenan

Research

Exhibit 1: ADP Test Results Over Time Year

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Higher-Paid 6.6% 6.7% 6.6% 6.4% 6.6% 6.6% 6.9% 7.0% 7.0% 7.1%

Lower-Paid 5.5% 5.2% 5.3% 5.2% 5.2% 5.3% 5.8% 5.5% 6.1% 6.0%

DEFINED CONTRIBUTIONS INSIGHTS6 Winter 2018

pay, while higher-paid participants contributed an average of 7.1 percent of pre-tax pay. See Exhibit 1.

Roth 401(k)Roth 401(k) contributions have become widely available and are now allowed in nearly seventy percent of plans. Twenty percent of employees made Roth contributions in 2017 when given the opportunity. See Exhibit 2.

Company ContributionsThe average company contribution for respondents in 2017 was 5.1 percent of pay — up from 4.8 percent in 2016. See Exhibit 3. Nearly all companies make contributions to their plan (only 3.7 per-cent do not). In 2017, matching formulas became a little more generous with 45.4 percent of plans matching participant contributions dollar-per-dollar, most commonly to six percent of pay (16.5 percent of plans) followed by 4 percent of pay (10.7 percent of plans).

ForfeituresMore than half of plans (55.1 percent) use forfeitures to reduce company contributions, and more than a third (36.7 percent) apply them to reduce plan expenses.

VestingNearly forty percent of plans provide immediate vesting for matching con-tributions, while 31.7 percent provide immediate vesting for non-matching contributions. Among plans that do not have immediate vesting, graduated vesting is the most common arrange-ment for all contribution types.

Investments OfferedPlans offer an average of 19 funds for company contributions and 20 for par-ticipant contributions. The funds most commonly offered to participants are indexed domestic equity funds (84.6 percent of plans), actively managed domestic equity funds (83.6 percent of plans), actively managed domestic bond funds (78.9 percent of plans), and

actively managed international equity funds (77.9 percent of plans).

Average Asset AllocationAssets are most frequently invested in actively managed domestic equity funds (21.8 percent of assets), target- date funds (22.1 percent), indexed domestic equity funds (13.5 percent), and stable value funds (5.8 percent).

Other Investment OptionsNearly 40 percent of plans offer a professionally managed account alternative to participants. Less than ten percent of plans offer an in-plan annuity option to participants.

Investment Policy StatementsMost respondents (90.0 percent) have an Investment Policy Statement (IPS), though it’s still less common among smaller plans.

Investment Monitoring FrequencyInvestments are most often monitored on a quarterly basis (63.1 percent), fol-

Research | Employers and Participants are Contributing to Plans at Record Levels

Exhibit 3: Company Contributions as a Percentage of Payroll Over Time Year

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

All Plans 3.7% 3.6% 3.5% 4.1% 4.5% 4.7% 4.7% 4.7% 4.8% 5.1%

Exhibit 2: Availability of Roth Over Time

0%

10%

20%

30%

40%

50%

60%

70%

80%

2017201620152014201320122011201020092008

Percentageof Plans

Year

Winter 2018 7Plan Sponsor Council of America • PSCA.org

lowed by annually (20.5 percent). See Exhibit 4.

Investment AdvisorsSeventy-three percent of plans retain an independent investment advisor to assist with fiduciary responsibility. Seventeen percent indicated they use a 3(38) advisor and twenty-seven percent use a 3(21) advisor.

Company StockTwelve percent of plans allow company stock as an investment option for both participant and company contributions, while four percent restrict it to company contributions only. An average of 16.3 percent of total plan assets is invested in company stock.

Investment AdviceInvestment advice is offered by 36.1 percent of respondent companies.

One-fourth of participants used advice when it was offered.

Automatic FeaturesThe use of automatic enrollment continues to rise — 61.2 percent of plans now have an automatic enroll-ment feature. See Exhibit 5. The most common default deferral remains three percent of pay, present in 32.0 percent of plans, though more plans are using a higher default contribution rate (nearly sixty percent of plans in 2017, up 6 percent form 2016 and three times the number of plans using it ten years ago). See Exhibit 6.

Plan LoansThe majority of plans (84.4 percent) con-tinue to permit participants to borrow against their plan accounts. Most plans permit participants to have only one loan outstanding at a time (55.5 percent), while 35.0 percent permit two loans.

Distributions and WithdrawalHardship withdrawals are permitted in 80.3 percent of plans. Hardship withdrawals were taken by an average of 2.3 percent of participants, when available. In-service distributions, other than hardship withdrawals, are permitted in 64.3 percent of plans.

Participant Education and CommunicationThe most common reasons for pro-viding plan education are to increase participation (73.9 percent), to increase deferrals (65.2 percent), and to increase appreciation for the plan (71.4 percent).

Plan ExpensesThe majority of plan expenses are paid by the company rather than the plan, with the exception of plan recordkeep-ing and investment management fees. Forty-two percent of plans are charged a basis points fee for record-keeping and administration fee and 38.3 percent of plans pay a flat rate per participant.

Transaction AccessMore than 80 percent of plans provide services via the internet, 58.5 percent via vendor benefit centers, 73.1 percent via sponsor benefit staff, and 43.6 per-cent use mobile technology (up from 36.3 percent in 2016).

PSCA’s 61st Annual survey is avail-able for purchase at https://www.psca.org/61st_AS.

Hattie Greenan is Director of Research and Communications for PSCA.

Research | Employers and Participants are Contributing to Plans at Record Levels

Annually20.5%

Semi-Annually12.9%

Quarterly63.1%

Monthly3.0%

Other0.5%

Exhibit 4: Investment Monitoring Frequency

Exhibit 5: Plans with an Automatic Enrollment Feature Over Time Year

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Percentage of Plans 39.6% 38.4% 41.8% 45.9% 47.2% 50.2% 52.4% 57.5% 59.7% 61.2%

Exhibit 6: Percentage of Plans with a Default Deferral of More than Three Percent Over Time Year

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Percentage of Plans 27.2% 26.0% 25.8% 32.2% 35.2% 40.2% 40.4% 51.6% 53.5% 59.5%

DEFINED CONTRIBUTIONS INSIGHTS8 Winter 2018

Fiduciaries Beware — There’s No Such Thing as a Free FundThe marketing lure of “free” and its possible implications on your fund lineup.By Chris Carosa

Investments

irce had warned Odysseus about the Sirens, whose enticing song lured becharmed sailors off course into rocky shoals and cer-

tain death. When his ship approached the island of the Sirens, Odysseus ordered his men to fill their ears with beeswax so they would not fall prey to enchanting melody. He, however, wanted to hear what the Sirens said. He ordered his men to tie him tightly to the mast as they sailed through the treacherous passage.

As the Homeric galley approached the Sirens, they began to sing to Odys-seus. They falsely promised “once he hears to his heart’s content” he would sail on “a wiser man.” Despite his urgent pleas to release him as he took in that infamous tune, Odysseus’ crew remained steadfast, and Odysseus remained fastened to the mast. It was only after the ship navigated well beyond the range of the sirens’ song did his men release Odysseus from his protective bond.

Investors and the fiduciaries that serve them must constantly cruise through and past two similarly alluring clarion peals: low fees and high performance. Of course, the SEC itself forever reminds us of the false promise of the latter. No one may ride the chariot of performance without whispering this warning: “All glory is fleeting” or, in the language of the SEC,

“Past performance can never guarantee future results.”

It’s commonly accepted that we can never heed the call of high perfor-mance. But what of that other shrill call — the trumpet of low fees?

Unlike the SEC’s common-sense phrase regarding performance, we have no similar cautionary axiom alerting us to the false promise of low fees. In fact, we have the opposite.

The media, consumer advocacy groups, and even regulators continually bombard us with a never-ending man-tra of the dangers of high fees. Indeed, we’ve seen a (somewhat justified)

erosion of plan-related fees over the last twenty years. In some cases, such as conflict-of-interest fees like 12b-1 fees, revenue sharing, and commissions, that’s probably OK. In other cases, particularly as it regards to mutual fund operating expenses, that might be penny wise and pound foolish.

The rush to lower fees has been the fear among fiduciaries since the DOL’s 2012 Mutual Fund Fee Disclosure Rule. Lately, index fund purveyors have been proclaiming their expense ratios as being holier (i.e., lower) than expense ratios of actively managed funds. Now,

C

Winter 2018 9Plan Sponsor Council of America • PSCA.org

Investments | Fiduciaries Beware — There’s No Such Thing as a Free Fund

even the index funds are fighting with each other in a “race to zero.”

Well, as of this summer, we can declare a winner in that race: Fidelity. In a bold move, the mutual fund giant has created the ultimate financial ser-vices loss leader: an index fund with an expense ratio of zero. This is not a trick. There are actually no expenses paid by the fund.

At least that’s what the expense ratio discloses. In reality there are expenses, it’s just that they’re being absorbed by Fidelity. Said another way, certain Fidelity clients are subsi-dizing the shareholders of these “free” mutual funds.

Before we delve into the fiduciary issues such a marketing scheme raises, let’s take a closer look at the concept of “free” and the powerful marketing psychology behind it.

The internet has been the great equalizer when it comes to free. How many of you still pay for news? With the exception of but a few news media companies, it’s almost impossible to grow a journalism business in a tradi-tional way. Esther Dyson predicted this in 1995 when she wrote in Wired, “The Net dramatically changes the economics of content.” Ultimately, Chris Anderson captured this zeitgeist in his book Free: The Future of a Radical Price.

Dyson and Anderson were on the same wavelength (and not just because of their shared Wired experience). Dyson predicted “Chief among the new rules is that ‘content is free’… In the world of the Net, content will serve as advertising for services.” Content, therefore, is a loss leader that drives consumers to other (presumably more profitable) products.

Fifteen years later, Anderson was able to report, “People are making lots of money charging nothing. Not nothing for everything, but nothing for enough that we have essentially created an economy as big as a good-sized country around the price of $0.00.”

Dyson and Anderson have gone beyond the “one-time free offer” long used by Madison Avenue mavens. This well-established marketing strategy clearly works. The academic world confirms this, most notably through the research of Dan Ariely, the James B. Duke Professor of Psychology and Behavioral Economics at Duke Univer-sity. “Free” motivates the masses.

In essence, Fidelity is trying to adopt the same marketing ethos that has become the content industry to the financial services industry. In a way, they have “one-upped” Vanguard, long viewed as the king of the low-fee hill.

Is that a hill worth defending? Only time will tell. More urgently, however, is that a hill a fiduciary — whether the plan sponsor of a corporate retirement plan or the financial profession who serves that market — dare play on? A prudent fiduciary wades carefully into unexplored jungles. This hill is an unexplored jungle.

Ariely intimates this very point. In Chapter 5 of his book Predictably Irrational, he states, “…the theory of demand is a solid one — expect when we’re dealing with the price of zero.” His research shows a price of zero clearly attracts more customers, but that doesn’t necessarily translate into more volume. The units acquired per customer went down when the price was zero.

In the mutual fund business, this metric is not good. There are fixed costs for each shareholder. These fixed costs aren’t related to the amount of assets a shareholder invests in the fund. Normally, a fund will want fewer shareholders but more assets per share-holder. According to Ariely’s research, Fidelity can expect more shareholders (because the fund is “free”) but less assets per shareholder (because the fund is “free”).

In the article “When Must a Fiduciary Say ‘No’ to No-Fee Funds?” (Fiducia-ryNews.com, October 4, 2018), Billal Adam, Sr. Vice President, Financial

Advisor at International Assets Advisory Wealth Management in Fort Lauderdale, Florida, says, “Fidelity’s CEO was quoted in Bloomberg saying that the goal of these funds is to get more people to try Fidelity in the hopes of being able to then do other business with them.”

At what point does “free” attract so many shareholders that the cost of subsidizing the “free” funds outweighs the loss-leader benefit? This is the very definition of “unexplored jungle.”

And that’s not just because the “free” fund business model is untested. There’s a greater fiduciary question here. Right now, Fidelity’s “free” funds are only available to retail investments, not retirement plans. If we are to believe that Fidelity is subsidizing the operating costs of these “free” funds with revenues from other parts of its business, doesn’t this raise the question of whether Fidelity is purposely over-charging in these other parts?

This is a very similar question to the use of revenue sharing to pay for the costs of a 401(k) plan. Under certain conditions, if different investments paid different revenue sharing fees, some participants would be paying more than other participants. When this issue came up several years ago, the consensus was to halt the practice.

Will we see the same consensus with Fidelity as it becomes clearer who’s pay-ing for the “free” funds and who isn’t?

Decades ago banks would give away free toasters to entice customers to build their money into their institution. Today, Fidelity appears to be giving away “free” funds for the same pur-pose. Fiduciaries need to be mindful of the siren song of low — or no — fees. Maybe, like Odysseus, it’s safer to tie themselves to the mast of skepticism, lest that song lure them into the rocky shoals of fiduciary liability.

Chris Carosa is Chief Contributing Editor at FiduciaryNews.com.

DEFINED CONTRIBUTIONS INSIGHTS10 Winter 2018

How Tax Reform Changed the Funding of NQDC PlansCorporate-Owned Life Insurance (COLI)’s value has been reduced.By Benjamin R. Eisler and David J. Marshall

NQDC Plans

Last year, Congress approved an unprecedented reduction in federal corporate tax rates. It has had a profound impact on

the funding of Nonqualified Deferred Compensation (NQDC) plans, and on the value of funding with Corpo-rate-Owned Life Insurance (COLI) in particular. Below, we detail how COLI has been affected, how companies can continue to get the most out of their COLI, and key considerations for those who may want to replace their COLI.

Key Takeaway: COLI’s Value Has Been ReducedCOLI is often described as a portfolio of investments with a life insurance wrapper. In exchange for paying insur-ance-related fees, it allows companies to generate earnings tax-free. This tax benefit has made COLI one of the most widely-used NQDC funding strategies.

In recent months, however, its value has declined.

• The large drop in tax rates caused an equally large drop in the tax savings that COLI provides.

• BlackRock now predicts equities and fixed income returns to be lower than in the past.1 Lower earnings mean lower taxes on those earnings — and an even lower tax savings from COLI.

The question now is, given that COLI-related fees range from 50–150

bps, does COLI still make economic sense? The table in Exhibit 1 reveals the answer. It shows the earnings required, at different expense levels, for the tax savings that COLI provides to be greater than its fees (these fees may include premium taxes, cost of insur-ance, M&E charges, administrative charges, and broker commissions — all of which impact COLI net returns). Considering these fees often total 125 bps and that much of COLI is in money market and shorter duration fixed

Exhibit 2

STRATEGY 1 Optimize with COLI Only

STRATEGY 2 Further Optimize with COLI, TRS

• Continue to fund and hedge the volatile portion of the NQDC plan with COLI.

• Allocate remainder of COLI to a stable value or guaranteed return fund if available, or if unavailable, withdraw the lesser of 1) its tax basis in the COLI or 2) the amount of COLI that is not used for hedging.

• Allocate entire COLI cash value to a stable value or guaranteed return fund if available, or if unavailable, to a short duration fixed income strategy.

• Hedges volatile portion of NQDC plan with a dynamically re-weighted Total Return Swap (TRS), whereby company pays LIBOR plus a spread and receives the returns of the plan.

Benefits

• Economic for all liabilities.

• Spread income is generated by the stable value (if available) over the non-volatile NQDC plan returns.

• Carrier may agree to lower fees since the COLI is less complex.

• If tax basis in COLI is withdrawn, capital is freed up that can now earn higher returns in the company’s core business.

Benefits

• Economic for all liabilities.

• Spread income is generated by the stable value (if available) over the cost of the swap.

• Carrier may agree to lower fees, since the COLI is less complex.

• Superior accounting treatment; gains on TRS are recorded in compensation expense, directly offsetting increases in NQDC plan

• Eliminates any over-hedging of the plan.

Earnings Required

50 bps 2.02%

75 bps 3.04%

100 bps 4.05%

125 bps 5.06%

150 bps 6.07%

COLIExpense

Level

Exhibit 1: COLI Earnings Now Required for COLI to Be Effective

* Uses the average combined state and federal corporate tax rate of 24.7%.

Winter 2018 11Plan Sponsor Council of America • PSCA.org

income, it is clear that some COLI is not earning the 5.06 percent below, and is thus not economic.

Even prior to these recent develop-ments, COLI had shortcomings:

• Ties up significant capital that could earn higher returns in company’s core business.

• Does not eliminate volatility in Compensation Expense or Operat-ing Income caused by the NQDC plan (COLI earnings are recorded in Other Comprehensive Income).

• Over-hedges the NQDC plan if used to fund 100% of the liability: increases in the liability flow through the income statement after-tax (pre-tax

expense less a deferred tax asset) while COLI earnings are tax-free (no deferred tax liability is required under GAAP).

All of this said, there are actions com-panies can easily take to get the most out of their COLI in this new tax envi-ronment. These are detailed below.

Key Takeaway: COLI’s Net Present Value, Accounting Treatment, and Hedge Can Be ImprovedAs mentioned above, a sizeable portion of COLI is allocated to money market

and shorter duration fixed income. This is because COLI investments typically map to NQDC plan allocations, and those allocations are made by partici-pants saving for retirement. This cre-ates a challenge for COLI because these investments generate lower returns for which COLI may not be financially beneficial. Two strategies, both easy to implement, can mitigate this problem. See Exhibit 2.

NQDC Plans | How Tax Reform Changed the Funding of NQDC Plans

Exhibit 3

STRATEGY 3 Partial Liquidation of COLI

STRATEGY 4 Liquidation of COLI Tax Basis/Use of TRS

STRATEGY 5 Elimination of COLI/Use of TRS and LoC

• Withdraw COLI cash value to a level where the cash value is equal to the after-tax NQDC liability (1-tax rate).

• Withdraw more (or all) of the tax basis in the COLI.

• Hedge part of the volatile portion of the NQDC liability with COLI and part with a TRS, or allocates the remaining COLI to a stable value fixed income alternative, if available, and uses a TRS to hedge the entire volatile portion of the liability.

• Although this is rarely done because of significant inside buildup that would be subject to tax, the company could unwind all of its COLI. Such an unwind could be executed over several years so that the tax impact is offset by deductions related to plan distributions.

• Hedges volatile portion of NQDC plan with TRS.

• If company is legally obligated to fund its liability, it replaces the COLI funding with a low-cost letter of credit (LoC)

Benefits

• Eliminates any over-hedging of the plan.

• No additional taxes are due, as long as the policy is a non-modified endowment contract (Non-MEC), which typically is the case for COLI, and the withdrawals are less than a company’s tax basis in the policies.

Benefits

• Frees up substantial capital that can now earn higher returns in the company’s core business.

• Superior accounting treatment (TRS gains are recorded in compensation expense, directly offsetting increases in the NQDC plan).

• Eliminates any over-hedging.

• Economic for all liabilities; only volatile components of the plan are hedged.

• No additional taxes are due, as long as policy is Non-MEC.

Benefits

• Frees up maximum capital that can now earn higher returns in the company’s core business.

• Optimal accounting treatment.

• Eliminates any over-hedging.

• Economic for all liabilities; only volatile components of the plan are hedged.

• Funding with letter of credit may be more secure than COLI (eliminates credit risk to underlying funds and insurance carrier).

Drawbacks

• Still ties up significant capital that could earn higher returns in core business.

• May not be economic for all liabilities.

• Suboptimal accounting treatment.

Drawbacks

• Still ties up significant capital that could earn higher returns in core business.

• Suboptimal accounting treatment.

Drawbacks

• Company must pay taxes on the COLI inside buildup — which could be significant.

DEFINED CONTRIBUTIONS INSIGHTS12 Winter 2018

NQDC Plans | How Tax Reform Changed the Funding of NQDC Plans

Key Takeaway: Alternatives to COLI Offer Significant Net Present Value, Accounting, Hedge BenefitsThere may be some cases where com-panies want to partially or completely get out of their COLI. This can generate even further value. A 2017 Columbia Business School study found that switching to an alternative to COLI can generate a Net Present Value (NPV) so large that it could pay for as much as two-thirds of the compensation owed to executives under the NQDC plan. It

can yield improved accounting treat-ment as well. Unwinding COLI may also, however, trigger a tax expense. Three alternative strategies to COLI — and the benefits and drawbacks of each — are outlined in Exhibit 3.

ConclusionTax reform and other factors have greatly reduced the value of COLI, but various readily available strategies can help mitigate this. The optimal strategy can offer substantial value, improved accounting treatment, and a more accu-

rate hedge. Atlas Financial Partners can quickly provide a customized model to assist companies in identifying the best strategy for them.

Benjamin R. Eisler and David J. Marshall are Principals with Atlas Financial Partners

1 https://www.blackrock.com/institutions/ en-us/insights/portfolio-design/capital- market-assumptions.

Plan Sponsor Council of America • PSCA.org Winter 2018 13

Nobody likes to be thought of as “average” — so why do people spend so much time worrying about the “average”

401(k) balance?These averages are reported with

some regularity by any number of pro-viders (based on the records for which they have access), and sometimes by academics drawn from government databases1.

The short (and less cynical) answer to “why” is most likely that the math is “easy.” You simply take the total assets (from whatever recordkeeper/plan balances you have), divide it by the number of participants in that group, and “voila” — you have an average.

Now, when you stop and think about it (and many don’t), you realize that doing so adds together the bal-ances of individuals in widely different circumstances of age and tenure — everything from those just entering the workforce (and who have relatively negligible 401(k) balances) with those who may have been saving for decades. It can also, in the case of government databases, add together those that have had an opportunity to save with those who haven’t, or who chose not to. That averaging also smushes together the accounts of individuals of vastly differ-ent income and financial status, who may (or may not) have other means of support, who may (or may not) be a primary source of retirement prepara-tion in their household, who live (and may retire) in very different places —

and, let’s face it, groups together indi-viduals who are not only dealing with very different financial circumstances, but also likely have widely varying retirement security needs.

Moreover — and this generally isn’t highlighted — when you consider results from single provider estimates, all those differences are potentially magnified by the reality that individuals change jobs, and employers change 401(k) providers, and so, those “averages,” of necessity, include the experience not only of dif-ferent individuals at a time, but different individuals from one year (and reported averages) to another.

As a consequence, while the math is easy, the result is not generally a very accurate barometer when it comes to assessing actual retirement accumulations.

So, how much could an “average” assessment distort things?

Consider the EBRI/ICI database maintained by the Employee Benefit Research Institute. At year-end 2016, the average 401(k) plan account balance was $75,358. On the other hand, the average of individuals who were in that database consistently — meaning that you are at least considering the same group of people during the period 2010 through 2016 — was $167,330. That’s right — twice as large.

However, as I’ve already noted, there are plenty of issues with focusing on averages. But if you take the average of a more homogeneous group — say the individuals in this database who have not only been in the database con-

sistently for the specific six-year period, but who have more than 30 years of ten-ure with their employer — it’s possible to get a much more accurate picture.

Even though some of that group may not have been eligible for, or par-ticipated in, a 401(k) throughout their career, it turns out they have accumu-lated significantly more — an average of $338,735, in fact. An amount that could, even at today’s interest rates, provide an annuity of $1,909 per month (for a male age 65). By comparison, in 2017, the average monthly Social Secu-rity benefit for a 65-year-old male was $1,348.70 (for women, $1,076.19).

The math may not be as “easy.” But the answer, certainly in evaluating retirement readiness, is surely more accurate.

Nevin E. Adams, JD, is the Chief Content Officer for the American Retirement Association.

1 There are any number of issues with the underlying data, even from otherwise reputable sources. For more insights, see Crisis ‘Management’ https://www.napa-net.org/news/managing-a-practice/industry- trends-and-research/crisis-management-2/, CPS Needs a New GPS https://www.napa-net.org/news/managing-a-practice/industry-trends-and-research/cps-needs-a-new-gps/, Data ‘Minding’ https://www.napa-net.org/news/managing-a-practice/industry-trends-and-research/data- minding/, and Facts and ‘Figures’ https://plansponsorinstitute.blogspot.com/2012/07/facts-and-figures.html

Better Than Average(s)How accurate are average account balances as measurements of retirement readiness?By Nevin Adams

Retirement Read(y)

DEFINED CONTRIBUTIONS INSIGHTS14 Winter 2018

Primum non nocere. First do no harm!California and Illinois join Oregon to mandate enrollment of private sector workers in less than optimal IRAs.By Jack Towarnicky

Compliance Watch

here are many reasons why access to a 401(k) or other employer-sponsored retirement savings plan has substantial value

to workers,1 including:• Ability to make Pre-tax or Roth

401(k) contributions of up to $19,000; $25,000 if you are age 50 or more (2019),

• Maximum annual addition of $56,000 (2019),

• Tax-preferred liquidity through plan loans,

• ERISA fiduciary protections, and increasingly,

• Automatic features — automatic enrollment, escalation and investment — using an age-appropriate, profes-sionally-designed asset allocation.

Today, we have more than 100 million individual retirement savings accounts (401(k), 403(b), 457(b), and IRAs). Assets have grown 680 fold from less than $25 billion in 1975 to more than $17 trillion in 2018!2 In fact, if DC plan asset growth continues at the same rate as occurred during the period 2nd Quarter 2007 through 2nd Quarter 2018 (including the Great Recession), Defined Contribution (DC) assets will exceed $190 trillion by 2060!

Proponents of state Individual Retirement Account (IRA) mandate programs often cite the following statistics as justification for retirement savings mandates:3

• Workers are 15 times more likely to save for retirement if they can do so at work via payroll deduction, and

• 20 times more likely to save for retirement if a plan offered at work uses automatic enrollment.

There is some truth to that. Some workers are more likely to participate in a 401(k) versus an IRA that does not deploy automatic features, pre-tax contributions, employer contributions, or electronic payment functionality. However, the 15 and 20 times statistics are not a valid comparison between payroll-deducted Roth IRAs and 401(k) plans.

Employers have known for more than 35 years about voluntary, pay-roll-deducted IRAs, however, only a handful adopted such programs.4 Employers know many IRA products already available in the marketplace have better quality and lower costs. Individuals know that too. During the period 1982 — 1985, I worked for an employer who offered payroll deduc-tion IRAs. Take up rates were miniscule — even during that period, the salad days5 for contributions to IRAs.6

America does not have a retirement savings access or coverage issue. All American workers have had access to a more than adequate, tax-preferred, retirement savings program for the past 36 years and more — the IRA! However, only 12 percent of eligible households

contributed to an IRA in 2016.7 Instead, America has a financial prioritization issue — retirement saving is not a top priority for many employers, nor for many workers and their households. Even workers who have access to a lucrative, employer-sponsored plan fail to enroll and participate. Where enrollment is voluntary, only:

• 57 percent of eligible workers participate,

• 37 percent of workers with annual incomes of less than $30,000 participate,

• 21 percent of workers under age 25 participate,

• 52 percent of workers ages 25–34 participate, 21 percent if under age 25, and

• Only 53 percent of workers with between two and three years of service participate, that drops to 31 percent if they have less than one year of service.8

The Oregon, California, and Illinois mandates duplicate existing IRA access — often at a higher cost with less value!9 Various limits reduce the effectiveness of these IRA mandates. Worse, the state IRA mandates have incurred legal challenges.10 Despite all these shortcomings, states perceive their modest levels of enrollment to be a success.11

T

Winter 2018 15Plan Sponsor Council of America • PSCA.org

Compliance Watch | Primum non nocere. First do no harm!

And, that’s my primary criticism. State mandates direct workers to high-er-cost, lower-value retirement savings options using out-of-date, suboptimal processing. Payroll deduction support is so 20th Century. Electronic banking, 21st Century functionality, is less expensive, convenient, and more reliable.

But, perhaps worst of all are the implications for employer-sponsored plans. LIMRA, the Life Insurance and Market Research Association, recently surveyed employers. Sixty percent said

it was somewhat or very likely that they would discontinue their compa-ny’s DC plan and enroll employees in a state-sponsored plan. Those results are mostly unchanged from a prior survey in 2016.12 So, if the state IRA mandates are successful, the results will be mixed to the extent employers terminate their support for a DC plan.

Bottom line, there are much better, more valuable, and more efficient solu-tions with lower costs — lower for the states, the employers, and the workers.

If the goal is access or coverage, there are other solutions that would reach all workers who don’t have access to an employer-sponsored plan. Those options avoid litigation and they minimize any negative impact on the employer-sponsored retirement savings marketplace the states use as a model for success.

First, do no harm!

Jack Towarnicky is the Executive Director of PSCA.

1 G. Iacurci, 10 must-know facts about today’s 401(k) plans, Investment News, 12/12/18, Accessed 12/14/18 at: https://www.investmentnews.com/gallery/20181212/FREE/121209999/PH/10-must-know-facts-about-todays-401-k-plans

2 J. Poterba, S. Venti, The Transition to Personal Accounts and Increasing Retirement Wealth: Macro- and Micro-evidence, NBER, June 2004. See Figure 1.2 Accessed 12/10/18 at: http://www.nber.org/chapters/c10340 ; See also: ICI, Retirement Assets Total $29.2 Trillion in Third Quarter 2018, 9/27/18, Accessed 12/10/18 at: https://www.ici.org/research/stats/retirement/ret_18_q3

3 Georgetown University’s McCourt School of Public Policy, Center for Retirement Initiatives, “Work Hard. Save Easy.” How State Leadership and Innovation Are Transforming Retirement Savings, Webinar, 12/13/18.

4 GAO, Individual Retirement Accounts: Government Actions Could Encourage More Employers to Offer IRAs to Employees, GAO-08-590, June 2008. “…Although any employer can provide payroll-deduction IRAs to their employees, regardless of whether or not they offer an-other retirement plan, retirement and savings experts told us that very few employers offer their employees the opportunity to contribute to IRAs through payroll deduction. …” Accessed 12/14/18 at: https://www.gao.gov/assets/280/276234.pdf

5 Shakespeare, Anthony and Cleopatra, Act I, Scene V.

6 ICI, The Evolving Role of IRAs in U.S. Retirement Planning, November 2009. See Figure 5, page 7. Accessed 12/14/18 at: https://www.ici.org/pdf/per15-03.pdf

7 ICI, 2018 Factbook, Accessed 12/14/18 at: https://www.ici.org/pdf/2018_factbook.pdf

8 Vanguard, How America Saves, 2018. Figure 30. Accessed 12/14/18 at: https://pressroom.vanguard.com/nonindexed/HAS18_062018.pdf

9 For example, Fidelity offers a no-fee IRA with 0 basis point index mutual funds, where, unlike state mandated IRA designs, the first $1,000 of assets need not be invested in cash equivalent accounts, and where administrative fees are $0 — compared to the 100+ basis point charge in Oregon, and the anticipated 75 basis point administrative fee in California and Illinois. Workers who save less than $1,000 may actually receive less than what they contribute. Roth, Fidelity Zero vs Vanguard: Which index fund is better? Voices, 8/14/18, Accessed 12/14/18 at: https://www.financial-planning.com/opinion/vanguard-vs-fidelitys-zero-funds-on-fees-expense-ratios-and-tax-efficiency See also: Fidelity Fees, https://topratedfirms.com/account-charges/ira/fidelity-ira-fees.aspx See also: A. McElhaney, California’s New Retirement Plan Selects State Street to Manage Its Investments, Institutional Investor, 8/17/18, Accessed 12/14/18 at: https://www.institutionalinvestor.com/article/b19k9zr76vqpdc/California-s-New-Retirement-Plan-Selects-State-Street-to-Manage-Its-Investments

10 Howard Jarvis Taxpayer Association, HJTA Files Suit Over Illegal CalSavers Program, 5/31/18, Accessed 12/14/18 at: https://www.hjta.org/hot-topic/pr-hjta-files-suit-over-illegal-calsavers-program/ See also: Filed Complaint, Accessed 12/14/18 at: https://s3.amazonaws.com/ si-interactive/prod/plansponsor-com/wp-content/uploads/2018/06/01111552/TaxpayersAssociationvCaliforniaSecureChoiceComplaint.pdf

11 T. Read, “Work Hard. Save Easy.” The OregonSaves Retirement Program is Off to a Promising Start, November 2018, Accessed 12/14/18 at: https://cri.georgetown.edu/work-hard-save-easy-the-oregonsaves-retirement-program-is-off-to-a-promising-start/

12 R. Steyer, Survey: DC execs would end their own plan for a state plan, 12/10/18, Accessed 12/14/18 at: https://www.pionline.com/article/ 20181210/PRINT/181219911/survey-dc-execs-would-end-their-own-plan-for-a-state-plan See also: LIMRA, Workplace Retirement Savings and State Plan Mandates: Employer and Employee Perspectives (2017), 7/18/2017, Accessed 12/14/18 at: https://www.limra.com/Research/Abstracts_Public/2017/Workplace_Retirement_Savings_and_State_Plan_Mandates__Employer_and_Employee_Perspectives_(2017).aspx

DEFINED CONTRIBUTIONS INSIGHTS16 Winter 2018

Fiduciary Awareness by 403(b) Plan Sponsors403(b) plan sponsors are increasingly focused on plan governance.By Hattie Greenan

403(b) Research

he Plan Sponsor Council of America (PSCA) conducted a survey of 403(b) plan sponsors in October 2018 to assess their

awareness of fiduciary responsibilities, and if it has changed in the last two years. The survey also assessed what was driving any change — the uncer-tainty regarding a Fiduciary rule, the multiple lawsuits in the news regarding 403(b) plans, or other factors.

Three hundred 403(b) plan sponsors responded to the survey, representing a diverse group of organizations. Two-thirds of respondents are ERISA plans, nearly a quarter are not subject to ERISA, and ten percent of respon-dents were unsure of their ERISA status. One-third of respondents have fewer than 50 participants, and less than 20 percent have more than 1,000. Respondents included a wide range of industries including social and community services organizations, higher education, K–12 Education, and religious institutions.

Forty percent of respondents did not make any plan changes in the last two years, and sixty percent made changes to improve their plan governance, streamline investments, assess plan fees, and/or other plan design changes. Nearly half of respondents made investment changes (size correlated with nearly three-fourths of large plans making investment changes), one-fourth made plan fee changes, and nearly twenty percent made plan gov-ernance changes. See Exhibit 1.

Summary of Survey Results

FiduciariesEighty percent of respondents view themselves as plan fiduciaries, up from 76.5 percent in 2016. There is variability among plan size with large employers more like to view themselves as a fidu-ciary. See Exhibit 2.

Investment ChangesHalf of the plans surveyed made changes to investment options — of those that did. See Exhibit 3.

• More than 80 percent removed or replaced underperforming investments.

• Half of large plans changed from retail to institutional share classes.

• Nearly twenty percent reduced the number of investment options.

• One-fourth of small plans adopted a Qualified Default Investment Option (QDIA).

Plan Governance ChangesOf the twenty percent of plans that made governance changes. See Exhibit 4.

TExhibit 1: Types of Plan Changes Made in the Last Two Years

Plan Size (Number of Participants)

Changes Made 1– 49 50–199 200–999 1,000+ All Plans

Investment Changes 18.3% 59.5% 62.1% 72.0% 47.6%

Plan Governance Changes 7.7% 25.0% 17.2% 24.0% 17.2%

Plan Fee Assessment/ Changes 1.9% 25.0% 41.4% 52.0% 24.7%

Plan Design 4.8% 4.8% 6.9% 8.0% 5.7%

None 70.2% 35.7% 25.9% 20.0% 43.2%

Other 1.9% 0.0% 0.0% 2.0% 1.0%

Exhibit 2. Percentage of Respondents Who View Themselves or Their Organization’s Investment Committee as a Plan Fiduciary

Plan Size (Number of Participants)

ERISA Status 1– 49 50–199 200–999 1,000+ All Plans

ERISA Plans 69.1% 94.8% 89.8% 94.7% 84.5%

Non-ERISA Plans 69.2% 91.7% 77.8% 77.4% 78.5%

All Plans 64.4% 91.4% 88.1% 84.3% 80.0%

Winter 2018 17Plan Sponsor Council of America • PSCA.org

403(b) Research | Fiduciary Awareness by 403(b) Plan Sponsors

• Nearly half re-evaluated their plan’s governance structure.

• More than half of plan sponsors hired a fiduciary advisor or shifted to a fiduciary advisor relationship.

• Nearly 20 percent reviewed or mod-ified their fiduciary insurance.

• Forty percent created an investment policy statement.

Plan Fee ChangesOne-fourth of plans made changes to fees, including half of large plans. See Exhibit 5.

• Of those, nearly half implemented fee levelization, and thirty percent began benchmarking fees.

• Nearly 30 percent changed from basis points fees to per participant fees.

Reasons for changesHalf of organizations made plan changes — the reasons they made changes include. See Exhibit 6.

• Normal course of the plan’s governance (53.6 percent)

• Advisor recommendations (48.8 percent)

• In response to litigation surrounding plans today (17.5 percent)

ConclusionPlan sponsors are changing key gover-nance practices to improve 403(b) plan performance and outcomes for employ-ees. The retirement security of millions of workers in the non-profit sector depends on effective plan designs and prudent oversight by plan sponsors. The data confirms that 403(b) plan sponsors take that responsibility seriously and continue to make changes to improve their plans.

The full report is available at: https://www.psca.org/2018_403b_snapshot

Hattie Greenan is PSCA’s Director of Research and Communications.

Exhibit 3. Types of Investment Changes Made

Changes Made All Plans

Removed/replaced underperforming investments. 82.9%

Reduced the number of annuity providers. 7.9%

Reduced the number of investment options. 17.9%

Changed from retail to institutional share classes. 20.0%

Eliminated proprietary funds of the service provider. 10.7%

Adoption of a Qualified Default Investment Alternative (QDIA) 17.9%

Other 14.3%

Exhibit 4: Types of Plan Governance Changes Made

Changes Made All Plans

Hired an advisor to act as a fiduciary or changed from a non-fiduciary advisor to a fiduciary advisor. 51.1%

Created an Investment Policy statement. 42.6%

Re-evaluated the plan’s governance structure. 48.9%

Reduced the number of plan providers or recordkeepers. 12.8%

Exhibit 5: Types of Fee Changes Made

Changes Made All Plans

Began benchmarking fees. 29.9%

Fee leveling. 46.3%

Changed allocation of recordkeeping/plan administration fees from basis points to per participant and/or transaction based fees 28.4%

Other 19.4%

Exhibit 6: Reasons for Making Plan Changes, When Changes Were Made

Changes Made All Plans

To enhance governance. 28.9%

To prepare for the fiduciary rule that did not go into effect. 10.8%

To prepare for other fiduciary rules currently being developed by the SEC and various states. 6.0%

These are ordinary changes in the course of the plan’s governance. 53.6%

Our advisor recommended we do so. 48.8%

In light of the litigation surrounding plans today. 17.5%

To mitigate risk. 32.5%

Other 19.3%

DEFINED CONTRIBUTIONS INSIGHTS18 Winter 2018

Health Savings Account (HSA) HeadachesSolutions and relief for plan sponsors regarding eight HSA pain points.By Karin Rettger and Jack Towarnicky

HSAs

Health Savings Accounts (HSAs) offer employers and their employees access to a great savings vehicle. We find

that they continue to be widely misun-derstood. The Plan Sponsor Council of America’s HSA committee offers these solutions to common HSA pain points. Here are eight tips you can use now or at your next open enrollment:

Headache #1: HSA and FSA ConfusionAn HSA is not the same as a Flexible Spending Account (FSA). The FSA basics have mostly been unchanged since 1984, when the cafeteria plan regulations were first proposed — annual elections, use-or-lose, etc. So, not surprisingly, after more than 20 years of education, workers are well trained to understand an FSA. Plan Sponsors started to intro-duce HSAs in 2005, and most providers and sponsors initially explained HSAs as an FSA look-a-like or as a kind of “super” FSA, and not as a long-term savings account. In our Spring 2018 Issue of Defined Contribution Insights we discussed 10 Common Myths and Misconceptions of HSAs, and you may find that a useful reference.

How do we remedy the misun-derstandings about HSAs? Unlike an FSA, the HSA does not have a use-it or-lose-it-provision. You also can change your payroll deduction throughout the year without a change

in family status. So, workers don’t have to estimate next year’s health care expenses during open enrollment. Instead of linking the amount of HSA contributions to next year’s out-of-pocket medical expenses, the worker can focus on the savings decision — at annual enrollment and throughout the year. It also allows plan sponsors the flexibility of offering HSA education throughout the year to remind employ-ees of the value the HSA offers.

We would suggest education throughout the year that positions the HSA with the 401(k) and not against the FSA. When workers start to understand the HSA properly, they will see it as a “super” 401(k). Both the HSA and the 401(k) offer pre-tax savings, and invest-ment options, but unlike the 401(k):

• HSA contributions are pre-tax for FICA and FICA-Med employment taxes,

• The HSA offers the added ability to pay for out of pocket medical expenses with tax free dollars, and

• Minimum required distribution rules do not apply.

Here’s one more big education oppor-tunity — under current law there is no time limit on reimbursement from an HSA. In other words, reimburse-ment from an HSA does not need to be made in the year medical expenses are incurred. This is a huge benefit to employees. If they can afford to pay for current out-of-pocket health care

expenses from today’s household budget, they can save those incurred receipts and get reimbursed in a future year. This allows unused HSA dollars to grow tax free, and also optimizes potential for greater investment growth. We explain this strategy to workers as “Shoeboxing” receipts. Reimbursing yourself tax-free at a later date, perhaps after retirement, can provide tax-free income in retirement. Think of it this way, if you don’t have an HSA, you will have to pay for out-of-pocket health care expenses from your 401(k), which results in a taxable distribution (if it is a traditional 401(k)). Don’t forget, tax free income may also reduce the taxes a worker may have to pay in retirement (on Social Security benefits) and the premiums a worker may have to pay in retirement (income-based premium surcharges for Medicare Part B and Part D coverage). We discussed the cost of healthcare in retirement in more detail in the Fall 2018 issue of PSCA’s Defined Contribu-tion Insights.

Here’s another way of looking at it: at retirement, if you have $500,000 in your 401(k) and $150,000 in your HSA, which one would you rather use to pay for health care expenses in retirement?

Starting in 2019, PSCA will provide HSA educational webinars. We will be including some HSA basics and educa-tion on how the HSA can be positioned alongside a 401(k).

Winter 2018 19Plan Sponsor Council of America • PSCA.org

HSAs | Health Savings Account (HSA) Headaches

Headache #2: Deductibles are “High”ly MisleadingWhatever you do, don’t call the HSA-capable health option a “high deductible health plan!” Why? It sounds too scary. Instead, call it something else. Try “Health Savings Option” or HSA-eligible Health Plan.” Simply, the minimum deductible for a HSA-capable health option is not so high anymore — the average deductible nationwide in a PPO is over $1,500 which is higher than the HSA minimum required deductible.1

Headache #3: Employees Don’t Contribute to the HSAInstead of the FSA and “use-or-lose,” you might say a major HSA pain point is “you snooze you lose.” Few plan sponsors incorporate features designed to open the HSA account when the

worker is first eligible. Only those expenses incurred after the employee is enrolled in a HSA qualify for tax-free reimbursement. So, you should con-sider automatically enrolling employees that choose an HSA-qualified health option. Similar to the 401(k), you can use a default HSA contribution amount — where employees have the option to opt-out or select a different amount. For example, if an employee chooses the HSA compatible health plan during open enrollment, you would enroll them in the HSA for $50 per pay period (or whatever amount you want to suggest).

Today, most plan sponsors offer health options through a Section 125 cafeteria plan — so employee contri-butions are automatically taken on a pre-tax basis. Automatically enrolling employees to make pre-tax contri-butions to the HSA would use the same rules. In other words, much like automatic enrollment in the 401(k), you

may want to assume that those who enroll in the HSA-capable health option should also be contributing to the HSA. Another concept you can use to facili-tate HSA contributions is to encourage employees who are already contribut-ing to the 401(k) to split their contri-butions between the two programs. In this way, an employee would continue to contribute to the 401(k) as necessary to receive the maximum employer contribution, but shift any excess to the HSA. Example: An employee is cur-rently contributing 10 percent of pay to the 401(k). The employer matches the first six percent of pay. The employee could change their 401(k) deferral to six percent of pay and enroll in the HSA at four percent of pay (therefore maintain-ing the same take home pay). The best strategy is to maximize the deferrals available under both a 401(k) and an HSA. You might worry that employees could negatively impact their retire-ment preparation, however, you should continue to educate employees about why the HSA can be more effective than the 401(k) in saving for retiree medical expenses. Finally, while most plan designs allocate employer HSA contributions to meet the comparabil-ity requirements, some plan sponsors deploy a matching structure — some-times using the same percentage match on HSAs contributions that they use on 401(k) contributions. We discussed automatic enrollment in HSAs in the Summer 2018 issue of PSCA’s Defined Contribution Insights.

Headache #4: Lack of Educational Materials on HSAsThere is a lack of educational materials that are built to engage employees and explain an HSA as anything other than a FSA look-a-like. PSCA’s HSA com-mittee has been developing non-vendor HSA materials that will highlight and explain a variety of HSA strategies that employees can use to fill this

DEFINED CONTRIBUTIONS INSIGHTS20 Winter 2018

HSAs | Health Savings Account (HSA) Headaches

education gap. Because employees can change their HSA contribution election at any time, we suggest you educate employees about HSAs throughout the year, when possible. If employees have a better understanding of HSAs prior to open enrollment, it might help them make a more informed decision. Throughout the year, you can engage them with tips about best uses and strategies for an HSA.

Headache #5: Verifying Employee Identity for HSA Set UpBecause HSAs are individual accounts and not under the employer’s control they are subject to PATRIOT act require-ments. Some HSA providers have been able to set up the accounts with the monies funded to a cash account — Wage Works is one of those providers. Regardless, you will want to educate the employee that this is their savings account and that after they enroll, they will need to complete the account setup with the vendor just as they would if they were setting up a personal invest-ment account. PSCA supports, and is advocating for, regulatory reform to make account setup easier.

Headache #6: A Health Plan Vendor is not Necessarily the Best Choice as the HSA VendorWe hear from many plan sponsors who assume they must use an HSA asso-ciated with the Health Plan provider. This is not the case. The HSA is not a health plan, and there are excellent independent HSA providers. Look for competitive low-cost investment options and a user-friendly website. In addition, some vendors are able to mirror your 401(k) investment line up. That may be an added benefit to the extent your employees participate in

and understand the investment options in your 401(k) plan.

Headache #7: HSA Vendor is Not Proactive in Promoting HSA Savings or InvestmentsMany plan sponsors are frustrated with a lack of engagement around the HSA. Too many HSA vendors are more focused on claims administration than wealth accumulation. As a result, only a small percentage of HSA account own-ers are realizing all of the value the HSA has to offer. Some health plan advisors are not licensed to sell investments and may not be able to fully educate partic-ipants about HSAs. A solution may be to ask your 401(k) service provider or advisor if they have developed and can offer HSA education and engagement as part of their employee education services. If not, an independent HSA advisor or consultant can assist you with designing a campaign.

Headache #8: Difficulty Verifying EligibilityA person cannot make contributions to an HSA if they do not participate in an HSA-eligible plan or if they are covered by a plan that is not HSA-eligible. This might include a spouse’s health plan, and general FSA, or Medicare. Many Medicare eligible employees enroll in Medicare Part A (since it is free or a requirement of the employer health plan) when they turn age 65 not realizing that even though Medicare is secondary to the employer-sponsored plan, that it will invalidate eligibility to contribute to the HSA. The burden of proof of eligibility is on the owner of the HSA and not the employer. Regard-less, many plan sponsors want to avoid an employee inadvertently enrolling in an HSA. Many HSA providers include a question regarding other health plan participation to prevent this. In addi-

tion, you can add a prompting question as a part of your on-line enrollment platform or enrollment process to try to educate employees about this.

ConclusionWe have identified eight HSA head-aches. The pain points included failure to see the HSA as a savings account, employees failing to make contributions to the HSA, and a lack of educational materials. We offered solutions that included positioning the HSA along-side the 401(k), highlighting the HSAs as a long-term savings opportunity, and as a solution for funding retiree health costs. Educational materials are improving and PSCA’s HSA commit-tee is dedicated to providing in-depth educational material to assist. Some of the pain points explored administrative headaches. Many of the solutions we provided encouraged you to talk to a variety of HSA vendors to see what support they may be able to provide to resolve these issues. Remember, an HSA offered in conjunction with the Health Plan is not necessarily the best option — getting RFPs on other HSA vendors is recommended.

The PSCA HSA committee wel-comes your thoughts on HSAs, headaches you’ve suffered, the pain points you are experiencing, solutions you have crafted — send us an e-mail at psca@psca.org.

Karin Rettger is President of Principal Resource Group.

Jack Towarnicky is the Executive Director of PSCA.

1 The Kaiser Family Foundation 2018 study of employer-sponsored health coverage showed that 85 percent of covered workers were enrolled in a plan with a general annual deductible and that the average annual deductible for single coverage was $1,573 — 17 percent higher than the $1,350 HSA minimum

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he 2018 mid-term elections are in the rearview mirror and a divided Congress will be seated in January. The new political landscape

upends the retirement policy dynamic in Washington and makes it likely that significant retirement legislation will remain on the radar. Heading into the new Congress, there are four key issues for plan sponsors to keep in mind.

Retirement policy may take center stage in the House Ways and Means Committee in 2019.Rep. Richard Neal (D-Mass.) will be the next Chairman of the House Ways and Means Committee in the next Congress. Mr. Neal is one of a handful of law-makers who can be considered a true “retirement policy wonk.” Mr. Neal is a longtime advocate of automatic IRA proposals and other legislation designed to increase the number of individuals with access to employ-er-provided retirement plans.

The prospects for bipartisan retirement legislation are good.There is broad, bipartisan support in Congress for the Retirement Enhance-ment and Savings Act (“RESA”), which would expand the availability of mul-tiple employer plans, facilitate in-plan lifetime income options, and simplify plan administration. The bill was unani-mously approved by the Senate Finance Committee in 2016, and the House com-panion bill sponsored by Reps. Mike Kelly (R-Pa.) and Ron Kind (D-Wis.) has

85 cosponsors. Unfortunately, RESA has been bogged down by procedural and policy disagreements this year, though the House did recently pass the Family Savings Act (“FSA”).

The FSA shares some common components with RESA (e.g., multiple employer plan expansion) but also has major differences. For example, the FSA included potentially controversial proposals like the creation of “univer-sal savings accounts” (i.e., tax-favored savings accounts with no withdrawal restrictions) and the expansion of 529 accounts to cover home schooling and other expenses, while omitting key provisions from RESA, such as new tax credits for small business plans, lifting the cap on auto-enrollment plans, and requiring lifetime income disclosure.

In the next Congress, the prospects for passage of bipartisan retirement legislation like RESA are good, given continuing support in both the House and Senate.

There is a growing momentum among Democrats for Social Security expansion.Social Security is one of the most pop-ular social programs, and the Dem-ocratic caucus has largely coalesced around a policy of increasing benefits and improving the program’s fiscal solvency. In 2015, 42 out of 46 Senate Democrats voted in favor of a budget amendment supporting Social Secu-rity expansion, and in September, 150 Democratic members of Congress

joined together to create the Expand Social Security caucus. It seems likely that House leadership will seriously consider Social Security expansion legislation in the next Congress.

The Administration is poised to move retirement policy by regulation and guidance.To date, retirement policy has largely taken a backseat to health-care issues and tax reform implementation in the Administration. However, President Trump recently signed an executive order prioritizing several retirement policies. In response, the Department of Labor quickly proposed regulations intended to expand the use of multi-ple employer plans, and the agency is considering options to streamline disclosures, including potential new rules regarding electronic delivery. The Treasury Department and Inter-nal Revenue Service are also consid-ering guidance related to multiple employer plans and required mini-mum distributions.

Michael Kreps is a Principal at Groom Law Group, Chartered.

David Levine is a Principal at Groom Law Group, Chartered.

Diana McDonald is a Senior Policy Advisor at Groom Law Group, Chartered.

Brigen Winters is a Principal at Groom Law Group, Chartered.

Top Post-Election Retirement Policy ObservationsFour key issues that could impact your plan in 2019.By Michael Kreps, David Levine, Diana McDonald, and Brigen Winters

Washington Watch

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Winter 2018 21Plan Sponsor Council of America • PSCA.org

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