With the ringing of the New Year now well past, it’s not too early for retirement plan sponsors to understand current opportunities and begin to watch for other priority issues that lie ahead in 2017.
Concerns: Risk management, effectiveness and compliance
The top concerns for retirement plan sponsors boil down to three things:
- managing risk
- increasing effectiveness
- avoiding a noncompliance surprise
These may not sound like new concepts but the current capital market and regulatory environment make these issues nuanced and indeed relevant.
Managing the plan’s risk
For defined-benefit sponsors, staying on top of risk management means taking a fresh look at the connections between your plan’s funded status, rising Pension Benefit Guaranty Corporation (PBGC) premiums, desire for a robust return on plan assets and a low but potentially rising interest rate environment.
Some sponsors will find themselves at a crossroad asking: Can we afford to pay a “tax” on unfunded liabilities (via the PBGC premium) while waiting for asset returns to fill our funding gap or should we take another action now to fund the plan? Is now the time to consider alternative financing solutions like borrowing to fund, or contributing non-cash assets to plans? And, if we do fund our plan, can we create more options for reducing plan risk through investment strategies and liability transfer actions?
Defined contribution sponsors can take some risk management lessons from the trend of increased 401(k) plan litigation. Keeping a steady eye on investment-expense levels, the choice between money market and stable value funds and the presence of employer stock is important.
Increasing plan effectiveness
In terms of plan effectiveness, now is the time to hone in on how your defined contribution plans are helping employees build retirement savings and income. We’ve learned that focusing solely on savings rates and asset leaves sponsors with too narrow a view of their programs. More nuanced participant behaviors are important too, such as proper usage of various tax-advantaged accounts.
Ultimately, you need to evaluate outcomes. Knowing where your plan isn’t working as well will allow you to begin a process of implementing better decisions in the coming year. For the many sponsors who continue to provide defined benefit accruals to legacy employees but have closed the plan to new entrants, the successful navigation of complex non-discrimination rules will be crucial to avoid potentially premature freezing of future accruals.
Avoiding noncompliance surprise
In the area of compliance, an ounce of prevention is worth a pound of cure. As retirement plans grow ever larger, the risk and penalties for noncompliance also grow. Periodically evaluating the governance structure of your plans and auditing operational activities can significantly reduce non-compliance risks.
Moving forward, sponsors who will have to interface with newly created state-sponsored plans will have an even greater compliance challenge.
Opportunities: Potentially lower tax rates, higher interest rates and a resolution to improve financial wellness
The opportunities in 2017 key up topics for both finance and human resources (HR).
Lower tax rates
First, organizations can consider getting ahead of potentially lower corporate income tax rates by funding defined-benefit plan liabilities now. Funding now could result in a lower after-tax cost of plan maintenance than funding after tax rates are lowered. Once a plan’s funded status is improved by accelerated funding, a sponsor would likely want to consider different investment and risk transfer strategies.
Employee financial wellness
The second big opportunity is to take this year to push ahead on financial wellness. The fact that financially stressed employees hurt the bottom line is well-documented. The tools available for employers to measure and improve financial wellness are more broadly available, and taking advantage of these programs can have big payoffs for employees and employers.
However, sponsors should do more than just make tools available to their employees – they will be better served by understanding the financial issues of their employee workforce, developing a strategy to improve overall financial wellness, and then providing employees with the right tools at the right times.
Lastly, the potential for higher interest rates and a more robust annuity market place could be a very good gift for employers looking to settle pension or retiree medical obligations in order to improve their balance sheet and income statement. Employers should review data and operational readiness now so that they can act if 2017 does in fact bring higher interest rates and improved funded status.
Many of these issues will take shape once the post-election buzz settles and the new President and Congress get to work. The new year will likely have many changes and we urge plan sponsors to be vigilant throughout.
Michael Archer is the leader of the Client Solutions Group for Willis Towers Watson’s North American retirement practice. He has 37 years of experience in actuarial consulting services, the last 27 with Willis Towers Watson. Mike’s background is in retirement and other benefit consulting and he has been at the forefront of developments in the pension liability transfer space.