plan sponsors may take a different direction than recommended by their consultant and still meet their fiduciary duty. In fact, “if the sponsor believes that the consultant’s recommendation is contrary to the interests of the plan and participants,” comments Fleckner, “or it believes that the consultant did not engage in a rigorous enough process, then the fiduciary may be obligated to reject the recommendation. As discussed with any fiduciary decision, the plan sponsor should document its rationale for taking action that differs from the consultant’s recommendation.”
GETTING STARTED: SETTING AN INVESTMENT PHILOSOPHY AND GOVERNANCE STRUCTURE
In 2015, in collaboration with our UK-based colleague at the time, Will Allport, and a host of multinational plan sponsors, we created a guide to achieving a consistent philosophy and governance structure for global DC plans, Global DC Plans: Achieving Consistent Philosophy and Governance (DC Designs, November 2014). Whether you are a plan sponsor offering a plan only in the United States or via multiple plans around the world, it may be helpful to consider the following five-step process for DC retirement plan design.
1. Establish a plan philosophy and guiding principles
2. Set retirement plan objectives and design
3. Create a governance oversight structure
4. Formulate objective measures of success
5. Outline implementation considerations
We’ll look at each of these steps in turn.
It is sometimes a great challenge for organizations that already have a complex employee benefits and pensions landscape to step back and consider the basic question: “Why do we offer a DC plan?”
Although it seems simplistic, we believe asking this question is a critical first step in establishing a philosophy for DC design. Does an organization want to be paternalistic to its employees, to educate, guide, and empower them toward successful retirement outcomes, to be an attractive employer, and to retain and nurture talent? Or alternatively, does an organization offer pensions simply to satisfy legal or fiduciary requirements, or perhaps simply to meet the market norm? The reality is often a combination of all of the above, but establishing which motivations are most important will aid organizations in creating the guiding principles for all of their pension plans.
While an overarching philosophy to apply to pension benefits is somewhat intangible, the principles through which an organization ensures this philosophy is delivered should be anything but! The guiding principles that each organization should develop need to be clear, rigorous, and tangible. Each local plan will be able to prove whether it meets the requirements of these clear principles. The UK’s Pensions Regulator put a great deal of effort into proposing effective principles for high-quality DC design, and we have drawn upon their work and others’ in the suggestions that we include in the following.
Suggestions for Core DC Plan Guiding Principles
■ Principle 1: Plans should be designed to target appropriate outcomes, for example, replace 50 percent of final pay throughout retirement.
■ Principle 2: Plans should identify, evaluate, monitor, and manage key DC risks, for example, volatility, potential loss (value at risk), inflation, and longevity.
■ Principle 3: Plans should have a clear governance framework to implement a global retirement benefits philosophy, with clear and transparent accountabilities and responsibilities.
■ Principle 4: Plans should provide ongoing governance, regulatory oversight, and investment training to plan fiduciaries necessary to competently fulfill their duties.
■ Principle 5: Plan design, investments, service providers, and fees should be reviewed annually by the organization’s global DC plan oversight body or other designated bodies.
■ Principle 6: Plans should seek recordkeepers that provide timely, accurate, and comprehensive records as well as appropriate disclosure on error resolution, fees, and services.
■ Principle 7: Plan member communications should educate and guide participants toward informed retirement planning and investment decisions.
Having established the overarching philosophy for retirement program design, and the core guiding principles that guide every plan, organizations next need to consider local factors and finalize the retirement benefit objectives for each plan.
This is the point at which most companies recognize that a one-size-fits-all approach to DC design probably will not work. For plans operating in more than one market, understanding the local labor market demands for each country in which the organization is operating is critical. No matter how many markets a plan serves, organizations need a clear view of the design of first pillar or first source Social Security benefits and the resulting income replacement targets, the competitive landscape benchmarked against other employers competing for the same talent pool, and statutory requirements. These and other considerations will help each plan to define its specific retirement benefits objectives.
Please note we are not suggesting that for multinational organizations, every plan within the organization should have similar objectives, or have the same design or providers. Rather, we would expect to see retirement benefit objectives that are philosophically consistent across all plans, and with the same core principles underpinning their design.
We believe that organizations that have not established the core objectives for each local plan risk a great deal. Without objectives, measuring the local plan’s success – and therefore measuring return on investment for pension costs that affect the financial performance of the entire company – is virtually impossible.
Once objectives are set at the local level, most organizations find the design and investment structures underpinning each local plan are broadly similar, again excepting for local market nuances (for example, providers or legal restrictions).
The first two steps of the five-step process require high-quality and clear communication across all the retirement benefits teams within an organization. Adhering to the core philosophies and guiding principles would be challenging without effective monitoring, along with engagement of senior leadership and broader stakeholders. Organizations should periodically revisit their guiding principles and objectives to ensure they evolve to meet the changing objectives of the corporation itself, alongside the needs of its employees. To achieve this, organizations should create a governance oversight structure that taps into the expertise of both in-house and retained investment, benefits, and other experts. The oversight structure establishes and evolves the guiding principles and philosophy for DC design, engaging key stakeholders throughout the organization. Critically, the structure allows for monitoring the plans for adherence to those core principles and for measuring the success of each plan relative to its objectives.
To effectively monitor DC efforts, organizations should establish clear success metrics. Since most DC plans aim to provide retirement income replacement, a percentage of final pay may be an appropriate success metric. Such a metric may be used internally to evaluate the plans; it need not be communicated to participants for fear they may construe the objective as a promise. Without clear objectives and the means to demonstrably measure progress against them, any retirement benefits program will be effectively “flying blind.”
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