As a plan sponsor, a key component of your
fiduciary best practices should include an annual overall plan review. The review should include metrics used to measure
the plan's success. It is critical to have
an accurate understanding how well your plan is meeting the retirement needs of
your participants.
There are general functions within your plan that your
annual plan review should include:
- Plan Design
- Recordkeeping and Plan Administration
- Investments
- Updated plan documents
- Plan compliance with IRS, DOL, ERISA
- Participant Communication and Education
- Service Provider Fees
Purpose of Annual Plan Review
The annual plan review should occur at the end of
your plan year or early into the new plan year.
The role of an annual plan review is to enable you as a fiduciary to effectively oversee each aspect of the
plan's operations. This includes the
plan's design, the participant statistics, quality of investments and their
performance, regulatory and legislative changes, compliance and participant
communications. It is also important to
conduct an annual review for financial stability of your plan's critical service
providers that track safeguard your participants assets such as the
trustee/custodian and administrator / recordkeeper.
The results of the plan review provides
documentation of the plan, an opportunity to correct plan errors, and improve
participant services. The review can
include establishing enhancements and goals for the plan in the upcoming plan
year. The review can identify
operational improvements and participant education/communications
programs. The review should include Section 404(c) compliance or areas
for improvement. Nondiscrimination test results, participations rates are best documented
in the annual review. A review should
include the plan statistics, comparative industry statistics and surveys, comparison
to peer employer plans, and participation rates.
A plan review can document and recognize milestones
achieved in the goals set for that year as well as identify areas for
improvement or deficiencies that can expose to fiduciary risk.
Best practices for promoting plan success:
- Monitor trends in participation rates
- Seek to improve contribution rates
- Prudently offer a menu of investments that promote asset allocation and diversification
- Educate participants with the goal of achieving financial literacy
- Promote retirement readiness
- Monitor trends
- Plan Design
- Benchmarking
Plan Design
Changes to plan design may be triggered periodically
by regulatory and legislative changes such as the PPA 2006 that provided new
fiduciary protections for plan sponsors.
Changes in the age, participation levels and other
employee demographic may trigger plan design changes. As your plan evolves and the workforce
changes there will be opportunities to revamp the plan’s design.
Specific changing demographics may have a
significant effect on your plan's structure and participants' retirement
outcomes. For example, changes in
employee demographics with rapid hiring and younger new hires tends to affect
the plan's QDIA, choice of investments and participant communication and
educational programs. Conversely, an
employer evolving with more experienced employees with higher balances and
approaching retirement may consider managed accounts, investment advice and
risk-based asset allocation funds. As
participant demographics change, the plan design should evolve to meet the
participants' retirement goals.
Some plan sponsors may accelerate new hiring which causes significant changes
in employee age groups, compensation and turnover.
As the
employer’s participants change over time, the plan should revisit the peer
benchmarking that it is using based on the changing profile of its
participants. As the profile of employees changes or evolves, there may be
other plan features that are more relevant to the needs of the population. In some cases, target date funds for new
hires may also be supplemented with managed accounts as balances grow.
Plan
sponsors are challenged to follow changing trends in retirement plans as the
demographics of participants change over time.
Plan Documents
Fiduciary files should document any changes made to
the plan document, amendments, administrative processes, plan design, compliance,
eligibility or recordkeeping should be written, signed, dated and maintained as
a part of the fiduciary files. Often
changes require amendments to the plan document which should be reflected in
the plan’s Summary Plan Description (SPD) given to the participants. In the case of major changes to the plan
document, the updates and supplements should be reflected in the Summary of
Material Modifications (SMM) which is also given to the plan’s participants.
Participant Disclosures
Under ERISA 404(a)(5) participant
disclosures participants receive annual fund and fee disclosures. Annually participants should receive QDIA
disclosures that provide fee information and fund performance against standard
benchmarks. Any fund changes to the plan and the transfer
of participant balances to a new fund require specific participant
notices. The annual review should check
that these disclosures and notices are being sent to participants on a timely
basis and are correct.
