By: Edward Wagner – Managing Director, SageView Advisory Group
As government agencies consider freezing their defined benefit plans or withdrawing from state plans, many are turning to 457(b) and 401(a) defined contribution plans to help their employees prepare for a financially secure retirement. One example of this new defined contribution trend is the STARS program (www.STARSca.org). Thirteen years ago, Regional Government Services Authority, partnered with other Northern California agencies to form a pool of government 457 and 401 plans to address the concern of rising defined benefit costs and to utilize efficiencies of scale. This pooled program, along with other similar programs in the private sector, were formed to help smaller groups provide a quality benefit on par with much larger groups. This pooled approach allows a single governing body to monitor and reduce fiduciary risk through consistent processes, as well as enhance the participant experience with a focused approach to communication and education.
Set up properly, governmental plans can be straightforward and flexible. Not set up properly, they can be expensive administrative quagmires that can lead to fiduciary concerns for plan sponsors and unsatisfactory outcomes for participants. For these reasons, the IRS has been paying closer attention to these plans for the past several years.
The traditional approach of using multiple providers can lead to suboptimal results
Many plans are set up using multiple providers, but a multi-provider plan design can sometimes result in higher costs, fragmented communication, and concerns about fulfilling fiduciary duties.
Higher costs: In a multi-provider environment, plan sponsors lose the economies of scale they might gain if they consolidated all plan assets with one provider. This can mean high retail pricing for their investments. A single provider can offer an open-architecture platform that includes low-cost, flexible revenue-share-class investments —which can make a big difference in participant investment results.
Fragmented communication: Additionally, participant communication may be fragmented and sporadic, resulting in low participation and substandard investment outcomes.
Fiduciary concerns: Multi-provider plans also may be faced with administrative complications that don’t stand up to IRS scrutiny. According to a study of IRS audits, the most common administrative errors related to use of multiple providers are:[1]
- Excess contributions caused by weak communication among providers.
- Failure to enforce the “first day of the month” requirement for contribution elections and changes.
- Distributions that don’t meet the “unforeseeable emergency” criteria.
- Failure to operate the plan in compliance with the plan document(s).
- Lack of coordination of maximum loan amounts among the providers.
- Failure to default loans as required under IRC section 72.
It’s true that governmental plans aren’t subject to ERISA requirements. But, as an article in the Journal of Pension Benefits points out, these plans are subject to state law and, in many cases, state fiduciary laws are based on principles very similar to those underlying ERISA – including modern portfolio theory, prudent person rule, and the use of generally accepted investment principles.[2] In other words, in most states, a plan sponsor’s fiduciary duty is to select, monitor, and prudently review the performance of all plan providers and the components of each plan offered. This would include the plan’s investments, costs and fees. Using multiple providers can make this a complex, time-consuming task, prone to errors.
Using a single provider can mean a smoother-running plan
Consolidating under a single provider can make a lot of sense for many governmental plans.
- Streamlined, consolidated investment choices may help reduce costs and fees and make it easier for participants to make investment decisions.
- Consistent, focused participant communications and education may help improve plan participation and increase participant satisfaction.
- Simplified administration generally leads to fewer errors and helps increase peace of mind for plan sponsors.
As always, pay attention to details
Aside from the issues specifically related to using multiple providers, it’s becoming more and more important for plan sponsors to be well-educated in the details of their plans so they stay in safe fiduciary waters. Today’s retirement plan market, for both private and public sectors, has evolved significantly from years ago. There are more options for the end consumer, which is good for the participant, assuming the plan sponsor is carefully weighing all those options and using appropriate benchmarks and criteria when making decisions for their employees.
[1] Gregory E. Seller and Marilyn R. Collister, “IRS Audits of Government 457 Plans,” Focus on 457
[2] Fred Reish and Brice Ashton, “Fiduciary Rules Applicable to “(b)” Plans,” Journal of Pension Benefits
Keep in mind that all investing involves market risk, including the possible loss of principal.
Registered Representative with and securities offered through Cetera Advisor Networks LLC, member SIPC
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