Everything seemed to be going well for future retirees a few years back. The economy was stable, the stock market was riding high and assets in 401(k) defined-contribution plans were galloping in value. Participants boasted about being able to retire at age 60, an almost quaint recollection now, since they’re still at their desks, wondering what went wrong. Employers that sponsor these plans are wondering the same thing. Workers who can’t retire for financial reasons and hang on to their jobs for longer than their employers would like aren’t easy to shed.
This can create productivity problems, since the employees aren’t exactly happy about the situation, either. And if workers blame plan sponsors for the paltry value of their retirement investments, it heightens corporate fiduciary risk. Under ERISA, fiduciaries can be held personally liable for losses to a benefit plan incurred as a result of alleged errors, omissions or breach of their fiduciary duties.
Is there value in cleaving investments into different tiers? Apparently so. For one thing, it’s a lot less confusing for participants. Hess points out that in the good old early days of 401(k) plans, there were few choices for participants to make. “They looked like defined-benefit plans—they were low cost, with a narrow number of funds,” she says. “And then the mutual fund industry got into the game in the 1990s, and the market shifted. At the same time, participants wanted more choices, given the rise in certain sectors like technology, which was skyrocketing. They wanted a piece of the action, and it was hard for the plan sponsors to fight it.”
As time progressed, the list of choices grew and grew and became increasingly numbing from a decision standpoint. Then the financial crisis hit and, well, you know the rest. “The sponsors are trying to adopt the practices now that were so successful with the defined-benefit plans, such as keeping costs in check, educating participants about risk-taking and providing one-stop solutions,” Hess adds. “We’re encouraging our clients to go the tiered route. It’s gone from being a leading industry practice to being a best practice.”