Overwhelmed by a lengthy to-do list, including the perpetual need to meet a number of ERISA regulatory obligations, plan fiduciaries often lose sight of the foundation for sponsoring a retirement plan: its purpose. Enacting a Plan Sponsor Philosophy is an effective way for committee members to remind themselves of this basic goal. Unlike a Committee Charter, which sets the lines of authority, or an Investment Policy Statement, which outlines acceptable actions, a philosophy defines a retirement plan’s purpose, making it a useful reference tool for committees during the decision-making process.
As the pace of regulation and subsequent litigation has increased, plan fiduciaries are finding it more challenging to make decisions that are consistent with both industry best practices and the intended goals of their retirement plans. This realization has led many committee members to reassess the ‘why,’ as opposed to just the ‘how’ of their decisions, which in turn has led to a trend in developing retirement plan philosophies. For example, an investment committee seeking an ERISA-approved qualified default investment option (QDIA) may select a target date fund series (i.e., ‘how’ they meet their QDIA requirement), while those with an enacted philosophy may also elect to assess the glide paths of a grouping of TDFs to ensure the final selection aligns with their plan’s goal (the ‘why’ one TDF series is selected over another) .
What exactly is it?
Much like a company’s corporate culture (an intangible system of beliefs, behaviors and activities), a Philosophy is there to guide the thought process but not to govern it. It does not supersede a charter or the enacted investment policies, nor would it be subordinate to these governance agreements. Instead, it serves to direct a committee’s thinking in carrying out their fiduciary duties—a constant reminder that while regulatory obligations and industry best practices need to be met and followed, they are the means to achieving a plan’s purpose, not the end.
Where to begin…
Developing a philosophy starts with examining a company’s corporate culture. Is the organization paternalistic? What type of turnover is experienced? Are there any other employer-sponsored retirement programs available to employees (e.g., a deferred compensation plan, a defined benefit plan)? Answering these types of questions helps set the foundation for pairing a philosophy with a plan’s goals.
Some illustrative examples:
Given the wide-ranging factors involved in its construction (covering plan design, investments, and fees, among other areas), plan sponsor philosophies can be as varied as the opinions of the individuals comprising a retirement committee itself. However, some broad-based examples include:
- Non-Paternalistic: Plan sponsors who feel their primary obligation is to provide employees with the essential components of a retirement plan (by meeting all ERISA requirements, but not necessarily expanding on them). Beyond that, it is up to the employee to make the most of it.
- Middle of the Road: Plan sponsors who feel it is necessary to do more than simply offer a plan, but are apprehensive about being too involved, may choose to assist employees indirectly, e.g., by including a simplified plan lineup comprised of a suite of low-cost options, a small grouping of active funds and a target-date series (as research shows simplified menus with low-cost options help improve participant outcomes).
- Paternalistic: Plan sponsors who feel it is a company’s duty to help their employees reach retirement readiness in any way they can (e.g., by directly assisting employees through a company match or by adding auto-features, such as auto-enrollment or auto-escalation).
How can this help my committee?
Once established, there are several areas where this philosophy can then provide guidance. Using the aforementioned examples:
|Area of Plan Management||Sample Questions||Non-Paternalistic||Middle of the Road||Paternalistic|
|Plan Design||Is the committee taking advantage of all available plan design features to maximize savings, e.g., auto-solutions?||No||Yes||Yes, but at higher levels|
|Investment Lineup||Does the committee subscribe to behavioral science (indicating simpler structures tend to lead to better results)?||No||No||Yes|
|TDF Glide Path||Is the glide path aligned with participant behavior (e.g., more aggressive for plan sponsors advocating employees remain in the plan through retirement)?||Maybe||Maybe||Yes|
|Communications Strategy||Does the committee encourage retirees to keep their assets in the plan?||No||Maybe||Yes|
|Fees and Expenses||Should the company pay a portion of plan fees?||No||Maybe||Maybe|
Note, these examples are not actual guidelines or recommendations; rather, they represent simplified extremes in order to illustrate how having a philosophy can aid in the decision-making process. Most plan philosophies will not have such easily defined particulars, as real-world logistics are far more complex.
Following construction, a committee should then analyze the newly enacted philosophy in the context of their current plan design, which will allow members to determine if current practices are optimal based on plan goals. Should they be at odds, plan fiduciaries can take steps toward bringing the two back into alignment (keeping in mind that extraneous factors, such as budgeting constraints, must also be considered).
Establishing a Plan Sponsor Philosophy is a challenging process, one that needs ample time and attention. It requires thoughtful contemplation of what a retirement plan’s objective should be and how a retirement plan committee can affect that objective. While potentially an arduous task, organizations that go through this process should find it easier to make plan decisions going forward, saving time down the road, while having those decisions be better aligned with their retirement plan’s intended purpose.
 While there are a plethora of factors to consider when evaluating target date fund glide paths, one of the more commonly discussed aspects is the ‘to’ versus ‘through’ debate. Is the plan sponsor advocating employees remain in the plan ‘to’ retirement (dictating a more conservative glide path) or does the plan sponsor believe participants should remain in the plan ‘through’ retirement (whereby a more aggressive glide path may be appropriate)?