Blog: To better help plan participants, don't be like 'Rabbit'

February 8, 2022

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David Stinnett

David Stinnett

The protagonist of John Updike's Rabbit novels, Harry "Rabbit" Angstrom, is always running, striving, and searching for meaning.

There is something familiar in his quest—a desire to better one's circumstances. Sometimes it's a desire that leads to positive change. And sometimes, as Rabbit often demonstrates, it results in change that's counterproductive.

It all depends on how change is executed, which is something plan sponsors know firsthand.

Always looking for ways to improve participant outcomes, sponsors are ever cautious of tripping over fiduciary issues that can result from changes to the plan.

In 2022, we see three areas of fiduciary concern that sponsors should be especially aware of: the cost of advice, SECURE Act 2.0, and proposed regulation regarding the use of environmental, social, and governance (ESG) factors.

The cost of advice and total cost of ownership

One feature we see plan sponsors adding more than any other is advice.

Plan sponsors are very practiced at thinking about cost and fees as they relate to the funds in their lineup. But they may not be accustomed to applying that same fiduciary rigor to the cost of advice.

We believe the cost of advice (and, in the future, broader services like financial wellness programs) will be seen as a source of potential litigation risk, similar to how fund expense ratios and per-participant fees have been viewed historically. Moreover, this heightened fiduciary risk underscores the importance of total cost of ownership, a framework that factors in not only base recordkeeping fees but also other sources of revenue associated with the plan to allow for true cost comparisons of greater transparency.

SECURE Act 2.0

The Securing a Strong Retirement Act of 2021, sometimes called the SECURE Act 2.0, is widely expected to be passed into law in some form this year.

We believe it would have numerous benefits for retirement savers, including greater choice in investments, improved retirement plan participant decision-making, and simplified retirement plan administration. We are particularly supportive of the provision expanding access to low-cost collective investment trusts (CITs) for retirement savers in 403(b) plans.

The act would also pave the way for incorporating student loan repayments directly into an employer's retirement benefits solution.

We believe this provision could prove valuable, assuming participants fully meet their contribution matches before paying debt to make sure they are maximizing their saving rates. But plan sponsors will want to understand the optimal trade-offs such a provision would raise for their employees (how to incent long-term saving and short-term debt management).

In short, sponsors will need to apply fiduciary best practices when determining whether to offer student-loan paydown within their retirement plan, including the selection and ongoing monitoring of such a service.

ESG factors

Proposed Department of Labor regulation regarding the use of ESG factors would recognize the important role they can play within a retirement plan, while continuing to uphold fundamental fiduciary obligations.

The fundamental requirement remains that investments be made in the financial best interest of plan participants. But the proposed regulation specifically states that the evaluation of the risk/return characteristics (the financial factors) of an investment may often require consideration of the economic effects of climate change and other ESG factors. That is, it supports the inclusion of ESG as a financial factor (and suggests it's a risk not to).

Fiduciaries who plan to implement an ESG strategy must continue to follow a diligent and documented process, ensuring decisions are made in the best interest of participants. While we await the final regulation, we have developed a framework to help sponsors navigate the fiduciary landscape related to their consideration of ESG options.

A continuing evolution in plan design

These fiduciary concerns—the cost of advice, SECURE Act 2.0, and ESG factors—are emblematic of plan sponsors' desire to better meet the needs of participants. If approached with care and the counsel of industry expertise, these emerging fiduciary topics can produce positive change.

It's perhaps an approach Harry "Rabbit" Angstrom should have taken. Of course, there's a reason happy endings in fiction are rare—many readers prefer drama and narrative tension. Luckily, with planning and forethought, plan sponsors can minimize this tension in the real world. That's where Vanguard Strategic Retirement Consulting (SRC) can help.

With deep experience spanning plan design, legal and regulatory concerns, fiduciary best practices, investor behavior, and communication strategy, SRC takes a comprehensive approach to retirement plan consulting. To learn more about how we can help ensure that your plan models fiduciary best practices throughout the year, please contact your Vanguard representative.

Notes:

  • All investing is subject to risk, including the possible loss of the money you invest.
  • Diversification does not ensure a profit or protect against a loss.
  • ESG funds are subject to ESG investment risk, which is the chance that the stocks or bonds screened by the index provider for ESG criteria generally will underperform the market as a whole or, in the aggregate, will trail returns of other funds screened for ESG criteria. The index provider's assessment of a company, based on the company's level of involvement in a particular industry or the index provider's own ESG criteria, may differ from that of other funds or of the advisor's or an investor's assessment of such a company. As a result, the companies deemed eligible by the index provider may not reflect the beliefs and values of any particular investor and may not exhibit positive or favorable ESG characteristics. The evaluation of companies for ESG screening or integration is dependent on the timely and accurate reporting of ESG data by the companies. Successful application of the screens will depend on the index provider's proper identification and analysis of ESG data.