A global survey conducted by
Mercer Human Resource Consulting reveals widespread weaknesses in the
management of defined contribution retirement plans. While plan management
practices undoubtedly fulfill minimum regulatory requirements, many fall short
of what is needed to meet employer and employee expectations. Â The areas of weakness include the monitoring
of benefit adequacy, qualitative review of investment managers, service
standards for administration, and member education. Â The survey also found that the majority of plan sponsors do not
have written policies or objectively monitor the success of their defined
contribution plans.
Overall, the study reveals
wide variations in the development of defined contribution (DC) plans. Â These range from newly emerging plans in
Germany and the Netherlands, which offer limited investment choice and governance
practices, to more refined approaches in Australia and the U.S., which provide
stronger governance and monitoring and high levels of member education and
choice. Â Plans in the UK and Ireland
fall between the two extremes.
The survey of 1,655
organizations across 10 countries indicates that 28% of plan sponsors in the
U.S. review the adequacy of benefits less frequently than every three years, or
not at all. Â In Canada, Ireland, and the
UK, the number rises to nearly half (48%, 49%, and 50%, respectively). Â (Note: In the U.S., employers tend to focus
on participation levels and savings rates, which are two measures of benefit
adequacy.)
A similar disparity of
practice was noted in the frequency of investment reviews. Â More than 90% of respondents said they
review investment performance annually. Â
However, reviews of qualitative factors, which are likely to drive
future performance, were much more varied. Â
Only 30% of UK participants said they conduct annual qualitative reviews
of their investment managers. Â This
compares with 48% in Ireland and 75% in the U.S.
"In light of the downturn in
investment markets, plan sponsors should assess the strengths and weaknesses of
their investment managers, along with projected benefit adequacy, to make sure
their plans remain on track," says Kathie Lamb, who leads defined contribution
consulting for Mercer Human Resource Consulting in the U.S. Â "If these are found wanting, then plan
sponsors should, at a minimum, communicate the shift in expectations to
employees so they can decide whether or not to increase their
contributions. Â Otherwise, employees may
have unrealistic investment expectations, and this ultimately puts the plan
sponsor at risk."
The survey also reveals that
many organizations have not established service standards with their DC plan
administrators. Â The number varies from
one-fourth (24%) in Australia to nearly one-half in the UK and the U.S. (49%
and 48%, respectively) and as many as 70% in Ireland. Â
"Receiving inaccurate or
late information can undermine employees´ confidence in the plan and diminish
its perceived value. Â Furthermore,
employees might hold plan sponsors responsible for investment losses and seek
compensation," says Ms. Lamb.
Fewer than one in three of
the respondents (29%) provide investment advice to their employees. Â Some 27% are considering making this
available, while 44% indicate they do not plan to offer it at all. Â Organizations that rate their plans as
highly successful are more than twice as likely to use an educational approach
to member communication than those rating their plans as only somewhat
successful.
"In moving from defined
benefit to defined contribution plans, employers are shifting financial risk to
the employee. Â Accordingly, they should
make sure their employees clearly understand the implications and that they
have information that will allow them to make appropriate choices," Ms. Lamb
says. Â "Successful DC plans have
communication programs that go beyond simply providing information to offering
genuine education."
Policies and objectives
Mercer´s research also
reveals that the majority of DC plan sponsors do not use objective measures to
determine the success of their plans, but use anecdotal evidence instead. Â In Ireland and the UK, only 18% and 26% of
respondents, respectively, formally measure whether their plans are successful,
compared to 53% in the U.S. and 56% in Australia.
"In some countries, defined
contribution plans are managed largely without clear, fact-based evidence to
confirm they are meeting business objectives. Â
This is surprising, given the considerable business investment these
plans represent," says Ms. Lamb.
Only half the respondents
surveyed (49%) have a written policy setting out the goals and objectives of
their DC plan. Â Australian companies are
most likely to maintain written policies (73%), while those in Ireland and the
UK are least likely (24% in each case). Â
The proportion in the U.S. is 41%.
The survey also indicates
that successful plans are more likely to have disciplined approaches to
management and monitoring. Â For example, organizations that rate their defined
contribution plan as highly successful are almost three times more likely to
have documented goals and objectives as those only rating them as somewhat
successful.
Overwhelmingly, the most
important success factor for DC plans is their value to employees, as cited by
8 out of 10 participants worldwide. Â
"The vast majority of
defined benefit plans have a rigorous management program in place. Â Many defined contribution plans, however,
while meeting regulatory standards, fail to fully meet the expectations of
members and sponsors," says Ms. Lamb. Â
"Plan sponsors that lack an effective approach to plan management may be
exposed to legal challenge and see their reputation damaged."
Current concerns
Under-performing assets was
cited as the primary concern by plan sponsors in all the countries
surveyed. Â
"Given global markets´
volatility, it´s not surprising that low investment returns are the top
concern, regardless of a plan sponsor´s geography," Ms. Lamb says. Â "In response, many seek to address problems
of low participation and contribution rates, inadequate investment offerings,
and inappropriate use of investment options."
About the survey
The research covered 10
countries where defined contribution plans are already established or emerging:
the U.S., Canada, Australia, Brazil, and six European countries - Germany,
Ireland, Netherlands, Spain, Switzerland, and the UK. Â A total of 1,655 plan sponsors took part, including 400 from the
U.S., 378 from the UK, 310 from Canada, 231 from Australia, 152 from Brazil,
and 75 from Ireland. Â The participating
organizations represented plans with more than 7 million members and more than
US$270 billion in assets. Â Data are not
included in some assessments where participant numbers from certain countries
are low.
The survey report is
available at a cost of US$400 from www.mercerHR.com/DCsurvey
or at www.imercer.com.
Mercer Human Resource Consulting is a global firm that helps organizations create business value through their people. Â With more than 13,000 employees in some 142 cities in 40 countries serving clients worldwide, the company is part of Mercer Inc., a wholly owned subsidiary of Marsh & McLennan Companies, Inc., which lists its stock (ticker symbol: MMC) on the New York, Chicago, Pacific, and London stock exchanges.
Source: Survey of Defined Contribution Retirement Plans 2002, Mercer Human Resource Consulting
Source: Survey of Defined Contribution Retirement Plans 2002, Mercer Human Resource Consulting
Source: Survey of Defined Contribution Retirement Plans 2002, Mercer Human Resource Consulting