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For participants who do not direct the
investment of theirs accounts, fiduciaries my be able to obtain relief
(sometimes called a fiduciary "safe harbor") under ERISA section 404(c). In
order to receive this relief, fiduciaries will need to invest the accounts
of participants who default (that is, who do not select their investments)
in "qualified default investment alternatives" (of "QDIA"). Upon the
issuance of final regulations by the U.S. Department of Labor, we anticipate
that the services provided by K4 Plan Goals can be used for this purpose.
Our conclusion is that, the services
provided by K4 Plan Goals materially help fiduciaries satisfy the
requirements under ERISA's prudent man rule to consider the needs of
participants and to provide suitable services for deferrals and investing.
Factual Description
This statement of facts is based on our
review of the materials provided to us by Klein Decisions regarding K4 Plan
Goals and our participation in a demonstration of its capabilities.
K4 Plan Goals is a web-based application
designed to assist participants with determining their appropriate deferral
rates and investment allocations based on their retirement goals. Klein
Decision will license the Program to service providers to retirement plans,
including investment providers, third party administrators (TPAs),
broker-dealers, software providers and registered investment advisors (RIAs)
("Service Providers"). The Service Providers can then include the Program in
the services they offer to their client plans. It is contemplated that
participants will be given explanatory materials and that the Program will
include features such as pop-up boxes and a help guide to assist
participants with its usages.
The Program asks participants to
consider at what age they want to retire, how much they want to save each
year for retirement and how comfortable they are with risk (that is, their
risk tolerance). Unlike many other programs, K4 Plan Goals uses a series of
questions to analyze the participant's degree of flexibility regarding each
of these factors. For example, the Program asks the participant for both
their target retirement age and a retirement age that would be satisfactory.
The Program also determines the relative
importance of each of these factors for the participant. This is
accomplished through a series of follow-up questions about the significance
of each of the factors to the participant. For example, the Program asks a
participant to rate the importance of retiring at his target retirement age
compared to the satisfactory age he entered. A scale from "extremely
important" to "not important" is used for this purpose.
A participant's responses to these
questions are not always consistent. As a result, the Program asks trade-off
questions to further analyze the participant's preference. For example, the
Program may ask the participant to rate on a sliding scale, whether it is
more important to retire at the target retirement age or to the retire with
the target level of retirement income. The participant's response to these
questions allows the Program to determine a "Satisfaction Score" for any
combination of retirement age, retirement income, savings rate and portfolio
risk between the participant's target and satisfactory levels.
K4 Plan Goals also conducts a monte-carlo simulation to determine the probability of "success" for many
combinations of retirement age, retirement income, savings rate and
portfolio risk that fall at or between the participant's target and
satisfactory levels. Other income such as social security or a pension may
be included in the calculations. Minimum standards for success are defined
by the Service Provider. For instance, the Service Provider may determine
that a successful scenario should have at least a 75% probability of the
participant not outliving her assets for given levels of retirement age,
retirement income, savings rate and portfolio risk. Candidate scenarios for
presentation to the participant are these that exceed this minimum success
level.
The Program uses asset allocation
portfolios designed by the Service Providers. The Program incorporates these
portfolios into its system. It uses the risk and return information provided
by the Service Providers to generate solutions based on the needs and
preference expressed by the participant. The Program can also use age-based
lifecycle funds (also referred to as "target maturity funds") and risk-based
lifestyle funds (including balanced funds) for this purpose. Klein
anticipates that the investments used in the portfolios and the funds will
not invest in employer securities, other than through a mutual fund or
similar pooled investment vehicle, and will not impose financial penalties
or otherwise restrict the ability of a participant to transfer out of the
investment.
Klein Decisions has indicated that these
portfolios and funds (the "Investments") are created by using generally
accepted investment principles, such as modern portfolio theory. As a
result, the Investments are diversified in order to minimize the risk of
large losses. The fiduciaries, in connection with their advisers, select the
Investments to be offered in each plan.
K4 Plan Goals suggest one or more top
ranked scenarios that incorporate the preference of the participant
(Satisfaction Score) and the probability of not outliving the participant's
assets (Success Rate). The top scenarios are those that maximize the
combination of satisfaction and success, subject to the minimum standard for
success described above. For example, the Program may display a scenario
that reflects the target retirement date and a satisfactory level of
retirement income as well as a scenario that reflects a retirement date that
is slightly older then the target retirement date and is closer to the
target retirement income. The Program's scenarios my include automatic
increases in a participant's deferral rate if allowed by the plan document.
The Program is focused on providing
scenarios that the participant is likely to adhere to. The top scenarios not
only reflect the participant's preferences, but also score the participant's
anticipated level of satisfaction. For example, a scenario that includes the
participant's target retirement age and target savings rate would have a
high satisfaction score if the participant indicated that these factors were
important to him.
K4 Plan Goals is designed to be easy to
use. It can be pre-populated with information about the participant by the
Service Provider. The participant can revise that information on the Service
Provider's web site and then check a box to implement the Program's
suggested changes. Alternatively, customized copies can be distributed to
participants at employee meetings and participants can make handwritten
changes to the pre-populated information. The designated person at the
Service Provider or plan sponsor, such as a Human Resources representative,
would make the changes online for participants and give them updated
versions. Participants could respond as to whether they wanted the Program's
suggested changes implemented and then have the changes implemented for
them.
The Program can be used to update
suggested scenarios. For example, if a plan changes its investments or a
participant changes their preferences, the Program can be rerun to obtain an
updated analysis. Plan may also want to re-run the Program periodically to
see if any changes need to be made to the participant's strategy. For
example, a participant my be able to retire earlier or defer less if their
investments perform better than anticipated.
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