A 10-point checklist for re-evaluating retirement plans

Employers are facing some mammoth challenges in managing retirement plans, including a heightened regulatory environment, potential risk, spiraling costs and increased scrutiny by employees and the public.

With this in mind, many organizations are re-evaluating retirement plans. Because of the current environment, it’s important for companies to ensure retirement plans are being properly managed or they may be exposed to fiduciary liability and increased risk associated with higher retirement plan expenses.

Employers should examine retirement program design, cost and operations to identify areas of concern and opportunities for change, size up risks and costs involved and develop an action plan to ensure the retirement plan is in order.

Here are 10 things organizations should keep in mind:

Develop retirement plan objectives. Document retirement plan objectives. Regularly measure progress against set, quantifiable goals and modify or update them as appropriate. Knowing retirement objectives prevents knee-jerk, short-sighted changes that may not be appropriate in the long run.

Review the design of the retirement program — is it out of date? Don’t be afraid to change the plan design to maximize its value. With escalating plan costs and increased scrutiny due to market losses, it’s never been more critical for employers to focus on retirement program design.

Understand current and future pension plan costs. Dramatic changes in retirement plan costs can adversely impact a company’s stock price. With the end of contribution holidays and pension surpluses, companies must reassess their cash situations as costs will continue to increase in the coming years as prior years’ asset losses are phased in over time.

Revisit asset allocation strategies and optimize investment strategy. Consider modelling the cash flow and expense requirements to help determine the optimal investment strategy. Remember to review investment choices by analyzing current options as well as alternatives, such as asset allocation and increasingly popular lifecycle funds.

Examine actuarial assumptions — do they reflect current best estimates of the future? Evaluate actuarial assumptions to ensure they reflect longer life spans and high retiree medical costs. Include consideration of short-term termination rates that differ from long-term expectations. Don’t forget to add in factors for revised investment returns and inflation. Be sure to review recent compensation and bonus amounts against current expectations.

Review retirement plan committee roles and responsibilities. Examine the role and structure of the plan committee and the procedures it uses to make decisions about the plan’s investments. To better manage risk, study the committee’s track record on asset allocation, performance and plan responsibilities.

Manage plans globally — remove cross-border inconsistency. Create a financial reporting system that includes global assumption verification to increase the quality of financial reporting. Doing so can help reduce costs and ensure alignment with business goals, such as developing special programs for internationally mobile employees or creating a global investment strategy focusing on all retirement assets.

Review administrative practices and procedures. Make certain the retirement plan is legally up to date, that its administration follows plan language and that its calculation process works properly to minimize the risk of errors and overpayments and underpayments. Don’t wait for an audit to uncover problems with administrative practices or procedures. The effort involved in fixing an error may be as onerous as the actual economic impact of the error itself. And don’t overlook compliance issues.

Evaluate the delivery system — is it working? If benefits are calculated manually or the organization is using outdated systems, the delivery of retirement benefits is probably ineffective. Bad data can heighten the risk of errors and can seriously restrict the ability to implement important plan changes. Research has shown the value employees place on their plans is greatly influenced by the way those plans are delivered and communicated.

Boost the perceived value of plans among employees. It’s more important than ever to communicate how plans will help employees build retirement income. With the recent stock market downturn and volatility, communication campaigns and self-service tools are ways to raise visibility and create awareness of an organization’s plans. Through these means, employers can help employees understand and appreciate current benefits and the tools available to help them plan for long-term financial security.

Wendy DiRisio is an actuary and retirement and financial management consultant in Hewitt Associates’ Toronto office. She can be reached at (416) 225-5001 or [email protected].

To read the full story, login below.

Not a subscriber?

Start your subscription today!