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Exclusive Interview: PSCA Chair Stephen W. McCaffrey Sees Challenges in Legislative Attempts “to ‘Fix’ an Un-Broken System”

April 21
00:03 2015

Too often we see the retirement industry news driven by regulators and service providers. When you think about it, shouldn’t this news really stem from the questions, needs, and wants of those providing the very retirement plans we Stephen_W_McCaffrey_300_2write about? It is in that spirit our Exclusive Interview this month features Stephen W. McCaffrey, Chairman of the Board of Directors of the Plan Sponsor Council of America (PSCA). Steve is no mere executive of a professional organization. He is a Senior Counsel of National Grid U.S., a subsidiary of National Grid UK plc, a global gas and electric utility.  Steve is responsible for practice areas involving all aspects of Employee Benefits related to defined benefit, defined contribution plans, and executive compensation, as well as any IRS and DOL matters regarding the benefit plans and is plan counsel to the National Grid U.S. Fiduciary Committees.

In addition to serving as Chairman of the Board, Steve also serves on PSCA’s Executive and Legal and Legislative Committees. In 2007, Steve was appointed to the United States Department of Labor’s Advisory Council on Employee Welfare and Pension Benefit Plans (the ERISA Advisory Council). He is admitted to the Bar of New York and Connecticut and received his J.D. from St. John’s University School of Law.

FN: Steve, how does a guy end up doing what you do? What experiences have brought you to where you are today?
McCaffrey: I have been working at National Grid (formerly KeySpan, and Long Island Lighting Company prior to that) for more than 30 years and my role has certainly evolved during that time. My initiation into benefit matters started out innocently enough – while working primarily on corporate tax matters, I was pulled into preparing and working on all the company’s Form 5500s for the retirement plan. My role then expanded in 1988 when I was charged with the responsibility of drafting the company’s first 401k plans. This undertaking perpetuated the perception that I was now the company’s foremost 401k expert and after continuing to field myriad questions from employees about our plans, this perception grew! Today, after working with PSCA’s committees, its legal and legislative team, lobbyist(s), and many plan sponsors, I realize that this area is now so diverse that few people are truly able to count themselves as complete experts in the 401k or 403b world. However, throughout my career I have had the opportunity to interact with a huge number of wonderful, dedicated people that have shared their defined contribution plan expertise and played a significant role in the development of this complex area. This expertise is enhanced by the fact that it is drawn from employers with so many unique plans, which are structured to meet the many unique characteristics of each plan sponsor.

FN: The PSCA has been around for 65 years. What do you feel is the organization’s most memorable accomplishment? What has been its most controversial position?
McCaffrey: In 65 years there have been so many, that it is hard to pick just one. PSCA’s accomplishments include: (1) defeat in the early 1950’s of what have been ongoing attempts to force distributions from DC plans in annuity form (ironically this is also being debated today); (2) being instrumental in the passage of legislation leading to section 401k in 1978; (3) helping preserve the ability of participants to save in tax-deferred plans during the Tax Reform Act of 1986 when Treasury attempted to eliminate that tax code provision; (4) leading the effort to mandate that states can only tax the retirement plan distributions of current state residents at the time of distribution; and, (5) being instrumental in the enactment of legislation making the retirement provisions of the 2001 tax act permanent, one of PSCA’s most significant achievements.

An important non-legislative achievement during the 2008/2009 financial crisis was the successful effort by PSCA and its plan sponsors to deter 401k participants from selling out their equity positions and/or electing not to participate in their plans resulting from the 2009 financial crisis. This prevented what would have been an even greater stock market crash, perhaps with truly catastrophic consequences.

FN: What is the PSCA’s strongest attribute?
McCaffrey: PSCA’s biggest strength is that it is a community of plan sponsors collaborating day-to-day in the benefits arena to preserve and strengthen the private employer-sponsored retirement system. Our members are diverse in size, industry, and geography, but united in our mission to provide retirement security to millions of employees through company-sponsored DC plans. This united voice is our greatest strength and is recognized in Washington as legislators and regulators regard PSCA as the pre-eminent plan sponsors association and an influential thought leader. PSCA has been providing objective and actionable benchmarking data and research for nearly six decades and we are renowned for providing high quality, unbiased training and education.  

FN: What do you see as the area where PSCA can improve the most?
McCaffrey: PSCA has always been on the cutting-edge of the defined contribution retirement system and, as the system has changed dramatically in the 65 years we have been around, we have changed with it, and in fact been an agent of change in the system. We will continue to lead and to adapt to changes coming our way in the future as we continue to advocate in our members’ best interest.

PSCA is increasing its outreach efforts at the grass roots level and engaging members, non-members, service providers, policy makers, and regulators though city event symposiums across the country. We are bringing PSCA to the people, so to speak, in recognition that in today’s economic climate, it is often difficult for plan sponsors to underwrite travel expenses associated with conference attendance.

FN: Turning to our primary audience, what do you see as the 401k plan sponsor’s greatest challenge and how does the PSCA intend to help them meet that challenge?
McCaffrey: There are many potential challenges we see coming down the road, including efforts to cut back on DC plans limits to raise tax revenue, plan design mandates, mandatory supplemental retirement programs, and other legislative efforts to “fix” an un-broken system. Recent US Department of Labor statistics indicate that 130 million active and retired workers and their spouses are covered by nearly 900,000 employer-sponsored retirement plans nationwide. Moreover, 46 million households now own some kind of Individual Retirement Accounts, many of those holding assets rolled over from employer plan. PSCA must continue to stand up to the challenges to undo an employer-sponsored retirement system that works and can be tweaked to work better to cover more workers.

Additionally, as a society we are looking at longer life spans, increasing healthcare costs, and a social security system that is widely expected to hit its funding capacity, all of which will put additional pressure on the defined contribution system to be able to support participants in retirement.

As it has for 65 years, PSCA will continue to fight against a one-size-fits all approach to retirement security and will continue to trumpet the success of the voluntary employer-sponsored system. We are convinced that mandated legislated plans, whether imposed by states or the federal government, hinder this voluntary approach. From both a legal and a practical perspective, plan sponsors must be free to continually monitor and constantly innovate practices that work for their businesses and to utilize other recent trends to improve participation rates and benefit outcomes. Flexibility in designing programs that are targeted to a companies’ unique employee demographic and industry needs are crucial to the success of their programs. We will continue to work collaboratively with our plan sponsor members to develop solutions to the coming challenges, and to make their voices heard in Washington.

FN: There seem to be many plans that still have plan menus that date back to the 1990s despite research evidence that shows the tiered menu option as better suited for employees. Why do you think this is so and what can be done to help plan sponsors upgrade these old plan menus?
McCaffrey: According to our research, the average number of funds offered to participants is 19 and has been for three years. It has trended up from an average of 10 in 1998 (first year we tracked this), 14 in 2002, 17 in 2004, and 18 in 2008-2010. Though there may still be some plans that offer hundreds of funds, I would challenge the notion that this is a significant problem in the industry.

There has been broad discussion in the industry that too many funds tend to overwhelm participants, and some research suggests that offering more than about 11 funds may increase decision-making paralysis by participants. However, as new fund types have been created (target-date, lifestyle, etc.) in the last 10-15 years and companies are looking to diversify their lineups (such as increasing exposure to alternative investments, emerging markets, etc.) companies are adding investment options to their lineups, so we are seeing a slight increase. Many of these fund options, however, are streamlining the decision making process for participants and mitigating the impact of additional funds.

The majority of participants indicate that they like fewer choices, and consolidation through a tiered approach or managed structure gives a stronger and simpler governance structure. Most plans have some type of target-date, lifestyle, or other asset allocation fund for participants who don’t feel they have the expertise to make asset-allocation decisions, yet also offer participants a core investment lineup of several options and/or a brokerage window for those with more advanced investment experience.

FN: How important is it that the DOL and the SEC adopt some form of Fiduciary Standard? Do plan sponsors really care about this or is there some other regulatory issue they’d rather see addressed?
McCaffrey: PSCA has the resources to help plan sponsors evaluate DOL’s rules and plans to continue to do so. We will be working with our members to understand the impact the DOL’s positions will have on our plans—including the fiduciary rule.

FN: The DOL is shifting focus to conflicts-of-interest. In addition, we’re seeing a lot of high profile court cases – including one headed for the Supreme Court – centered on the damages caused by conflicts-of-interest. Why do you feel plan sponsors have fallen victim to this? Do you think they’re now more aware of the fiduciary problems associated with conflicts-of-interest? Do you think the proposed DOL Conflicted-of-Interest (a.k.a. “Fiduciary”) Rule goes far enough to protect employees? Does the PSCA have resources that can help plan sponsors address this issue?
McCaffrey: Fee disclosure rules and 401k fee litigation over the past decade or more has undoubtedly heightened plan fiduciary sensitivity to the issue. In general, plan sponsors are increasingly aware of potential conflicts-of-interest among plan advisors. We also recognize the efforts of top-notch, reputable advisors and service providers who work hard to shine a spotlight on conflicts. PSCA’s fiduciary training coursework is tailored to address this kind of information to help plan fiduciaries navigate potential conflicts in plan investment and administration, as are PSCA conferences, where experts and industry leaders network and exchange ideas with PSCA members to enable them to identify their individual plan’s needs and tailor solutions. 

FN: Participant education in 401k plans, and to some extent 403b plans, remains a headache. Between employee apathy, boring presentations, and no real generally acceptable successful role model, the industry has been trudging along trying to improve overall financial literacy. To some extent, auto-enrollment and auto-escalation can address the objectives of education. Why has this been such a dilemma and what can be done to improve basic retirement savings education? Is on-line the key? Do you see a broader use of gamification (such as rewarding good savings behavior with prizes in addition to the company match) in the future?
McCaffrey: I do not view participant education as a headache, but rather a challenging opportunity for sponsors to seek creative ways to engage all employees, especially the younger ones, for whom current financial demands may be more immediately important than their retirement, which is many years away. It’s not that people can’t understand, or don’t want to understand, the issue, it’s that future retirement needs are competing against kids, work, ballgames, tuition, and other important immediate commitments. That is why we feel that it is important for the conversation to shift toward a more holistic approach to financial education and financial wellness. Though this is still seen as a nice-to-have rather than mission-critical at many companies, there are some exciting, innovative products and solutions that are making professional investment management and holistic financial planning affordable and simple.

Plan sponsors have been implementing successful creative education campaigns with the help of their service providers for many years (as seen in our annual Signature Awards competition). As mentioned above, after the crash in 2009, there was an education effort across the board to explain to participants what had happened and to keep them engaged and saving in the plan. That education worked and very few workers quit plans.

In fact, PSCA’s 2015 401k Day campaign, free to members, will provide a comprehensive set of financial literacy tools to use over the course of a week, or a year, that addresses this very issue.

This area continues to evolve and I see exciting developments through the concept of financial wellness programs. One more recent trend is “gamification” and a few large companies are already using it, with great results. This can be very effective with the younger members of workforce who are increasingly web-based and mobile. We expect to continue to see an increase of use at larger companies with young workforces and the resources to implement it.

FN: Ultimately, the goal of any retirement savings plan is retirement readiness. Although many articles highlight the shortcomings here, the successes have gone underreported. How can retirement plan benchmarks be adjusted to focus more attention on retirement readiness and, in particular, the success we see in that area?
McCaffrey: Looking at participant balances and contribution levels alone (typical measurements), does not tell the whole story because it doesn’t take into account assets outside of the employee’s current plan. Many workers have several jobs throughout their career, so they don’t necessarily have just one plan account and may have additional investment or savings accounts. Participant needs also vary greatly so giving an arbitrary goal such as you should save some number times your final pay, or you should expect to need some percentage of your current spending to be financially comfortable in retirement are not effective measurements. Any measurement of retirement readiness should be personalized to the participant – drawing conclusions from averages is just not representative of participant experience. 

FN: In many ways, large company plan sponsors have the ability to offer the most in terms of retirement plans. Small company plan sponsors too often find themselves short on resources and manpower to build similar types of plans. Orin Hatch has been talking about promoting enhanced MEP 401k legislation to make it easier for small companies to pool together and provide plans comparable to large company plans. What are the advantages of MEP 401k plans and what do you see as the obstacles? How is the PSCA preparing to offer resources to its members in this area?
McCaffrey: This is a very interesting development that should be fully explored to provide additional flexibility for all size employers in offering plans their workers. The advantage of a MEP is clearly the economies of scale – the ability to provide plans to multiple unrelated employers at a lower cost than may otherwise be available to a single plan sponsor. However, we need to be thoughtful about the potential downsides, for example, the concern than an individual employer would have less flexibility regarding plan design in a MEP. This is something that PSCA is keeping an eye on and we expect to weigh in on in the coming months. 

FN: What other thoughts, issues, and needs are there that you would like to share with our audience?
McCaffrey: PSCA and its member companies are resolved to continue to build upon the success of the voluntary employer retirement system. PSCA is committed to continuing to promote the best interests of defined contribution plan sponsors and participants, and to acting as an agent of change in the benefits industry as we move forward collectively as the voice of plan sponsors. PSCA will continue its mission is to help plan sponsors solve real problems, create positive change for employee benefit programs, and expand on the success of the employer-sponsored retirement system. We continue to believe that employers benefit from strong retirement plans that help them attract and retain talented employees, and at the same time protect their employees as plan participants with financial security and confidence so that they will be able to enjoy their retirement years. As the benefit landscape changes, PSCA will change with it and continue to help employers provide top-notch, cutting-edge retirement and related savings programs.

On behalf of its members, PSCA is committed to continue working with Congress, the Executive branch, and administrative agencies to promote retirement savings through this voluntary employer system. We intend to continue our strong record of collaboration with our members to promote, preserve, and structure their tax incentive programs to make them work more effectively to facilitate retirement coverage and savings for America.

FN: Steve, we’ve enjoyed this chance to sit down with you and get your thoughts on these important issues. Our readers have no doubt gained great insights based on your answers. We’re glad to see the PCSA taking a proactive approach and look forward to speaking with you in the future.

 

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Christopher Carosa, CTFA

Christopher Carosa, CTFA

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