How to take a Taft-Hartley plan from trustee to member directed

Choosing the direction and valuation of your Taft-Hartley DC plan

More than two-thirds of union members with access to a retirement plan have a DC plan. And like any DC plan, Taft-Hartley plans can be trustee directed or member directed. In a trustee-directed plan, the trustee—someone designated by a plan fiduciary—chooses the investments that all participant accounts will invest in. This is the model used with Taft-Hartley defined benefit (DB) plans and with many Taft-Hartley DC plans. In a member-directed plan, the fiduciaries provide a fund menu from which members can choose their own investments and allocations. 

In a trustee-directed plan, trustees are less likely to require daily valuation of the accounts, as they’re managing the investments at a plan level. In a member-directed plan, for the member to be able to make their own investment decisions and changes, the investments must be valued on a daily basis to provide accurate information.

Why are many Taft-Hartley DC plans trustee directed?

Taft-Hartley retirement plans operate within an environment that has historically favored trustee-directed, non-daily valued plans. Most union members are covered by a DB plan, with DC plans historically seen as supplementing the pension benefit. Because of this, the DC plan hasn’t been seen as the primary means of saving for retirement. Daily valuation and the participant tools and features that come with it haven’t been deemed as necessary.

Over the last few years, changes in the retirement plan market have been changing some of the rationale that supported trustee directions and non-daily valuation:

• Many DB plans have been beset by funding difficulties, first with the 2008 financial crisis and continuing through persistently low interest rates. This has increased the importance of members’ DC plans in helping them prepare for retirement.
  
• As the population ages and millions of baby boomers retire, awareness of the need to save for retirement has increased, with more people wanting to see an accurate accounting of—and to manage—their own retirement accounts. 
• Legislation and litigation continue to increase the need for more transparency of plan and investment costs.

Why do investment direction and frequency of valuation matter? 

Not having control over their own investments and not having an accurate daily valuation of their account can mean a lack of transparency across the plan and can complicate decision-making for members. 

Equitable treatment of distributions—Let’s take the example of a retired member who wants to take a distribution. If the plan isn’t valued daily, the member will receive the distribution based on the most recent valuation of their account. In a falling market, that member will likely benefit from an artificially high valuation, and, at the end of the year, the members who are still in the plan might have to make up the difference. Conversely, in a rising market, the member taking a distribution may not be able to take advantage of all the market gains they’re due, and those remaining at the end of the year might receive more than their share. 

Improved visibility—In a plan that’s not valued daily, the members can’t always get an accurate view of their balance. It can also take time to get a withdrawal or distribution check, with a more drawn-out process. With daily valuation, participants can see an up-to-date balance anytime, anywhere on their plan’s mobile app or website or on quarterly statements that more accurately reflect the value of their accounts. And they can request a withdrawal or distribution and receive the money within just a few days.

Access to tools and resources—Many DC recordkeepers offer online tools that participants can use to help manage their retirement savings and their personal finances—these tools generally rely on daily valuation to come up with accurate estimates. With timely information about their balance in a daily valued plan, members can use the tools for help making decisions, managing their funds, rebalancing their accounts, or assessing their retirement readiness. 

Increased transparency—In a non-daily valued plan, members only see their plan’s net performance, whereas participants in a daily valued plan can see their investment performance and the related plan and investment costs. 

Member direction is not a loss of trustee control 

One of the benefits of having a trustee-directed plan is that an investment professional makes the investment decisions, helping lessen the fiduciary exposure of the plan sponsor. With a member-directed plan, the responsibility is shared between the plan sponsor and their investment consultant. 

A fear that some trustees have about moving to a member-directed plan is that few members have the investment knowledge of the trustee and, as a result, could end up making poor investment choices. Most recordkeepers offer education, financial tools, and advice to help members engage with their plan and learn how to manage their money.

Moving to daily valuation doesn’t have to mean giving up control over the investment options made available in the plan. The trustees are still tasked with selecting and monitoring the lineup, and they can use those decisions to provide members with prudent investment options. They can also potentially keep portions of the portfolio in less liquid instruments, such as hedge funds, private equity, real estate, and exchange-traded funds.

Why you might consider a change from trustee to member directed 

If your membership is asking for more visibility into their plan, or if you’d like to get your membership more involved in planning for their retirement, you might consider changing to a member-directed plan. Daily valuation of accounts means members can make transactions and get access to more of your recordkeeper’s financial wellness and retirement planning tools. In turn, the plan sponsor’s fiduciary burden is potentially reduced, with members having visibility into fees and responsibility for their own investments—although, again, still within the limits of the trustee-chosen lineup.