7 Signs of the Times

A month ago, when we wrote about the 61^st Annual Survey of Profit Sharing and 401(k) Plans from the Plan Sponsor Council of America (PSCA), there were several key points highlighted – but there are some interesting findings you might have overlooked.

Perhaps the most significant finding of that survey – the longest running of its kind – was a record employer contribution rate (5.1% of pay) and a total savings rate in excess of 12%, the highest percentage ever recorded in the history of the survey. Also noteworthy was that nearly three-fourths (73.1%) of plans now retain an independent investment advisor to assist with fiduciary responsibilities – up from 69.5% in 2016.

But here are some findings from the survey of plan sponsors that you might have missed.

There’s less ‘waiting.’

Once upon a time, the norm was to have participants wait a year before letting them participate in the 401(k) plan. There was administrative logic in that decision – after all, turnover rates being what they are, why go to the bother of setting someone up to contribute to the plan (and match those contributions) if they were only going to be around for a short time?

But the most recent PSCA survey finds that nearly half (47.2%) of surveyed employers allow for immediate eligibility, and more than half (55.7%) of the largest plans do. In fact, even among the smallest employers, more than a third (35.3%) let workers become participants immediately.

Not to mention that nearly 40% of plans provide immediate vesting for matching contributions.

Sponsors are making savings suggestions.

Nearly a third (31.2%) of plan sponsor respondents say they provide a suggested saving rate to participants, and for more than 4 in 10 that rate is 10% (28.5%) or higher (12.7%).

There’s a growing role for rollovers.

Just under 4 in 10 (39.4%) of responding plans say they actively encourage participants to roll assets into their plan (though that was somewhat less common among the largest plans). Little wonder, since more than 95% of 401(k) plan sponsors say they accept rollovers from other plans.

There’s a real ‘to or through’ target split.

More than half (55.4%) say their target-date fund goes “through” retirement, while the rest have embraced a “to” retirement glide path. Wonder if participants in those plans appreciate the difference?

Participant behaviors are being tracked.

Not surprisingly, and for any number of legitimate reasons, contribution levels are the most monitored participant behaviors. The vast majority (85%) of the largest plans do so, as do nearly two-thirds (62%) of the smallest. What’s a bit striking is that the second most monitored behavior – and one that held true against nearly all plan sizes (except the smallest, where it was third,after investment allocation) – was loan usage.

Does anything happen with this tracking? About half (45.4%) of plan sponsor respondents said they took action based on what they learned from monitoring participant behaviors.

Traditional success measures (still) matter most.

While more than three-quarters (84.8% of the largest plans) evaluate whether their plan is successful, the benchmarks used are fairly traditional. Participation rates are the most common (90.8% of all plans), with deferral rates (75.8%) looming large, but a distant second. Fewer than a third (31.4%) use income replacement ratios.

Many weren’t looking to make big changes.

More than a third (34.7%) planned no changes at all, and even more (39.9%) planned only “minor changes to the investment lineup.”

- Nevin E. Adams, JD
 
More information about the Plan Sponsor Council of America’s 61st Annual Survey of Profit Sharing and 401(k) Plans is available at www.psca.org.

"Choice" Architecture - for Plan Sponsors

In recent years, the notion that the ways in which choices are presented to individuals — known as “choice architecture” — can influence their decisions, has been widely embraced.

Well before the advent of the Pension Protection Act of 2006, the retirement plan industry had acknowledged the positive influences of those behavioral finance techniques on overcoming, or at least countering, certain human behaviors.

Based on the evidence of several decades of adoption, we know that automatic enrollment — even with the ability to opt out — transforms voluntary participation rates of roughly 70% to near-unanimous participation. And yet, even with the structure and sanction of the PPA, today fewer than half of the roughly 7,000 plan sponsor respondents to the 2013 PLANSPONSOR DC Survey have implemented that design (large plans being significantly more likely to do so than smaller programs).

Even plan sponsors that have adopted automatic enrollment tend to do so with a default deferral rate that is almost assuredly too low to assure success for anyone (typically 3%, the rate specified in the PPA safe harbor) — which might not be so bad, but for the lagging implementation of contribution rate acceleration. The PLANSPONSOR survey found that only about a quarter (26.9%) did so. Even among the largest plans (more than $1 billion in assets), only about half (54.2%) “auto accelerate.”

And then there’s the inclination to automatically enroll only new hires. Industry surveys suggest that only about a third of auto-enrolling plans extend that to current workers.

Setting aside for a minute the reality that not every workforce is suited for the administrative rigor of automatic enrollment — and that many smaller employers have in place safe harbor plans that serve to automatically “enroll” workers via that safe harbor contribution — there are real, tangible, and often unacknowledged employer costs to undertaking automatic enrollment.  

Specifically, the transformative participation effects cited earlier frequently carry significant additional costs in terms of the employer match. The math of switching to a so-called “stretch match” — which seeks to ameliorate the cost issue by altering the rate of match (say by matching 25 cents on the dollar up to 12% of pay, rather than 50 cents on the dollar up to 6%) — may work, but workforces that have been accustomed to the latter formula will almost certainly see the former as a reduction in benefits.

Similarly, while PLANSPONSOR’s 2013 DC Survey found that three-quarters of the roughly 7,000 plan sponsor respondents said that it was either very important (41.1%) or important (36.8%) that their plan provide retirement income solutions to participants. Yet most do not offer any income-oriented products/services in their plan. That’s a disconnect, to be sure. But in view of expanding fiduciary concerns in selecting and monitoring those offerings, is it irrational?

Over the years, a lot of thought has gone into plan design features — choice architecture — that can help participants make better decisions (or, in some cases to make better decisions on their behalf). But policymakers and regulators, and the academics who sometimes advise them, tend to forget that the employer’s decision to keep, and to offer these programs in the first place, is also a choice.

A choice that the rules, regulations and limits bounding these programs don’t always encourage.

- Nevin E. Adams, JD