‘Still’ Standing: 6 Key Industry Trends to Watch

The Plan Sponsor Council of America recently released its 62nd Annual Survey of Profit-Sharing and 401(k) Plans, documenting a record high rate of savings, alongside an uptick in Roth contributions and other trends. However, sometimes the things that don’t change can be just as telling…

Target-date trends (still) dominate, but… 

Let’s face it – target-date funds are one of the most common items on a plan investment menu today (the PSCA survey noted that it’s the option in which assets are most frequently invested) and – in no small part due to their prevalence as a default investment alternative – continue to garner a lion’s share of new contribution dollars, if older savers (perhaps more precisely, longer-tenured savers) haven’t embraced (or more accurately, been defaulted into) the option with as much enthusiasm. That said, while more than two-thirds (68.6%) of respondents offer a target-date fund option, that’s actually down 5% in the past two years.

Interestingly enough, the PSCA survey found a rough 50-50 split among respondents between those relying on target-date fund glidepaths that are “to” versus “through” retirement. Additionally, actively managed TDFs outnumber passive by more than two-to-one among plans with fewer than 5,000 participants. That is reversed among plans with more than 5,000 participants.

Robo-advice (still) isn’t making much headway.

Just 1 in 10 (10.9%) of plan sponsor respondents provide participants with access to a robo-advisor, and if that’s somewhat higher (approximately 15%) among larger programs, the vast majority do not.

However, it may be worth noting that 15.6% who don’t currently say they are considering the option, particularly among smaller programs – though in last year’s survey, that was 17.2%.

Automatic enrollment (remains) a large-plan feature.

Fewer than a third (30.5%) of the smallest programs offer the feature, and only about half (56%) of plans with 50-199 participants, compared with roughly three-quarters among larger programs. On the other hand, roughly a decade ago – when the Pension Protection Act of 2006 was new – only about a third (35.6%) of respondents to the PSCA survey offered automatic enrollment. But then, it’s now been a decade… 

Not that it’s not been considered – but asked why those that didn’t offer the feature had made that choice, the predominant reason given was satisfaction with participation rates.

However, among the largest (> 5,000 participants), the most cited rationale was… cost.

Once participants are enrolled, they (still) tend to “stick.”

The percentage of participants who opt out of automatic enrollment programs in private sector retirement plans has always been relatively small, generally 5-10%, and in this year’s PSCA survey some 70% say that the opt-out rate remains 5% – or lower.

That stands in some contrast with the data we have seen with the early state-run plan options, where the opt-out rate has been in the 25% and higher range, though those programs lack an employer match and the nurturing that employment-based plans typically provide. And, arguably, the 75% who “stick” there are better off than with no plan at all.

Financial wellness is (still) largely a large plan feature. 

While nearly half (45.8%) of the largest (5,000 or more participant) programs claim to have a “comprehensive financial wellness program,” only about a quarter (27.1%) of those with 1,000-4,999 participants do, as do only 22% of those with between 200-999 participants.

For all the coverage that the subject engenders – and it’s considerable in this space – it’s not unusual to find awareness and interest gaps among plan sponsors, with perspectives ranging from ignorance to ambivalence to downright skepticism, even among large plan sponsors. The data here (and in other surveys of plan sponsors) suggest that the concept/focus is far from universal.

Traditional success measures (still) dominate.

Participation rates remain the dominant success measure of plans of all size: 87.6% overall, and more than 95% of the largest programs, cite that benchmark. Deferral rates rank second – 75.8% overall, but higher among larger plans, with average account balances a distant, but (to my eyes, anyway) a remarkably robust third.

For all the talk about an expanding focus on outcomes, income replacement ratios are a distant fourth, although 42% of the largest programs (those are the ones with the financial wellness programs, after all) do track this benchmark. Of course, particularly with a voluntary approach to retirement saving, employers may well be hesitant to establish as a benchmark of success the attainment of a goal that is not only unique to each individual, but generally outside of their ability to control or influence.

Though we can hope that participants – who do have some control over that outcome – are paying attention.
Industry surveys, particularly those with a broad range of plan types and providers and the perspective of decades that PSCA’s survey spans, provide an invaluable sense and appreciation of not only where things stand, but also how far we’ve come.

And sometimes, even when the trend is more or less status quo, and perhaps even more so, their real value lies in helping us see where we need to be.

- Nevin E. Adams, JD
 
More information about the Plan Sponsor Council of America’s 62^nd Annual Survey of Profit Sharing and 401(k) Plans is available at www.psca.org.

5 Things You May Not Know About Roth 401(k)s

I made the switch to Roth for my retirement savings years ago – and I have long counseled younger workers, who were likely paying the lowest tax rates of their working lives, to do so as well.

Pre-tax treatment has, of course, been the norm in 401(k) plans since their introduction in the early 1980s. On the other hand, the Roth 401(k) wasn’t introduced until the Economic Growth and Tax Relief Reconciliation Act of 2001, and even in that legislation wasn’t slated to become effective until 2006 (and at that time was still slated to sunset in 2010).

Despite that late start, according to a variety of industry surveys (Plan Sponsor Council of America, Vanguard, PLANSPONSOR), roughly 60% of 401(k) plans now offer a Roth 401(k) option, and PSCA data shows that 28.6% of 403(b) plans already allow for Roth contributions. Participant take-up, which just a few years ago hovered in the single digits, is now in the 15-20% range.

Here are five other things you may not know about the Roth 401(k):

To allow designated Roth contributions, a plan also has to offer traditional pre-tax 401(k) contributions. 

A plan can only offer designated Roth contributions if it also offers traditional, pre-tax elective contributions. Oh, and they can be offered by either a 401(k), 403(b) or 457 plan.

You can auto-enroll designated Roth contributions. 

The plan must state how the automatic contributions will be allocated between the pre-tax elective contributions and designated Roth contributions.

You can “catch up” on a Roth basis. 

Individuals can make age-50 catch-up contributions as a designated Roth contribution to a designated Roth account.

You have to include Roth contributions in the 401(k) plan annual nondiscrimination testing. 

Designated Roth contributions are treated the same as traditional, pre-tax elective contributions when performing annual nondiscrimination testing. Moreover, just like other elective deferral, they must be included when calculating the top-heavy ratio each year. You cannot allocate forfeitures, matching or any other employer contributions to any designated Roth accounts.

You can take loans from designated Roth accounts. 

As long as the plan permits, you can identify from which account(s) in your 401(k), 403(b) or governmental 457(b) plan you wish to draw your loan, including from a designated Roth account.

Retirement plan education has long had as a basic tenet that individuals will be paying lower tax rates in their retirement future. Of course, tax rates – and future income levels – are hard to predict. Both can rise more than anticipated in the future – and a Roth option can provide some essential flexibility to diversify tax treatment, as well as investments.

- Nevin E. Adams, JD

For more information, see Retirement Plans FAQs on Designated Roth Accounts from the IRS.

Different Mindsets

Last week Beloit College released the Beloit College Mindset List, as it has each August since 1998. Originally created as a reminder to faculty to be aware of dated references, the list provides a “look at the cultural touchstones that shape the lives of students entering college.”

For example, this year’s freshman class, born in 1994, have never known a time when history didn’t have its own channel, when there were tan M&Ms (or when there weren’t blue ones), or when “It’s A Wonderful Life” was shown more than twice during the holidays. They grew up talking about “who shot Mr. Burns?” not “Who Shot J.R.?” and while for them there’s always been an NFL franchise in Jacksonville, they’ve never known one in Los Angeles. That floppy disk icon for “save” in the word processing document is as anachronistic to them as the “CC” reference to “carbon copy” likely was to their parents’ email. And, perhaps most significantly, they have never lived in a world without the World Wide Web.¹

Despite those differences, the class of 2016 will one day soon be faced with the same challenges of preparing for retirement as the rest of us. They’ll have to work through how much to save, how to invest those savings, what role Social Security will play, and—eventually—how and how fast to draw down those savings.

Those fortunate enough to have access to a work place retirement savings plan at least stand to have some advantages their parents didn’t. They’ll have a better shot at joining those programs immediately, rather than waiting a year, as was once the norm. There’s a growing chance that they will be enrolled in those plans automatically,¹and with the option to increase that initial contribution automatically as well. The expanding availability of qualified default investment alternatives, like target-date funds, should make their investment choices easier and better diversified, and some will likely benefit from the counsel of a growing number of expert advisors. As for help in figuring out how best to draw down those savings in retirement, more choices and alternatives come to market every year.

However, they also have another big advantage (and one that helps make all those other advantages all the better): They’ll have the advantage of time, a full career to save and build, to save at better rates, to invest more efficiently and effectively.

It’s more than just a shift in mindset—and it could give retirement saving a whole new perspective.

- Nevin E. Adams, JD

¹ The full 2016 Mindset List (and links to prior years’ lists) is online here.

² EBRI has recently quantified the impact of eligibility for participation in a 401(k) plan on retirement readiness for Gen Xers. See this report online here. See also “Retirement Income Adequacy for Boomers and Gen Xers: Evidence from the 2012 EBRI Retirement Security Projection Model,” online here.

IMHO: Catching Your Drift

I recently found myself driving in an unfamiliar city without the aid of a GPS (global positioning system).

Sadly, I had become so accustomed to having that device available, I hadn’t even taken the time to print out instructions from any of the usual Internet sources, and while there were maps in the vehicle, none were of the area in question. That didn’t matter, I told myself—because I had made that drive before, had a pretty good idea of where I needed to be and, armed with a pretty reliable memory for such things, I set out with only a little trepidation.

Just about the time I was getting pretty confident in my ability to navigate without all the high-tech “crutches,” I was thrown a series of curves. The primary route was closed due to construction, the rerouting didn’t seem to take into account where I was trying to get to, an unexpected one-way street suddenly emerged going the “wrong” way, and then I found myself directed onto a parkway whose designers had apparently never contemplated the need of a misdirected driver to pull off and turn around.


In just a matter of minutes, I went from coasting along cool and confident to a state of growing concern (it felt suspiciously like panic) as I began to be drawn what I was sure was miles off my designed course, and heading further away all the time.

Then I remembered that I DID have a GPS on my phone. One that, admittedly, lacked the calm, reassuring voice of the more traditional version giving me step-by-step directions, but it was something. However, it wasn’t the ability of the device to offer routing instructions that I found most useful—the screen was too small (and my need to watch traffic too great) to do much with that feature.

The feature that saved me that day was the blue dot—that element of the GPS that, with a simple touch, will show where you are. That information, presented on the map of my surroundings, allowed me to not only find where I was, but to then visualize where I needed to be and begin heading in that direction. Oh, I missed a turn or two after that, but thanks to that locator “dot,” I quickly saw when I made those mistakes and was able to remedy them before going miles out of my way.

Most participants don’t set out on their retirement savings journey with a confident sense that they know where they are going, much less any real sense of how to get there. Nonetheless, by the time they sit through an education session (or two), make their way through the attendant materials, and try to complete the requisite enrollment forms, they may well feel that they are heading in the right direction.

And then, something happens—it doesn’t have to be an “event” like the financial crisis of 2008 (though it can be); sometimes it’s as simple as just not having had the time to pay attention to your account while the market decides to go on a losing (or winning) streak, or it can simply be a result of the preoccupations that come with those ordinary, but often unplanned, changes in your daily (and financial) life. It can be any of a series of things that pop up just about the time you think you have nothing but smooth sailing ahead; the things that crop up to suddenly “close for construction” the path you had thought you’d be able to follow for a long and uneventful journey.

At times like that—and, arguably, at any time—it’s important for participants—and plan sponsors—to have some kind of idea not only of where they want to be, but where they are relative to that destination.

Because, after all, it’s a lot easier to stay—and get back—on track the sooner you find out you’ve begun to drift from it.

—Nevin E. Adams, JD .

“Checking” Accounts

I finally got to the dentist last week.

Don’t get me wrong, I like my dentist. The folks there are more than nice, they treat you like an adult (even when you clearly haven’t flossed since your last visit), and they outline options in a way that feels like you actually have a choice (including my personal favorite, “If it’s not bothering you, do nothing”).

That said, it had been a ridiculously long time since I had been there. Honestly, I knew it had been a while, but when my dentist pulled out his (detailed) record of my last visit—well, let’s just say I couldn’t believe it had been that long. In fact, I think if I had known how long it had been before I went, I might well have postponed it again, if only to spare myself the embarrassment.

Fortunately, despite my extended hiatus, things were in pretty good shape. Sure, the cleaning was more painful than it might have been, but overall, things were better than I had a right to expect.

After the market tumult of the past several weeks, I’m sure there are a lot of plan participants who are nervous about the state of their retirement savings accounts, and perhaps rightly so. I’m betting that, for most, it’s been longer than they think since they checked those accounts—and despite the recent headlines, those accounts may be in better shape than they expect.

The mantra in such times is, inevitably, “stay the course”—wise counsel in most situations, particularly since the impulse in such times is often action that one comes to regret in the fullness of time. However, for some, just sitting still and “taking” what the markets choose to inflict on your retirement savings can be excruciating.

To Do List

Here are some things participants can do while waiting for things to turn around—things they may have been putting off:

Get started on rebalancing by changing the investment elections of new contributions, rather than transferring existing balances. It will take longer to realign the entire account, but at least you aren't realizing those as-yet-unrealized losses.

Increase current deferral rates. When you think about just how much cheaper those retirement plan investments are now, it's hard to pass up that kind of bargain. More so if you aren't yet saving at the maximum level of the match.

Consider automated rebalancing. Most providers now have in place mechanisms that will, on some preset frequency (monthly, quarterly, annually), automatically rebalance individual accounts in accordance with investment elections. It's a good way to keep things in balance without having to worry (or remember) about the best time to do so.

—Nevin E. Adams, JD

“Starting” Points

You may have missed it, but there was a bit of a “dust up” in our industry last week.

It started on July 7 when The Wall Street Journal ran a front-page story titled “401(k) Law Suppresses Saving for Retirement” (a story that is still, as I write on Saturday morning, on WSJ.com’s most popular listing). And, no, that article wasn’t talking about discrimination testing rules, the imposition of annual contribution limits, talk of a mandatory limit on loans, or the imposition of mandatory annuitization of distributions. Rather, it was talking about…automatic enrollment.

The report claimed that “40% of new hires at companies with automatic enrollments are socking away less money than they would if left to enroll voluntarily,” citing data from the Employee Benefit Research Institute (EBRI). The problem, according to the report, was that “[m]ore than two-thirds of companies set contribution rates at 3% of salary or less, unless an employee chooses otherwise.”

Well, duh. That, as they say, is the law.

EBRI quickly took issue with the WSJ’s characterizations, outlining in some detail the non-partisan group’s extensive history in examining these trends, and then noted that “The Wall Street Journal article reported only the most pessimistic set of assumptions,” failing to “cite any of the other 15 combinations of assumptions reported in the study” referenced in the report. More significantly, EBRI’s Jack VanDerhei commented later that same day that the WSJ managed to completely ignore the reality that automatic enrollment is “increasing savings for many more—especially the lowest-income 401(k) participants.”


Now, while EBRI was, IMHO, rightly miffed to see its data and analysis mis-, or perhaps less-than-fully, represented, the authors of the Pension Protection Act were no less maligned. The law was designed to help more employers make it easier for more employees to become participants, and for those participants to become more-effective retirement savers, and it seems to me that, in just about every way, it has been a huge success. Are there those who once might have filled out an enrollment form and opted for a higher rate of deferral (say to the full level of match) that now take the “easy” way and allow themselves to be automatically enrolled at the lower rate called for by the PPA? Absolutely. However, as the EBRI data show—and, for anyone paying attention, have shown for years now—the folks most likely to be disadvantaged by that choice are higher-income workers, most of whom, IMHO, should know better.

The simple math of automatic enrollment is that you get more people participating, albeit at lower rates (until design features like contribution acceleration kick in). Said another way, participation rates go up, and AVERAGE deferral rates dip—initially.1 Then, over time, as contribution-acceleration designs take hold, we’re likely to see those average deferral rates increase2. But for some, it will mean less savings, and for many, perhaps not savings enough.

There are, however, some things plan sponsors can do now to keep things moving in the right direction sooner:

Auto-enroll workers at higher rates, perhaps as high as the level at which they will receive the full company match. Sure, the Pension Protection Act calls for 3% as a minimum to be eligible for its safe harbor—but there’s no law/rule that says you can’t go higher.

Auto-enroll ALL workers, not just new hires. Since the PPA’s introduction, PLANSPONSOR’s DC Survey has consistently shown that two-thirds of employers adopting automatic enrollment do so on a PROSPECTIVE basis (see IMHO: A Prospective Perspective). Do you really care more for the people you just hired than those who have devoted years of loyal service?

Remind ALL participants of the importance of actively saving for retirement. It may be a bit counter-intuitive to try to reach automatically enrolled participants who didn’t even take the time/expend the energy to fill out an enrollment form, but it’s important. By most measures, workers who save only to the level of the company match won’t have saved enough to provide a financially secure retirement. However, a generation of participant behaviors suggests that they assume that saving to the level of the match is the “right” answer, and it’s likely that they will assume that the level of automatic enrollment established is “enough.” We all know better.

IMHO, automatic enrollment designs are, literally, a starting point—for plan sponsors and their soon-to-be participant savers alike (3).

—Nevin E. Adams, JD

The WSJ article is online HERE. EBRI’s response is HERE

1 Complicating the picture is that the PPA took hold just ahead of an economic downturn that led a small, but noticeable, group of employers to reduce and/or suspend their match (and a not-so-small group to lay off lots of workers), while health-care costs continued to rise and, based on previous surveys, likely siphoned some participant contributions from retirement savings.

2 VanDerhei notes on EBRI’s blog that “[t]he other statistic attributed to EBRI dealt with the percentage of AE-eligible workers who would be expected to have larger tenure-specific worker contribution rates had they been VE-eligible instead. The simulation results we provided showed that approximately 60 percent of the AE-eligible workers would immediately be better off in an AE plan than in a VE plan, and that over time (as automatic escalation provisions took effect for some of the workers), that number would increase to 85 percent.”

3 This from a column I wrote about automatic enrollment designs in 2005: “...there is at least one published study that indicates that, over time, the establishment of a default deferral rate seems to lower the overall rate of deferrals in the plan. Mostly, this seems to be a result of an increase in the number of workers who simply leave their choices in the hands of the default option. But it is hardly beyond the realm of reason to imagine a scenario where workers take the establishment of a default rate as being the “right” answer for them as well.

All in all, advisors should remember that the results of automatic deferrals, however encouraging at the outset, should not be left unattended. An “automatic” deferral is a start, perhaps even a good start. It should not, however, be the end of the matter."

Rest “Room”

It should come as no surprise that the vast majority of plan sponsors who have adopted automatic enrollment have chosen to default that initial deferral at 3% of pay. No, that’s not the level at which most plans match deferrals, and it’s certainly not a level of deferral likely to produce sufficient retirement savings. It is, however, the starting deferral rate attributed to such programs under the auto-enroll safe harbor provisions in the Pension Protection Act (PPA). Coincidence? I think not.

Ironically, that same safe harbor provision requires that employers either go back and automatically enroll all eligible participants (giving them the ability to opt-out), or be able to establish that they did at some point (see “The Pension Protection Act: This Changes Everything”). Most providers, certainly pre-PPA, were unable to provide the requisite proof of those prior enrollments—and thus it would seem that most employers seeking the protections of that auto-enroll safe harbor would have re-enrolled all eligibles; and yet, surveys (including PLANSPONSOR’s own DC Survey) routinely show that only about one in three employers do so. In fact, twice as many choose to implement automatic enrollment only for new hires (see “IMHO: A Prospective Perspective”).

Now, when you look at the former finding and compare it to the latter, you can only draw one of two conclusions: either that most plan sponsor adoptees of automatic enrollment aren’t interested in obtaining the protections afforded by the PPA’s safe harbor, or they don’t understand that their approach doesn’t qualify.


There’s nothing wrong with opting to embrace automatic enrollment at a point in time and only applying that to employees hired after that date. Sure, you won’t garner the benefits of the PPA safe harbor, but most plan sponsors probably don’t “need” that (though they might well want it). Moreover, there are some very real financial consequences associated with automatic enrollment—survey after survey shows that very nearly every employee who is automatically enrolled stays in the plan. Depending on your match and current participation levels, that can add up to a lot of additional contribution dollars.

Oddly, as real as that financial impact is, that’s not the reason I most often hear from plan sponsors. Instead, they are (still) more inclined to suggest that the longer-tenured workers have had—and rebuffed—their opportunity to participate in the plan. Many plan sponsors remain worried that these longer-tenured workers will consider such “un-permissioned” actions to be some kind of personal affront. And yet, five years after the passage of the PPA, all I ever seem to hear are stories about how those more-seasoned employees are appreciative, even thankful, for finally being enrolled in the plan. It’s as though they heard the messages all those years, knew they should be doing something about retirement, but didn’t quite know how to get started.

There’s another interesting finding from PLANSPONSOR’s DC Survey, and it has held true for several years running. Asked about their motivation for adopting automatic enrollment, the vast majority—nearly two-thirds, in fact—say, “Our organization wanted to be more proactive in helping employees save.”

Perhaps it’s now a good time to help the rest of them.

—Nevin E. Adams, JD

Group “Think”

Somewhere over the course of your academic or professional career, I’m sure you’ve been exposed to a group exercise dealing with being stranded in an inhospitable place (the moon, or maybe a deserted island) with a limited amount of supplies, and a limited amount of time to choose from those supplies to ensure your survival.

In these exercises, you’re asked to make those picks as an individual exercise, and then put together with a group to make group choices. Not only are the group choices generally different, they are nearly always “better” (more likely to ensure survival) than those made by individuals. The point of the exercise is, of course, that we make better decisions working together as a team than we do trying to make them on our own—and it generally works out that way.

Sure, that may work in hypothetical situations where none of the group members has any particular expertise. But if I’ve crash-landed on the moon, and there’s a trained astronaut in the group—well, let’s just say you’re probably better off following their lead than putting things up for a vote.

That said, to me, the point of that exercise isn’t necessarily that group decisions are better than individuals’—they frequently aren’t, IMHO—but that groups we are part of make different decisions than we might as individuals.


Now, sometimes that inures to our benefit. There is certainly value in a collective experience/perspective, and there is an important collaborative element in just being able to bounce ideas off other people. Moreover, there are times when individual members of the group have knowledge and/or expertise that everyone doesn’t have. And let’s face it—plan sponsors make a lot of individual decisions, but even relatively small employers are inclined to rely on the collective experience of a group when it comes to making plan design and investment decisions. That’s supposed to make for better decisions but, as any retirement plan adviser can attest, not always.

Behavioral finance purports to explain why people make the financial choices they do, choices that are frequently at odds with what “rational” decisionmaking would support. In recent years, a lot of attention and focus have been directed toward behavioral finance, particularly as it applies to participant decisionmaking or the lack thereof (in fact, thus far most of those behavioral finance-oriented solutions – automatic enrollment, contribution acceleration, QDIAs - have been directed not toward helping participants make better choices, but rather toward making better choices for the participants).

In fact, in the cover story of the January issue of PLANSPONSOR, Gary Mottola, Associate Director of Investor Education at the Washington-based Financial Industry Regulatory Authority (FINRA), observes: “Plan sponsors are very aware of the biases that affect individuals, but I do not think a lot of sponsors are aware of these biases” that can affect them. Plan sponsors make most of their decisions in groups and committees, so they are vulnerable to both group and individual biases.”

What kinds of biases? Well, there are things like “shared-information bias,” where groups tend to focus on things of common knowledge/interest, even if it isn’t the most pertinent/critical. My favorite is “group polarization,” which speaks to a group’s tendency to make more-extreme decisions—both in cautious and risky directions—than individuals. In essence, the group tends to reinforce its own prejudices—and then some.

Even the best committees can make bad decisions, not because they aren’t well-intentioned, or even well-equipped to make complex financial decisions, but because they may make decisions based on dynamics of which they aren’t even aware.

What’s ironic, IMHO, is how intertwined the acknowledgement of such behaviors has become in thoughtful plan designs—and yet how infrequently we acknowledge their impact on those who make the complex financial decisions that affect the participant decisions.


- Nevin E. Adams, JD

Check out “Misbehavioral Finance”

What Lies Ahead

If 2010 was not quite the return to “normal” we might have hoped, there was more than enough—both new and old—to draw the attention of plan sponsors. Here is a look at the trends that were on our mind this past year—and those just over the horizon.

Doctor Bill? "Curing" Health Care?

What we said: It is still hard to believe that the Senate and House positions on any number of key issues can be reconciled—but then, there was a point in the summer of 2006 when many felt the same way about the Pension Protection Act. But if it does pass—or if it does not—it seems safe to say that the issue is not going away any time soon. What remains to be seen is if the “cure” is worse than what it aims to remedy.

Where we are: Given the legislative hurdles that the Patient Protection and Affordable Healthcare Act (PPACA) faced a year ago, it still seems amazing that the legislation passed. Of course, the dominant majorities in Congress that were necessary to carry that off are no more (some would argue in no small part because of their role in passing the legislation), legal challenges have been filed by roughly half the states, and the newly resurgent Republicans in Congress are threatening to “repeal and replace.”

What’s ahead: Common wisdom is that the legal challenges will fall short, and that President Obama’s certain veto of any attempt to repeal (much less replace) the legislation will keep those efforts at bay as well. Those in support of the legislation continue to believe that the American public will eventually warm to the idea (in fairness, many already do), while those opposed find vindication in the results of the recent mid-term elections. My guess is that we will still be talking about this a year from now—and that the issue will loom large in the 2012 election cycle.


Fee Fie? Revenue-Sharing Litigation

What we said: Barring a smoking gun discovery among the cases already filed, it seems likely that the laws—and disclosures—will change before the litigation has any real impact. On the other hand, it is entirely possible that the mere existence of that litigation—and the ever-present litigation threat—will serve to reform the system in a way, and on a schedule, that would not otherwise have been possible.

Where we are: No smoking gun yet, but four years in, a number of the cases have settled, another group has been dismissed and, by my count, only one has been fully adjudicated (and that in favor of the plaintiffs). The courts are split on the issues, and many have been willing to extend plan fiduciaries the benefit of the doubt, so long as participants had the ability to make their own investment choices. As litigation worries go, this brand drew the highest level of concern in PLANSPONSOR’s annual Defined Contribution Survey—but it wasn’t much. As for that much-anticipated “second generation” of lawsuits? Well, somewhat surprisingly, it has yet to materialize.

What’s ahead: This year the Form 5500 took a big first step in prompting a new level of fee disclosures, and the near-final proposed regulations on 408(b)2 should carry that one step further. The Labor Department continues to challenge the courts’ generous application of ERISA 404(c)’s shield—and has gone so far as to make its point clearer on the application of 404(c) with the addition of language in the recently proposed participant fee-disclosure regulations. Many seem to think that more disclosure—and the more public disclosure in the form of Form 5500—will simply serve to provide the plaintiffs’ bar with fuel for the fire, while others believe that more, and more consistent, disclosure will make it easier for fiduciaries to know what they are paying and if it is reasonable. My guess is that both will turn out to be correct.

Auto-Premonition—Doing It for Participants

What we said: Automatic enrollment may have taken something of a “holiday,” but it seems unlikely to be “over” as a trend. Look for it to pick up the pace again in 2010—and for the Obama Administration to turn its attention to the issue in the next year (or two).

Where we are: Well, in many respects, it was déjà vu all over again—with a sluggish economy doubtless contributing (no pun intended) to another flat year for automatic enrollment adoption rates. Still, while the overall adoption rate in PLANSPONSOR’s annual Defined Contribution Survey was slightly lower this year, there was a discernable uptick in adoption at the largest programs—even if small and micro plans showed no change at all. That said, the primary motivation this year, as it has been the past two, has been to be more proactive in helping workers save, and there’s every indication that it will remain so in the future.

What’s ahead: I’m sure plans will continue to adopt the design—for all the right reasons—but it is hard to see anything leading to any kind of major acceleration in the trend in the short term.

Default Lines—Targeting Target-Dates

What we said: We don’t know yet what regulators may try to do to help ensure that investors—particularly near-retirees—are not misled by the simplicity of a fund title and marketing pitch. Plan sponsors are on notice that there are differences here and, with luck, will continue to ask pointed questions. Because, after all, when you’re selling “you don’t have to worry about it,” somebody has to.

Where we are: Much of the “damage” from 2008 has been restored, providers have taken pains to ensure that buyers understand their underlying glide path assumptions (certainly those having to do with equity allocations at age 65), and regulatory bodies have taken some baby steps in helping individual investors better understand these offerings. All in all, the storm seems, for the very most part, to have passed.

What’s ahead: More and better disclosures, a growing interest in offerings that take more into account than mere retirement date (including managed accounts), and more discussion around the importance of open architecture solutions and concerns about the (lack of) ERISA fiduciary status for the providers who bundle their own offerings together. But as for real change—failing another sharp stumble in the markets—most seem to be content with the way things are.


Next up: Pension Funding, Advice, and the Roth 401(k)

"Sure" Things

In a very real sense, this has been a “rebuilding” year for many plan sponsors and participants: a time spent rebuilding account balances, resurrecting and/or reviving employer matching contributions, a time for shoring up participation rates, and—in some cases—restoring trust. The markets, overall, have been sympathetic to those causes, but in many respects, the still-soft economic trends doubtless weighed on the kinds of dramatic trend shifts that we have seen in recent years.

That said, only a quarter (24.9%) of some 6,000 plan sponsor respondents said that “all or nearly all” of their participants were deferring enough to take full advantage of the employer match, a reading that declines sharply with plan size. Additionally, participation rates were roughly flat with a year ago; with responding plans reporting a combined participation rate of 71.5%, compared with 72.3% a year ago. The median participation rate was also lower; 75.0% in 2010, compared with 78% in last year’s survey.

As for automatic enrollment, the 2010 trend line was mixed. While the overall adoption rate was slightly lower this year, there was a discernable uptick in adoption at the largest programs (62.7% in 2010, compared with 52.3% a year ago) and about a 10% increase in the number of mid-size and large programs—but small and micro plans showed no change at all. The overall pace of contribution acceleration—that process of providing for annual increases in the rate of deferral—slipped from a 15.5% adoption rate in 2009 to just one in 10 plans this year (though most of that decline came from the smallest plans). However, even the adoption rate at the largest plans was effectively flat from a year ago.


The number of plans not offering some form of financial/investment advice continued to shrink. In this year’s survey, fewer than one in four plan sponsors did not offer that support, though larger programs were more likely to eschew the option. Relying on a financial adviser outside the plan was the preference for 37.5% of this year’s respondents, though that option was significantly more appealing to micro and smaller employers. While there continued to be different trend lines in different market segments, there was a distinct and noticeable trend across market segments toward offering—and accepting—“help.”

But as I sorted through the results of our annual Defined Contribution Survey, the one thing that emerged as something of a theme across multiple categories was—a lack of clarity. Plan sponsor respondents—and I maintain that those who respond to our survey are some of the most knowledgeable and actively engaged in their responsibilities—expressed what I thought were relatively high levels of uncertainty around several key plan-design elements: fees, target-date glide paths, retirement-income offerings, the focus of their investment policy statements, and even the “best” option for a qualified default investment alternative (QDIA).

Now, that may simply be a reflection of the wide array of choices available, the pace of new product development, and the unsettling effects of volatile markets. In fact, it might even reflect a certain level of prudent humility on the part of serious plan fiduciaries, who are aware of just how much they don’t know in the midst of that change and turbulence and are willing to own up to that reality.

After all, as Mark Twain once said, “It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so.”

—Nevin E. Adams, JD

Decision Decisions

As a parent, you spend a lot of time telling your kids what to do, and perhaps more time than you think you should convincing them that it was their idea. If you’re lucky, you get to watch them make the “right” choices on their own—and to see them turn out well in the end. What you really try to avoid doing, certainly as they enter adulthood, is to make those decisions for them.

With defined contribution plans, over the last three decades or so, mostly we told workers what to do (or at least what people very much like them should do). And, despite a lot of hand-wringing to the contrary, most did. There were, of course, “holdouts”—a stubborn and/or inattentive group that resisted those entreaties, at least up until the point at which we did the right thing “for” them by automatically enrolling them in these programs. One might have thought that their resistance was thoughtful, perhaps principled, and maybe economic—and yet, survey after survey shows that those who were defaulted in stayed there. Were they lazy, afraid to make the wrong decision, unable to make any decision, or merely inattentive? Perhaps all of the above. Regardless, the debate about whether we should “impose” on them our sense of the right thing to do—to make that decision for the “recalcitrant” minority—would seem to be over.

The New Frontier

The new frontier in participant decision-making appears to be retirement income or, more precisely, helping individuals make arrangements for a suitable stream of income post-retirement. There is a general—and perhaps increasingly pervasive—sense that the solution to this challenge is already at hand (or could be with a tweak here and there): the annuity.

That assumption was in evidence last week at a presentation by a panel of behavioral finance academics at an event sponsored by Allianz (1). As part of its response to the Labor Department’s RFI on retirement income, Allianz had worked with the inimitable Schlomo Benartzi to assimilate a wide range of behavioral finance techniques to better understand participants’ reluctance to embrace annuities (at least in large numbers), and to help remedy “the annuity puzzle” (yes, it even has a name, apparently). Certainly from an academic perspective, there is no valid reason why an individual seeking a dependable stream of income in retirement wouldn’t take advantage of a product that purports to do just that. And yet, in the “real” world, individuals continue to defy those expectations.

All of which, to my ears, began to beg the question, Should we be helping participants to do the “right” thing about retirement income, as we did about retirement plan enrollment? Should we be making that decision for them as well?

It is an idea that is already “out there,” and one that seems of interest to the Obama Administration. Certainly there is a concern that many take their multiple defined contribution distributions between “now” and whenever retirement finally occurs in cash and deploy them for purposes other than retirement. This “leakage” from the system almost certainly depletes the accumulative effect of retirement savings for many younger and lower-income workers, leaving them to literally start over at their next place of employment (there is some evidence that larger balances accumulated by older workers are more routinely rolled over into tax-advantaged vehicles such as an IRA).

Which again leads one to ask, what WOULD be the harm in letting a default mechanism make the “right” decision for them, certainly so long as they could opt out? Hasn’t our experience with automatic enrollment shown not only that people are willing to let good decisions be made for them, but that they appreciate it as well?

We once resisted automatic enrollment as a design choice for reasons that seemed just as daunting: We didn’t know the “right” deferral percentage, weren’t sure how it should be invested, worried that it would lose value between the time it was withheld and (potentially) returned, and were bothered by the potential conflicts between state wage law and federal directives. The Pension Protection Act effectively resolved those issues, provided a structure for a valuable safe harbor protection, and yet managed to avoid mandating its approach. As a result, it’s more likely than ever that more savers will have more savings to manage at retirement, perhaps for longer in retirement, than would otherwise be the case.

Now, for most situations at present, the retirement income amounts involved may well be too small, the products available too expensive and/or complicated, the protections for employers and participants alike too vague, the portability and/or access to the funds frustratingly problematic. And, let’s face it: Current annuity designs (2) don’t really come in a convenient “trial size.”

Still, IMHO, we need to focus on creating workable, sound default decisions—because the alternative for many until we do will be making decisions by default.


—Nevin E. Adams, JD

(1)All in all, it was a fascinating presentation, and the report summary that accompanied it is well worth a read (see “Annuities Get a Behavioral Finance Makeover” ). Those reports included notions that workers, and especially older workers, pay too much attention to recent stock market movements, suffer from a “hyper” aversion to risk, and, after their mid-50s supposedly have a particularly tough time making complex financial decisions. All of which purported to explain not only why workers don’t make good investing decisions at retirement, but perhaps even to suggest that they wouldn’t want to (ironically, one study indicated that, given the opportunity to make an active decision to purchase an annuity, a surprisingly robust 49% did).

(2)For the record, I’ve no particular affinity for the annuity concept per se vis-à-vis an alternative that provides the reliable stream of income at retirement for a reasonable price, and no reason to think that an adviser-led participant solution couldn’t compete very effectively with an annuity, much as an adviser-led investment program can do as well (and perhaps better) as a qualified default investment alternative. Of course, every participant doesn’t have access to an adviser, and many don’t have accounts large enough to warrant those attentions—and we need solutions for those participants as well.

“Different” Strokes

Having been born in the Midwest, lived a quarter of my life in the South, and now another sixth in the Northeast, I can tell you—people are different. However, having worked for huge firms and considerably smaller ones, I can also tell you that, when people come together in groups, they are not as different as you might think (or hope, as the case may be).

There is a “common wisdom” in our business that suggests that all plan sponsors are, more or less, alike; that large plans are the inevitable early adopters of trends that, sooner or later, trickle down to plans of all sizes. Consequently, those who make their living trying to discern trends and patterns frequently focus on the behaviors in evidence at larger programs—figuring that, in three years or so, those same characteristics will emerge across the spectrum.

There’s some logic to that perspective, IMHO. Plan fiduciaries frequently draw comfort and solace from the experience of others, and smaller programs can hardly be faulted for adopting plan designs and approaches that have been “vetted” by programs with more copious resources. Moreover, providers frequently introduce innovations with price tags that initially discourage smaller-program adoption (at least until later iterations are included as part of the “package”).

That said, I have always found it dangerously simplistic to assume that small plans will, inevitably, follow along eventually in the footsteps of their larger cousins.

"Less" Likely

Consider that smaller programs—let’s use $5 million in assets and less (though some would carve even that in half)—are significantly less likely to have adopted automatic enrollment than those with more than $200 million; in PLANSPONSOR’s DC survey, only about one in five small plans had done so, compared with more than half of larger plans. Now, a goodly number of those smaller plans already had safe harbor designs in place, so had no “need” of automatic enrollment. In fact, one could argue that the safe harbor design is a kind of automatic enrollment. Smaller programs were also much less likely to have a contribution acceleration design in place (just 8.7% compared with about a third of larger programs).

PLANSPONSOR’s Annual DC Survey, which captures the perspectives of some 6,000 plans, found that smaller programs were more likely to make participants wait to vest in employer contributions, and only half as likely to have embraced immediate vesting—differences that admittedly might be predicated on economic considerations.

Only about half of smaller programs had an investment policy statement (IPS) in place, compared with nearly nine of 10 among larger programs. Perhaps not surprisingly, smaller plans reviewed their plan investments much less frequently (49% said annually, the most common response, while more than half of larger plans did so quarterly). They were also less likely to review fees regularly—and much more likely to “never” review them (one in 10).

Consider also that smaller programs were less likely to have adopted a target-date (TDF) solution as a default (28.6% versus roughly two-thirds among larger plans); though, even among smaller programs, target-dates were the predominant default fund choice. They were, however, more likely to be unsure that TDFs were the “best” QDIA option (44%), and more likely to doubt that their recordkeeper was offering the “most appropriate” TDF option.

"More" So

Investment performance was significantly more important to smaller plans, and fee transparency was also noticeably, if modestly, so. Things like financial strength, market image/reputation, and recognizable “brand name” funds stood out in their ranking of preferred provider attributes. However, when it came to things like participant service, reasonable fees, and provider Web site, there was no apparent difference at all.

Smaller programs were more likely to offer advice, and MUCH more likely to offer advice via an adviser outside the plan. Smaller plan sponsors were significantly more focused on the quality of advice to plan participants than larger programs, more worried about the reasonableness of fees, and placed less emphasis on adviser independence but greater emphasis on the ability to negotiate on behalf of the plan than did larger programs.

Of course, the service criteria are expressed in relative, not absolute, terms. That certain aspects were more important to smaller plans does not mean that others were unimportant. However, for those who work with and/or focus on smaller programs, those differences can be significant.

After all, we may all be alike—but that doesn’t mean we’re all the same.

—Nevin E. Adams, JD