"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

“Miss” Perceptions?

Next week we will launch our eighth annual search for the nation’s best retirement plan advisers.

Each year, we receive a number of inquiries from advisers about the awards, many that fall into a category I tend to think of as “exploratory”—feelers as to what we are looking for.

Well, at its core, what we hope to acknowledge—and, thus, what we are looking for—hasn’t changed at all from when we first launched the award in 2005: advisers who make a difference by enhancing the nation’s retirement security, through their support of plan sponsor and plan participant information, support, and education. And, since its inception, we’ve focused on advisers who do so through quantifiable measures: increased participation, higher deferral rates, better plan and participant asset allocation, and delivering expanded service and/or better expense management.

Now, we’ve always tried to be very transparent about the award, and the process that underlies the selection. That said, I know that some have questions—and perhaps misperceptions—about the award and how it is administered. So, based on conversations I have had with some of you over time, not to mention the general inquiries that emerge around an award that garners this much attention, here are five things you should know about PLANSPONSOR’s Retirement Plan Adviser of the Year award:

(1) It’s NOT a personality contest. Sure, advisers who are nominated by 30 of their closest friends and wholesalers stand out (though only after you’ve passed the quantitative round). But even then you get no extra points for having support in the “community.”

(2) You will have to provide actual data about the impact your firm is making on things that really matter. We look at participation rates, deferral increases, participant asset allocations, and even fee negotiations. And we will talk to your plan sponsor clients (and expect them to confirm your data). If you don’t have, or aren’t monitoring, those kinds of data, you probably aren’t ready for this award.

(3) Award semi-finalists and finalists are chosen based on a blind review of qualification data. Our process selects semi-finalists and finalists based solely on data and screened reference checks. Only after the finalists have been selected are their names known to the judges.

(4) Our judges sign nondisclosure agreements. Yes, we have judges for this award—judges who not only know the space, but know how to evaluate the data. Two of the five judges for each award are advisers; prior winners of the award, in fact. We have always thought their perspective was important as a “real world” check on the award criteria. That said, we understand that some advisers might be reluctant about sharing data about their practice1 with potential competitors—and our judges agree, in writing, to respect the confidentiality of that information.

(5) Those who don’t participate don’t win. It may be an honor “just to be nominated,” but those who don’t respond completely and accurately to the aforementioned requests for information don’t make it past the nomination round.

May the best adviser(s) win—and, based on our prior winners,they generally do.

—Nevin E. Adams, JD

Editor’s Note: Those who have additional questions should feel free to e-mail me at nevin.adams@assetinternational.com, or Alison Cooke-Mintzer at acooke@assetinternational.com

More background information on the award is available HERE
Additional information is available here


1 We’re not talking about client lists here; average rates of deferral and savings across your client base, your average client size, that kind of thing.

QDIA Essentials

PLANSPONSOR’s National Conference last week featured a series of panels titled “Five Things You Need to Know About…” focused on a series of topics.

One of those was qualified default investment arrangements (1), or QDIAs—and while the “five things” that follow are somewhat different from the list presented by that panel, what follows was certainly inspired by the discussion.

Here’s my list:


(1) You don’t need to have a QDIA to get 404(c) protection.

IMHO, one of the most marvellous things about the Pension Protection Act’s defined contribution provisions was that they weren’t imposed on plan sponsors. They provided clarity, structure, guidance, and, yes, protection on things like automatic enrollment, contribution acceleration, and default fund choices—but didn’t require that you embrace these concepts, unless, of course, you hoped to benefit from the protections associated with adhering to those structures. Sure, IMHO, it’s a lot easier to obtain 404(c) protection under the umbrella of the PPA’s qualified default investment alternative (QDIA) provisions—but plan sponsors who had those protections in place before the PPA can still have them by still continuing to doing the things required to retain them today.

(2) You need to pay attention to participant notices.

Among all the fuss over what a QDIA is, and the applicable structures for automatically enrolling participants in those options, it has been easy to gloss over the requirement to notify those defaulting workers that they are being defaulted, and that they have a right to opt out—both upon enrollment and annually thereafter. Failure to provide the proper notices at the proper times has long been an impediment to fulfilling 404(c)’s conditions—and, if you’re not careful, perhaps enough to thwart QDIA’s shield as well.

(3) A QDIA doesn’t have to be a target-date fund.

Admittedly, target-date funds are the low-hanging fruit of QDIA options. While balanced funds, managed accounts, or even target-risk funds are explicitly acknowledged in the regulations, it is also clear that in order to be “qualified,” the QDIA must be structured in such a way as to take into account the age of the participant and/or the workforce (see “IMHO: It’s About Time” at http://www.plansponsor.com/IMHO___It’s_About_Time.aspx). New adoptions seem to be embracing the target-date approach, but, at least anecdotally, it seems that plan sponsors who previously had a balanced-fund default are finding ways to make it work.

(4) The fiduciary requirements to prudently monitor and select a QDIA are no less than for any other plan investment option—and they are fiduciary requirements.

Plan fiduciaries can reap significant benefits from the adoption of a QDIA, and participants even more so—if the option is prudently selected and monitored. Now, personally, I think you could make a case that the selection of an investment fund in lieu of any participant direction whatsoever (much less one that studies consistently indicate will likely never be reallocated) should, if anything, be held to a higher standard than that imposed on the “regular” investment options on the retirement plan menu.

But, at a minimum, in the QDIA regulations, the Labor Department made it abundantly clear that “selection of a particular qualified default investment alternative… is a fiduciary act and, therefore, ERISA obligates fiduciaries to act prudently and solely in the interest of the plan’s participants and beneficiaries.”

Moreover, that, “[a]s with other investment alternatives made available under the plan, fiduciaries must carefully consider investment fees and expenses when choosing a qualified default investment alternative.”

(5) Just because a default fund isn’t a QDIA doesn’t mean it isn’t a prudent default choice.

While target-date vehicles are certainly convenient for plan sponsors and well-received by participants—and explicitly acknowledged as QDIA-eligible—they aren’t the exclusive prudent choice for a default option. Of course, choosing something else—a target-risk fund with no age orientation, a balanced offering, or even a stable value fund—won’t afford you the same protections that a QDIA will. On the other hand, a well-chosen, thoughtfully monitored investment default might not require them.

—Nevin E. Adams, JD

(1) Default investments are investment options chosen by plan fiduciaries in situations where participants fail to provide investment instructions, either through some kind of administrative oversight, or in cases such as automatic enrollment. The Pension Protection Act of 2006 (PPA) provided certain specific conditions under which plan fiduciaries would be afforded special protections when certain specific qualified default investment alternatives were provided for that purpose.

Legends for Our Times

Ours is an industry of fairly recent invention–one that is, in many respects, only just beginning to emerge from the growth pangs of adolescence. Ours is an industry constantly and dramatically evolving–and one that all too often seems relentlessly driven to push us forward to the next challenge, through the next legislative overhaul, and onto the next wave of tumult in the markets, sometimes in the same six-month period. For plan sponsors, change is not only the order of the day, it is the day. That certainly has been true for the 15 years during which PLANSPONSOR has been published.

But if the pace is relentlessly forward, there are nonetheless those among us who have a vision that stands out from the crush of the day, who provide a better way for the rest of us, either through thoughts or deeds, to succeed in helping bring about a more secure future for those who depend on us.

As our 15th anniversary approached, we began thinking about those individuals--individuals who have made an impact on this business of retirement benefits. For clarity, we limited our focus to the past 15 years, though there are certainly individuals whose contributions predate that timeframe and whose impact is still felt today. We also limited our list to 15, though it could easily have been twice that size.

They are leaders, innovators, partners—some have challenged the status quo, others have laid the foundation for a new one, and still others have helped us all negotiate the period(s) in between. There are some familiar faces, as you might expect–many have appeared in our pages over the years, several were highlighted as “influencers” in our 10th anniversary issue, and a number have subsequently been honored with PLANSPONSOR’s Lifetime Achievement Award. There also are some with which you may not be familiar, though you are almost certainly aware of their contributions. We are pleased to be able to introduce them to you here. Admittedly, there may well be those on this list that some may challenge–or some not represented who have arguably made equally significant contributions.

This is, however, our list–15 who have, in our estimation, during the passage of the past decade and a half, made a lasting contribution to the nation’s retirement security.

There are those who make a difference in our lives– parents, spouses, mentors, friends–and then there are those who make a difference in all of our lives.

They are legends.

- Nevin E. Adams, JD

The legends are online HERE