Reading some reports from institutional consultants could make you believe that most plans are deploying auto features. But the reality, especially for smaller plans, according to Vanguard’s “How America Saves” report, is different. There are valid reasons why many smaller 401(k) and 403(b) plans are not offering auto features, but the key to expanding them is retirement plan advisors.
First the reality: reporting on 21,261 plans with $50 million or less in assets and 1,400 larger plans, just 24% of smaller plans offer auto enrollment compared to 61% of larger plans—the small plan numbers are up from 15% in 2017. Just over half of smaller plans with auto-enrollment offer auto-escalation, compared to 69% for larger ones.
The results are stark: smaller plans participation rates without auto enrollment are just 52% compared to 82% for plans with this feature; participation at larger plans without auto enrollment is 65% and 94% for those that do offer it. Average deferral rates of 7.7% are the same for both markets—no difference for plans that auto-enroll. Larger plan average account balances are $148,000 compared to just under $80,000 for smaller plans.
Only 46% of assets in smaller plans are in target date funds compared to just 42% in larger plans, but new contributions into this professionally managed investment are 60% for smaller plans and 64% for larger ones that have fewer investment options.
Because small businesses account for 99.9% of companies and nearly half of all employees, the focus is on smaller plans, of which more than 90% use an advisor, according to the recent Fidelity survey. And because the plan administrators at smaller organizations juggle 10 jobs with little to no formal training, the advisor becomes the key to advocating for new features like auto-enrollment, auto-escalation and TDFs, not to mention managed accounts, PEPs, retirement income and private investments.
The auto or ideal plan, which can boost account balances dramatically, includes:
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Auto enrollment and re-enrollment
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Deferral at 6%
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Auto escalate 1% annually, capped at 12%
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Stretch the match if auto escalation is not offered
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Professional managed investments like TDFs or managed accounts
The ideal plan does not increase fiduciary liability and can be less work if there is 360-degree payroll integration—it can cost more if there is a match, assuming greater participation. Auto escalation should occur when or around the time workers receive a raise, so they do not feel like they are losing something.
Organizations with high turnover will be creating a lot of smaller orphan accounts and may want to wait before auto-enrolling. Some smaller plans and larger blue-collar or retail organizations are concerned that lower-paid workers cannot afford to contribute—the Vanguard report shows that the average employee compensation for those not participating in smaller plans is just $34,000. Some experts, like Mark Iwry, advocate for richer matches for lower-compensated workers to incentivize them.
While professionally managed investments make sense as the QDIA, without engagement or additional data, using a managed account as a default might increase cost without much, if any, benefit over a TDF. There is an opportunity for the employer or advisor to engage with participants who opt out, who are at least taking some action.
Some plans push back on stretching the match as participants maxing out would have to increase their contributions. Other plans feel that the auto plan is too paternalistic, preferring to let people make choices.
If DC plans truly aspire to replace DB plans, there needs to be a guaranteed element, which might occur automatically around the age of 50 within a TDF or managed account. The retirement income can be moved to an institutional platform when the participant retires or separates, eliminating transferability issues and not forcing the plan to retain the assets, which most smaller plans do not want to do. Some experts suggest that retirement income needs to be customized, but DB plans worked well without it. Keep it simple!
How can plans overcome objections and inertia to deploy the ideal and even perfect plan? National averages are not useful—plans should compare themselves to the 10 to 12 organizations in their area that they recruit from or lose employees to. With the help of their RPA, they should create a presentation with the goal of being in the 60th to 70th percentile.
The ideal or perfect plan, which is by far the most effective way to improve outcomes, is an inexpensive way for companies to attract and retain the best and the brightest but plan administrators need their RPAs to step up and be their advocate.