The retirement plan industry has undergone significant changes since the passage of the Pension Protection Act of 2006 by instituting many ‘automations and nudges’ to help streamline decision points for participants. Some of the empirical evidence below suggests that these changes are helping to simplify the decision-making process and improving participant diversification and participation rates.
- A Vanguard study from 2018[1] reported:
- Participation rates nearly doubled under plans using automatic enrollment (93% versus 47%)
- Participation was stickier under the automatic enrollment plans (93% of participants remained in the plan after three years versus 62% of participants that chose to enroll under voluntary enrollments plans)
- Participation rates increased for young and low-income earners under automatic enrollment plans
- The average number of investment funds offered for participant contributions for all plans has decreased from 28[2] in 2012 to 25[3] in 2018. The decrease is starkly larger for plans with participant counts greater than 1,000; with 20 fewer funds being offered (57 in 2012 to 37 in 2018). Changes in smaller plan segments were observed, but to a lesser degree. In our experience, some large segment plan sponsors sought to simplify their operations by consolidating to a single vendor for the 403(b) plan.
- The percentage of plans that default participants into an investment option that enroll but don’t select an option has increased from 71%2 in 2012 to 80%3 in 2018. The most common default option selected for participants in the target retirement date fund, at 67% for all plans. Here too we’ve seen a big change in the past six years. Target retirement date funds have increase by 30% percentage points and target risk funds and money market funds have dropped from a combined 37% to just 10% for defaulted participants.
With these macro trends as a background, some of our client assignments include the opportunity to ‘restart’ a retirement program as they transition their 403(b) plan from individual to group contract. The motivation for this change is to allow the plan sponsor to acquire control over the plan assets held in the group custodial contract should plan level changes be required in the future. This project not only includes developing a new investment menu but often coincides with a review of the plan’s design and treatment of fees.
Below are the features that are typically discussed with clients going through these exercises. Please note that there are cost implications of some features and thus those benefits may not be affordable for all each plan sponsor.
- Auto enrollment
- Auto increase
- Re-enrollment
- QDIA selection
- Tiered investment lineup
- Communication strategy
- Distribution options
- Participant loans
- Roth contributions
- Fee assessment
In the next couple of blog posts, we will explain how we discuss the benefits and drawbacks of these plan features and how our clients consider the implementation impacts on their workforce.
Notes:
[1] The Vanguard Group: Automatic enrollment: The power of the default. February 2018.
[2] PSCA’s 2012 403(b) Plan Survey
[3] PSCA’s 2018 403(b) Plan Survey
Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Multnomah Group does not provide legal or tax advice. Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.