“We have advocated for continued adoption of automatic features (auto-deferral, auto-increase) for employer sponsored retirement plans. What sort of trends are you seeing with your clientele? Are some automatic features more common than others? What sort of reasons are you noticing for those clients who have avoided automatic features? (Are they too paternalistic, or expensive?) Finally, what, if anything, are you doing as a recordkeeper to improve participant outcomes using automatic features?”
We have advocated for continued adoption of automatic features (auto-deferral, auto-increase) for employer sponsored retirement plans. What sort of trends are you seeing with your clientele?
Plan sponsors are now coalescing around the idea that a 401(k)’s success is measured by the outcomes it produces for individual participants, helping them become more prepared for retirement than they would be on their own.
We see sponsors focusing on three core components. First, sponsors are embracing smarter plan design, including more automatic features. This is buoyed by the understanding that participants are often best served when the plan sponsor takes action on their behalf to get them started on the journey toward retirement preparedness.
The second trend is advice. Historically, we have relied on individuals to make their own 401(k) investment decisions. But there is a growing understanding that participants would fare better with help. As a result, we’re seeing increased adoption of managed accounts wherein a professional manages a participant’s investments based on multiple personal data points.
Finally, we see a growing awareness of investment costs. The industrywide movement towards fee transparency has spurred sponsors’ desire to understand the cost of the investment vehicles inside 401(k) plans. These fees are the most significant cost a participant experiences and therefore may have the greatest impact on how much they ultimately save for retirement. Sponsors are increasingly incorporating low-cost index mutual funds to drive down that investment expense, and more recently, they are selecting low-cost exchange-traded funds (ETFs) to lower costs even further.
Are some automatic features more common than others?
Automatic features are not a new concept. Over the years, about 50 percent of our clients have adopted automatic enrollment; that is, putting participants in the plan automatically, unless they choose to opt out.
Automatic savings increases, used by about a third of our client base, are also common. With this feature, a participant’s contribution rate is raised by a specific percentage (usually 1 or 2 percent) annually up to a desired level. This gradual increase is effective because the initial rate at which most people start contributing is often insufficient.
Recently, we’ve seen more sponsors adopt an approach whereby all plan participants are automatically enrolled in managed account services, but can opt out if they choose. We refer to that as a plan reset. When sponsors employ this approach, about 85 percent of participants stick with the advice.
Participants consistently tell us that they want professional advice; however, it can be difficult for them to seek out and implement it on their own. With a plan reset, the employer does it for them, allowing participants to start in a place they are trying to get to. Over the past few years, we have seen more than 10 percent of our clients move to this approach, putting them at the forefront of that trend.
What sort of reasons are you noticing for those clients who have avoided automatic features?
Some sponsors have been reluctant to implement automatic enrollment because of the costs associated with recordkeeping or the company match, or both. The reality is that auto-enrollment has plateaued, with about 40 percent adoption across the industry. The automatic savings increase has some room to grow, but it likely will plateau, probably at a similar percentage.
The plan reset still has room to grow, and an employer can implement it without the same cost concerns that come with other automatic features. There is a cost associated with professional management that is borne by the participant, but using index funds in the plan still can mean overall lower costs.
Some sponsors are initially reluctant to adopt the plan reset approach because they’re nervous about their employees’ reaction, but when they actually implement it, they are greeted with gratitude. The same concerns were raised when automatic enrollment and automatic savings increases were new, but participants overwhelmingly stick with automatic features. They trust their employer to make beneficial decisions on their behalf.
Finally, what, if anything, are you doing as a recordkeeper to improve participant outcomes using automatic features?
We’re also investing in enhancements so plan consultants, like Westminster Consulting, can develop the portfolios used in the managed accounts. Enabling consultants to construct custom portfolios based on their knowledge of the unique needs of a plan can benefit participants.
By reducing investment expense with index funds, especially exchange-traded funds, and implementing a low-cost managed account, plan sponsors have actually reduced all-in costs while increasing the value of the 401(k) benefit.
This approach represents a true value shift. Sponsors now see the value of putting their participants in a much better starting place than they would be through traditional means. Despite sponsors’ best efforts, years of education have not successfully turned most participants into savvy investors or significantly moved the retirement outcome needle. In concrete terms, research from Morningstar suggests that participants receiving advice as part of a managed account service could end up with nearly 40 percent more income in retirement. We aim to empower plan sponsors to implement innovative plan design to build in a level of engagement that will give participants the possibility of better retirement outcomes over the long term.