Research

DATA & RESEARCH | PLANADVISER April 2008

2009 Micro Plan Analysis - Small World

Data show micro plans are not simply miniature replicas of the larger-plan space

By Alison Cooke Mintzer See Archive >

Startup plans, and those slowly growing but still part of the micro plan segment, have traditionally not been seen as appealing to many advisers because the economics of serving the plan do not seem to be advantageous. However, more than half (61.8%) of micro plans with less than $1 million in assets responding to PLANSPONSOR’s 2008 Defined Contribution Survey say they use the services of a financial adviser. That is in line with surveyed plans of all sizes—which still means that nearly 40% of those plans are without the help of an intermediary.

Plan Demographics

Although it is not much of a difference, micro plans have a slightly lower participation rate than plans overall: 69.0% compared with 73.8% (of course, with smaller numbers of employees, even one person not participating has a larger effect on that rate than it does on larger plan figures). They also are more likely to make employees wait to participate in the plan, as more than half (50.8%) delay participant eligibility for more than six months (compared with 31.2% of plans overall).

Although automatic enrollment has helped boost participation at nearly one-third of plans overall, only 13.5% of micro plans are implementing such a feature—though that may not make much of a difference if micro plans do not have significant turnover to make automatic enrollment worthwhile. However, of the plans that did implement automatic enrollment, it was more likely to be used for all employees (66.1%) than at plans overall (40%).

Ongoing Evaluations

Somewhat surprisingly, micro plans say they frequently evaluate their DC providers and costs or fees. That may raise questions about what a micro plan sponsor considers “formally" evaluating, but 35.6% of micro plan sponsors say they formally evaluate their DC provider annually, and 15.9% say they formally evaluate every one to less than two years (both figures are larger than the number of plans overall that say they evaluate on that timetable).

More than half of micro plans (54.0%) also say they formally review costs and fees annually (compared with 71.4% of all plans), with another 14.2% doing so every one to two years (more than the 11.4% across all segments). However, 15.1% say they never review plan costs.

Micro plans have the most disparity with plans as a whole when it comes to reviewing investment options formally. Only 10% say they do so quarterly, and another 9.3% say the review is completed twice per year (compared with 31.1% and 16.0% of all plans, respectively). The largest segment of micro plan sponsors (43.3%) formally review the investments annually, and another 12.3% do so every one to two years. However, again, a noticeable segment of sponsors (14.4%) never do so.

Part of that lack of review may be as a result of a lack of organizational structure to deal with the required due diligence. For example, 76.2% of micro plans do not have an investment committee for the DC plan. Although this could be due partially to the size of the companies sponsoring these plans, there is definitely room for improvement. Furthermore, less than half (42.5%) of these plans have an investment policy statement (IPS) (compared with 71.0% of overall plans).

Even those micro plans that do have an IPS in place are less likely to be vigilant about the compliance with the statement: 43.2% of micro plans say they rely on outside vendors for compliance; 10.0% say they are not very vigilant and only periodically check IPS compliance; and 2.6% are not very concerned with such compliance. Encouragingly, however, 44.2% of micro plans are very vigilant about monitoring compliance with the statement, although that is less than the 51.9% of plans overall.

Investment Options

One area advisers frequently are expected to lend a hand is in the selection and monitoring of investment options, and it appears that, in selecting investment options for the micro plan space, there is room for improvement.

Micro plans are, in general, less likely to follow trends at the same time as the general industry, and that is true about asset allocation funds, which are not as popular in the micro plan space as they are across the industry. Only 15.4% of micro plans offer lifecycle funds, compared with 39.9% of plans overall; 11.1% of micro plans offer target-risk funds, compared with 22.2% of all DC plans surveyed; and 16.2% of micro plans offer managed accounts, less than the 20.7% of plans overall.

Default investments are an area where micro plan sponsors seem a little slow to follow industry trends. Although 44.7% are using target-date funds, balanced funds, or managed accounts (the qualified default investment alternatives—QDIAs), another 42.9% are still in stable value funds or money market funds as the defaults (compared with 64.9% and 14.9% across all plans, respectively).

The small-business and micro plan arena presents challenges for plan sponsors attempting to navigate unfamiliar waters, trying to consider both the needs of the retirement plans and the specific financial planning needs of the small-business owners themselves. The micro plan segment is one group of plans that seems poised for more help from the wealth of knowledge available in the retirement plan advisory segment.

Methodology

In July and August 2008, approximately 35,136 survey questionnaires were sent to defined contribution (DC) plan sponsors from the magazine database of PLANADVISER’s sister publication PLANSPONSOR, as well as client lists supplied by DC providers; 5,973 total usable responses were received by the close of the survey on September 10, 2008. Of the total respondents to the 2008 PLANSPONSOR DC Survey, 641 (10.7%) were plans with less than $1 million in DC assets.

 

Illustration by Harry Campbell