Data & Research June 10, 2013

PSNC 2013: Automating Success

“Auto” plan features are on the rise.
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Nearly half of all retirement plans feature automatic enrollment, roughly one-third auto-re-enroll existing non-participant employees, and about 30% use auto-escalation. A panel of experts at the 2013 PLANSPONSOR National Conference (PSNC) spoke about how inertia can be used to produce better retirement outcomes—and when 100% participation is not the goal.

Auto-enrollment, re-enrolling and escalation are all more common in larger plans, but more and more small-plan sponsors are exploring whether automation is right for their participants. For those still waiting to add auto features, saying “I don’t want to touch their money” can sound a lot like “I don’t want to spend more money,” according to Matthew Mintzer, head of National Accounts at J.P. Morgan Asset Management.

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Plan automation can be a communication solution for large plans and a “quick fix” for discrimination testing in small plans, said Kevin Mahoney, vice president and premier benefit adviser of Global Institutional Consulting at Merrill Lynch. However, identifying the plan’s objective should precede any auto implementation. Does the sponsor want to keep people in the plan, or is there a high turnover rate among the majority of the employee population? “Focus needs to be on measuring success for the plan,” Mahoney said.

For Steve Glasgow, senior vice president and financial adviser at Avondale Partners LLC, automation is itself a measure of success. “We’re not at 100% [of our clients utilizing auto-enrollment],” he said, “but we’re pushing hard to get there.” On the other hand, Richard Davies, managing director of defined contribution (DC) at Russell Investments, said he once had a plan sponsor tell him: “I’m not trying to run the best 401(k) in America, it just needs to be good enough.” At this and other discussions at PSNC (see “PSNC 2013: Metric Taking”), the call to plan sponsors seemed to be: Know thyself.

 

A sponsor who offers a great plan may want his participants to take some initiative in the process, Glasgow said. As participants are not likely to re-think their approach to retirement, however, sponsors will have to change their strategy—and even how they view the benefit. Making enrollment easy is the first step.

According to Mahoney, people who are not already in the plan probably intended to enroll, but were unable at one time or another due to outstanding circumstances. The belief that auto-enrolling is somehow “unfair” to lower-income employees may be especially detrimental to that group, Davies added. These individuals may be unwilling or unable to save as much on their own, but they do not opt out of the plan, either.

Most people feel very positive about being auto-enrolled into a plan, Glasgow said. If you have a client who thinks it is “too paternalistic or creeping socialism,” Davies suggested requiring them to sign a “yes/no” form, which can result in similar enrollment rates.

The average auto-enroll deferral rate is 3%, a number that Glasgow fears may send the wrong message to participants and suggest they need less than they do. Mahoney said that it is incumbent upon plan sponsors to get the most out of their providers. One way to do that, he said, is by taking a more creative approach to match contributions. Stretching out a plan’s match—50% of the first 6% or one-third of the first 9%—can maintain company costs while multiplying participant savings rates. With 10% as the goal, many plan sponsors believe that a 6% starting rate with 2% automatic increase is the way to do it. According to Davies, “Six [percent of salary] is the new 3 [percent].” Mahoney took a stronger stance: “Auto-increase until they cry uncle.”

 

Sara Kelly 

The Markets June 10, 2013

ABC Testifies on Pension De-Risking

The American Benefits Council (ABC) testified before the ERISA Advisory Committee (ERIC) to describe the motivations behind employers reducing their pension plan liabilities by “de-risking.”
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Craig Rosenthal, a partner with consulting firm Mercer, testified last week on ABC’s behalf. He emphasized that the legislative and regulatory environment for pension plans has made sponsorship increasingly difficult over the past few decades.

Rosenthal pointed out that since the Pension Protection Act (PPA) became law in 2006, pension plans have been required, effective 2008, to fund any funding shortfalls over a seven-year period. Additionally, changes have been made to Pension Benefit Guaranty Corporation (PBGC) premium calculations that have resulted in pension plan sponsors generally paying higher premiums to the agency.

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“If funding and accounting obligations can be stabilized and the spiraling up of Pension Benefit Guaranty Corporation premium obligations can be reversed, there would be far less reason for companies to de-risk,” Rosenthal told the EAC panel.

Rosenthal explained that plan sponsors are considering the following factors when deciding whether to de-risk:

  • The size of the pension plan liabilities relative to the overall size of the plan, which affects the impact that funding and balance sheet volatility can have on the company;
  • The plan sponsor’s views on the economic outlook and the plan’s ability to withstand risk;
  • The administrative costs associated with maintaining the plan, including PBGC premiums, and the plan sponsor’s views on future premiums;
  • The plan sponsor’s ability to raise capital, if necessary, to de-risk the plan;
  • The existence of collective bargaining agreements; and
  • The plan sponsor’s ability to obtain accurate historical plan participant information.

“There is no one-size-fits-all answer as to why some companies adopt de-risking approaches and others do not, nor is there a simple answer as to why companies that do die-risk do so in different ways,” Rosenthal said.
 

Rosenthal discussed the two main approaches to de-risking—retaining liability thought liability driven investing (LDI) or transferring liability to a third party—as well as the related topics of full vs. partial de-risking, no cutbacks in participant rights, and participant decisions about lump sums. ABC’s ultimate recommendation to the EAC panel was to consider preserving defined benefit pension plans by mitigating the complex financial challenges imposed on pension plan sponsors.

The American Benefits Council is a national trade association for companies concerned about federal legislation and regulations affecting all aspects of the employee benefits system. Its members represent the spectrum of the private employee benefits community and either directly sponsor or administer retirement and health plans covering more than 100 million Americans.

Rosenthal’s full testimony can be downloaded from the ABC website.

 

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