Data & Research May 2, 2014

Small Businesses Increasing Retirement Savings Efforts

The smallest of employers are gaining enough confidence in the economic growth of their businesses to increase efforts to help employees save for retirement.
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Fidelity Investments latest Small Business Retirement Savings Analysis reveals increases in average balances and contributions in small businesses’ retirement benefits plans for the third consecutive year. According to the analysis, average balances in Simplified Employee Pension Plans (SEP-IRAs) increased by 92% to $84,410 from 2008 to 2013. Average balances in Savings Incentive Match Plans for Employees (SIMPLE-IRAs) increased 100.8% to $36,235. 

In addition to contributing to their own retirement, small business owners are contributing more to employees’ accounts, Brian Hogan, director of small business retirement products at Fidelity in Smithfield, Rhode Island, tells PLANADVISER. From 2008 to 2013, the employer contributions for employees to SEP-IRAs increased 17%, and SIMPLE-IRAs saw an increase of 13.3% in employer contributions to employees’ accounts, he says. 

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Hogan explains that SEP-IRAs are funded only by employer contributions, they do not allow for employee deferrals, and they have higher statutory contribution limits than other defined contribution plans. These tend to be offered by very small, mostly family-owned companies. SIMPLE-IRAs, however, are structured more like 401(k)s, where employees are allowed to contribute to their own accounts.

Offering these plans provides tax benefits for small businesses, Hogan notes. Mainly, they get to deduct any contribution made on behalf of employees from taxable income. In addition, if a small business starts a new plan, it can get a tax credit for start-up costs up to $500. SIMPLE-IRAs also allow employees to save income pre-tax, reducing their current taxable income.

For small businesses deciding to offer a retirement plan to employees, which type of plan to offer depends on the number of employees, how much administrative responsibility employers want, and what contribution limits they would like for themselves and employees, according to Hogan. Also, small business owners should determine whether employees want to make their own contributions to their accounts.

He notes that if a small business owner offers a SEP-IRA, the contribution made to employees’ accounts must be the same, in percentage or formula, as what the owner contributes to his or her own account. “If they don’t want to do that, or if they have a higher number of employees or employees want to contribute to the plan themselves, a SIMPLE-IRA is the best choice,” Hogan says.

He adds that with a SIMPLE-IRA, plan sponsors do not have the same fiduciary responsibility as they would with a 401(k) plan. They do not have to select an investment lineup for the plan; they choose a provider, and participants set up their own accounts and decide on investments. Hogan notes that if a business has more than 100 employees, it may not offer a SIMPLE-IRA, and will have to choose another plan type.

“It was encouraging to see the results [of our analysis],” says Hogan. “We’ve seen, as the economy turns around, small business owners are becoming more confident in their businesses and in making contributions to [their own and employees’] retirement.”

Data & Research May 1, 2014

How High Can DCIO Go?

A myriad of factors are driving growth in the DCIO (defined contribution investment only) market, and assets look likely to keep on mounting.
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The growth in DCIO assets stems from several trends, says Celine Dufetel, a principal with McKinsey & Co., who leads the firm’s North American retirement practice. At the same time that defined benefit (DB) plans are closing, there is continued focus around improving defined contribution plan outcomes, Dufetel tells PLANADVISER.

In “Capturing the Rapidly Growing DC Investment-Only Opportunity: The Time for Decisive Action Is Now,” a white paper released Thursday, McKinsey explores the $3 trillion DCIO market, described as the largest and fastest-growing segment of the $6 trillion pool of U.S. defined contribution assets. The share of DCIO assets has grown from just 30% of total DC assets in 2000 to 54% today, and McKinsey expects total DCIO assets to reach nearly $4 trillion by 2018.

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Plan sponsors using DCIO services want to make sure they have the right investment fund options, the right number of options for participants and access to best-of-breed managers, Dufetel says, adding that plan advisers will play an important role in the effort to refine investment menus.

Dufetel says both heightened fiduciary obligations and fee disclosure regulations are driving plans toward investment programs managed by asset managers that are not also the recordkeeper of the assets, i.e., DCIO service providers. Calling fee disclosure an ongoing evolutionary trend, Dufetel says the regulation has brought more scrutiny onto plan fees. “It has definitely driven pricing pressure and influenced the shift to passive management,” she says.

A report from Strategic Insight, a sister company of Asset International, agrees that the growth of DCIO will shift market share away from proprietary or recordkeeper-run DC assets. (See “DCIO Assets to Grow to 60% of 401(k) Assets by 2017.”) “The new transparency will undoubtedly shed light upon what have often been considered ambiguous fee arrangements,” says Bridget Bearden, director of retirement research at Strategic Insight and author of the report.

The scrutiny on DC plan fees will accelerate the shift of DC assets to open-architecture models, particularly among platforms that traditionally had only offered their own funds. Bearden adds, “The availability of external managers on proprietary recordkeeping platforms has already gained in prominence in recent months.”

Another factor underlying DCIO mandate growth, according to Dufetel, is the increasing presence of investment consultants who are encouraging a decoupling of the recordkeeping sale from the investment selection process.

Trends to Watch

According to Dufetel, five trends over the next five years will shape the ongoing transformation of the DCIO market:

  • The explosive growth of target-date funds (TDFs) will continue, she predicts, driven by auto-enrollment. This will likely mean the next “battleground” for open architecture will be within TDFs, as plan sponsors question the underlying assumption that a given manager can be best-of-breed across all asset classes.
  • Increasingly streamlined investment menus, with as few as three or four fund options, will make it harder to break into plan line-ups, Dufetel predicts. 
  • Increased scrutiny of fees will drive further passive (and potentially exchange-traded fund) share gains.
  • Concerns about adequate income in retirement will continue, but the focus will expand to include the unique needs of pre-retirees as well.
  • The distribution process will become increasingly complex and institutionalized, requiring deep expertise in DC and the resources to match.

Advisers can be helpful to plan sponsors in a number of ways as these trends unfold, Dufetel says. She encourages advisers to continue open and active dialogue with plan sponsors on several topics, including the following:

  • Are the underlying assets in a target-date fund truly the best-of-breed, or is there an opportunity to provide a more competitive and tailored target-date offering?
  • Are the number and types of funds appropriate, or is there an opportunity to streamline?
  • What is most important to the plan sponsor in fund selection? Low fees? Performance? Adherence to Morningstar stylebox? Track record?
  • How does the plan sponsor weigh the need for a more open platform?
  • Is the plan sponsor meeting the needs of the pre-retiree segment?

Evergreen topics should also be discussed, such as how does the plan sponsor increase participant adoption and drive improved retirement readiness. “We would encourage plan advisers to continue to be thoughtful about the other stakeholders—asset managers, recordkeepers, third-party administrators (TPAs), consultants—and how they can best work together to serve the plan sponsor and ultimately the plan participant,” Dufetel says.

More information about the white paper, “Capturing the Rapidly Growing DC Investment-Only Opportunity: The Time for Decisive Action Is Now,” is on McKinsey’s website.

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