Data & Research June 29, 2016

DC Plan Participants More Diversified in Investments

Millennials are the most diversified generation, according to a five-year analysis of Wells Fargo's book of business.
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Over the past five years, the number of participants in defined contribution (DC) plans administered by Wells Fargo that satisfied the minimum investment diversification goal has increased 26.2%.

As a general rule, Wells Fargo considers a participant to be “diversified” if the participant is invested in a diversified investment solution such as a target-date fund, managed account product, or a comprehensive advice program. If a participant chooses to self-manage their investments, Wells Fargo considers the participant to be “diversified” if the participant invests in at least two different classes of equity funds and one fixed income fund, and has less than 20% invested in employer stock.

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Millennials are the most diversified generation at 83.6%, compared to 79.6% for Generation X and 76.7% for Baby Boomers. Wells Fargo attributes this to more Millennials being defaulted into their plan’s qualified default investment alternative (QDIA). Wells Fargo says having a QDIA is a key driver of diversification for plan participants.

Eighty-four percent of Wells Fargo-administered DC plans have a QDIA and, of those, 82% use either a target-date fund series or managed account program as their QDIA. On average, 72% of participants in Wells Fargo’s book of business are invested in their plan’s QDIA. The data shows that participants not invested in QDIAs tend to have much lower chances of meeting the diversification goal—only 37% of participants not invested in QDIAs reach the diversification goal.

For segments of the existing employee populations that entered the plan before auto-enrollment in a QDIA was in place, Wells Fargo says targeting specific participant segments with diversification messaging can be a cost-effective way to drive positive participant behavior and is a recommended best practice.

NEXT: Other DC plan improvements

Among Wells Fargo-administered plans, participation has increased by 19% in the last five years. Increases can be seen across all demographic segments.

The higher the income, the more likely the employee is participating; however, there is positive movement at all income levels. For example, participation went from 30.6% in 2011 to 47.9% in 2016 (56.5% increase) for participants earning less than $20,000 per year, while participation went from 73.6% in 2011 to 81.4% in 2016 (10.6% increase) for those earning $100,000 or more.

Baby Boomers have the highest participation rate, currently at 65.9%. However, Millennials and Gen Xers have gained ground in their participation rates over the last five years as well. Most notable is the 32.1% growth in Millennial participation. Wells Fargo attributes this to the impact of automatic enrollment.

Contribution rate is the slowest moving category with a 7.3% increase since 2011, but is still growing across most demographic segments.

While income is a factor in reaching the 10% contribution rate goal, it is worth noting that workers earning less than $20,000 had a higher percentage of participants meeting the 10% goal than workers in the $20,000 to $39,000 income range. Workers earning $100,000 or more who contribute 10% or more represent the “most improved” group with a 15.3% increase since 2011. The next largest increase came from workers in the $40,000 to $59,000 income range where workers contributing 10% or more increased 8.3%.

Baby Boomers have the highest percent of participants contributing 10% or more—currently 44.5%. However, the percentage of Millennials and Gen Xers reaching the 10% goal has increased more over the last five years, with the former increasing by 23.8% and the latter by 18.5%.

The study report may be downloaded from here.
Compliance June 29, 2016

Self-Dealing Suit Settlement Reached by Aegon and Transamerica

Under the terms of a proposed lawsuit settlement, Transamerica will have to make structural changes in the way it runs its own retirement savings plan, including changing how fees are calculated.
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The settlement comes out of class-action litigation filed early last year in which fiduciaries at Transamerica’s parent company, Aegon, were accused of self-dealing via the company’s retirement plan offered to its own employees. A participant sued Aegon USA, some of its subsidiaries and trustees of the plan, alleging they violated the Employee Retirement Income Security Act’s (ERISA’s) requirement to act for the best interest of plan participants.

The original complaint suggested that the defendants burdened the plan with layers of superfluous fees; that the plan pays fees higher than its peers; and that the fees go mostly to Aegon, which serves as recordkeeper and investment manager for the plan through its Transamerica affiliates.

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According to court documents, Aegon had placed many of its investment products in the plan, including at least 16 Aegon-managed investments in collective trusts or pooled separate accounts. These trusts and accounts charge investment management and portfolio administration fees for managing the securities in the portfolio. However, the lawsuit alleges, the manager of each of the collective trusts and pooled separate accounts does not manage a portfolio. Instead, each such commingled fund simply reinvests in an Aegon mutual fund of the same asset class and strategy, which, the complaint says, has the effect of layering a superfluous and excessive investment management fee on top of the fees charged to the mutual fund.

Aegon continues to deny any allegations of wrongdoing in the settlement, which has, according to court filings, been preliminarily accepted by both sides in the dispute. The company asserts the investment and administrative fees of the plan “were reasonable and that the practice of offering Transamerica’s own products as investment options for the plan is both common and lawful.”

According to court documents, the settlement will bring about structural changes in the way the company runs its retirement savings plan—and how it calculates fees. Payments will also be made to compensate class members.

“Plaintiffs place the value of structural changes to the plan over the next three years at $3 million,” case documents show. “In addition, Transamerica will pay a cash settlement of $3.8 million. From that amount, costs will be deducted, including a cash contribution award to each of the named plaintiffs (up to $6,000), attorney fees (up to one-third of the cash award) , administrative fees to the settlement administrator, any taxes attributable to the settlement fund, and payment to an independent fiduciary.”

The settlement still requires a final “fairness hearing” to be formally implemented, but this appears likely given the approval of both sides and the preliminary opinion of the judge presiding over the case. Following the results of the fairness hearing, the court “expects the plan as changed to have fees as low as and other measures as pro-member as the midpoint of the range of its peers, or better (more pro-member), or show good cause why not.”

NEXT: Transamerica denies any wrongdoing

Transamerica spokesperson Greg Tucker, senior vice president and head of public affairs, shared the following statement with PLANADVISER:

“Regarding the lawsuit alleging excessive investment management and administrative fees associated with the Transamerica 401(k) Retirement Savings Plan, we take these allegations very seriously given our strong commitment to fair and transparent communications regarding fees and expenses associated with participants’ retirement plans, including those relating to our own employees.

“Although we have maintained that these allegations are unfounded, we have agreed in principle to settle the case in order to avoid the time and expense of litigation.  The bulk of the settlement proceeds will be distributed to Transamerica’s current and former employees who were participants in the Plan. The parties’ settlement agreement was preliminarily approved by the court overseeing the lawsuit on June 24.  In July, class members will receive information about the proposed settlement from the court-appointed settlement administrator, who is also establishing a website and a dedicated toll-free number to answer questions regarding the settlement.  Class members will also have an opportunity to provide comments on the settlement to the Court, prior to final approval.

“As a reflection of the fact that the Plan has been well-managed, the principal structural relief in the settlement is to continue most of the Plan’s current investments, including the Plan’s investments in low-cost pooled accounts offered by Transamerica.   We remain committed to providing a competitive 401(k) retirement plan to all employees, which includes matching contributions to help make possible a secure and confident retirement.”

The proposed settlement agreement is here.

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