Cerulli Associates defines the institutional
market based on the identity of the end-client, classifying assets as
institutional only when the asset manager’s end client is an institution.
The U.S. institutional market weathered two major
bear markets following the tech bubble burst in 2000 and the more recent global
financial crisis, yet the market has shown steady growth, said Michele
Guiditta, associate director at Cerulli. “As of year-end 2011, the
institutional market held $13.2 trillion in assets under management,” Guiditta
said.
In the report, U.S. Institutional Markets 2012,
Cerulli looks at the entire industry, summarizing trends and revealing
opportunities and challenges the industry faces. The report also analyzes
service and product strategies, as well as the implementation of effective
sales strategies.
In the past two decades, according to Guiditta,
defined contribution (DC) plans have begun replacing defined benefit plans (DB)
in retirement vehicles. “With over $3.5 trillion in assets, private defined
contribution (DC) is the largest U.S. institutional market,” Guiditta said.
“DC markets have grown faster than DB markets,”said
John Hsu, senior analyst at Cerulli. “And we expect that trend to continue over
the next five years. There is an opportunity for asset managers to continue to
grow their assets in the 401(k) market, which comprises more than 90% of the
corporate DC market by assets.”
Cerulli cites other opportunities with alternative
products and investment consultants in the institutional market, as well as
challenges asset managers face with endowments and foundations.
Speaking candidly for the “Trials and Tribulations of
Auto-Enrollment” webcast sponsored by the American Society of Pension Professionals
and Actuaries (ASPPA), McKinney admitted that automatic enrollment does present
some administrative burdens to defined contribution (DC) plan sponsors.
However, the best argument for implementing auto-enrollment is that it works,
he said, noting that studies have shown it increases plan participation and
opt-out rates for participants automatically enrolled are low.
Plan sponsors who have implemented auto-enrollment in their
DC plans say they did so to help employees save, to help their plan pass discrimination
testing and because they feel it is the socially responsible thing to do,
according to McKinney. Plan sponsors’ arguments against implementing
auto-enrollment include that employees will not like having money taken from
their pay, sponsors are happy with the status quo for their plan, or they do
not know enough about it.
So, what do DC plan sponsors need to know when deciding
whether to auto enroll?
There are three types of contribution arrangements.
The automatic
contribution arrangement (ACA) is the basic deferral agreement which requires
participant direction. Plan sponsors must follow the qualified default
investment alternative (QDIA) rules, and the ACA can be added any time during
the plan year.
The eligible
automatic contribution arrangement (EACA) is the most common automatic
enrollment plan design. It allows for “do-over” withdrawal within 90 days for
participants who decide they do not want to be enrolled, and it allows for a
three and one-half month extension for distributions of excess contributions
and excess aggregate contributions. Plan sponsors must follow QDIA rules, and
the EACA can be added to the plan any time during the plan year.
The qualified
automatic contribution arrangement (QACA) is the statutory safe harbor
automatic enrollment plan design. It offers an exemption to average deferral
percentage (ADP) and average contribution percentage (ACP) discrimination
testing. The minimum default deferral is 3% and maximum is 10%; it calls for
automatic escalation up to 6%. A QDIA is not required to be used, but is
recommended. An employer contribution is required, but plan sponsors can
implement a two-year cliff vesting schedule. The QACA feature must be added for
full plan year; for example, plan sponsors cannot decide to auto-enroll during
the fall open enrollment period with a QACA.
McKinney noted that if a sponsor has testing issues with its
plan, an EACA will not solve it. However, if the plan sponsor has cost
issues, no employer contribution is required with an EACA, or if the
sponsor does make an employer contribution, it can use a vesting
schedule to allow for forfeitures to reduce contributions.
There are several administrative issues plan sponsors should consider when deciding to implement auto-enrollment:
When
to auto-enroll – Plan sponsors should consider plan eligibility
requirements; if the plan offers immediate eligibility, employee
turnover could mean the plan will carry more small balance participants,
increasing administrative costs. On the other hand, a later eligibility
could mean more participants will notice their decrease in pay and may
not roll with it. This could mean more 90-day “do-over” distributions.
Whether
to use auto-escalation – Escalating participant deferrals all at the
same time may be easier, but could mean some are escalating soon after
starting. Escalating participant deferrals on the participant’s one-year
anniversary in the plan may make more sense, but require more
administration.
Notice requirements – Plan
sponsors must send participants a notice of auto-enrollment 30 to 90
days prior to the first deferral and annually. The penalty for notice
failure can be up to $1,100 a day by the Department of Labor (DOL).
McKinney said this is one of the biggest issues with implementing
auto-enrollment, but sponsors should ask what plan providers do to help.
Plan
sponsors should also consider the current Employee Plans Compliance
Resolution System (EPCRS) correction if an employee is left out of the
auto-enrollment process, according to McKinney. It requires a qualified
non-elective contribution (QNEC) by the employer of 50% of the deferral
amount that should have gone into the plan during the time the
participant was excluded, a QNEC of 100% of the match to the deferral
amount that was supposed to come out of pay, and earnings on the
contribution amounts for the time they were not invested.