The focus is increasingly moving from fees to outcomes and
helping plan sponsors determine benchmarks for their retirement programs, said Stace
Hillibrant, managing director of 401K Advisors LLC. Since 1981, when 401(k)
plans were meant just to supplement defined benefit (DB) plans, meeting after
meeting has taken place
, but everyone agrees that we haven’t raised the
bar, Hillibrant said. “We’re at the precipice of some major changes in this
industry,” he added.
Participants need help understanding how to better prepare for retirement, Hillibrant said, and plan sponsors need help deciding which benchmarks to use. But the details of indexes and funds are not the keys. The question is, how will plan sponsors determine whether their plans are successful? “How do we get from where we’ve been to where we need to be?” Hillibrant asked.
The industry has undergone slow but logical change, said Chris Augelli, vice president of product marketing and business development at ADP Retirement Services. “It took time for people to understand the DC [defined contribution] world,” Augelli said. Moving from the DB to the DC world was a monumental shift that has changed the industry’s focus from the employer to the employee level of retirement readiness and outcomes.
Investments, fees and fiduciary management are still key issues, said Paul Temple, vice president, director and national sales manager of DCIO (defined contribution investment only) at OppenheimerFunds Inc. “You can have the best of the best and still be failing with contribution and participation rates,” Temple said.
Plans are viewed more holistically now. Temple offered the example of issues with savings rates and designing a plan mitigate problems, perhaps by stretching an employer match by matching 50% of the first 4% of contributions. “We’ve always talked about participants leaving money on the table,” Temple said. “Plan design can be used to help them increase their contribution rate to 8% or 10%.”
Fees and investment reviews receive less emphasis, said Steven Geisert, vice president of the defined contribution practice at PIMCO. Plan sponsors are revisiting the entire structure of plans, asking how to raise contribution rates and weighing auto features. Sponsors who do not want auto-enroll are examining whether education or different investment lineups can help plans.
“Look at the history of the DC core menu,” Geisert said. From its original one investment option, it grew to hold three, then six, 12 and up to 20 options or more. But more plan sponsors are examining investment offerings to discuss eliminating some options, since a higher number of funds correlates with a lower participation rate.
Behavior and Engagement
Behavioral finance is increasingly used to study participant behaviors and methods of engagement. Citing Shlomo Benartzi’s “Save More Tomorrow,” Hillibrant pointed out that people in their 20s—the iPad and iPhone generation—are among participants with the highest plan “stickiness,” possibly because they saw how poorly prepared their parents were, or are, for a comfortable retirement.
Benchmarking has helped sharpen the focus on outcomes, Temple said. “Firms receive feeds of data from recordkeepers and get great details about plan participants,” he said.
DC plans will undergo increasing “DB-ification,” Geisert
said. Pension plans, without the same litigation and communication issues of DC
plans, outperform DC plans
, in part because they can invest in options sometimes
unavailable in the DC space. “The other side of equation is that the pension
was built for building income,” Geisert said, and DC plan sponsors also want to
The ideal 401(k) plan, Geisert said, would be a more holistic retirement benefit plan, designed to generate income, and with strong use of auto features.
Adoption is stronger in the larger plans, according to Augelli, and auto features need to be optimized at higher rates among all plan sizes. “Participants need to understand what it is they are saving for,” he said. “We are not yet talking sufficiently about outcomes, making sure participants have the information about health care costs, how to balance paying for children’s education and other goals with saving for retirement.”
According to Hillibrant, advisers and plan sponsors have to connect the dots. “People will stay in those higher deferral rates and participate at higher levels if there is a payoff,” he said, adding that if participants are not made aware of the need to prepare for retirement, contributions simply become one more paycheck deduction.
After PBS’ Frontline aired a documentary about retirement plan fees, Hillibrant said he received dozens of calls. (See “Documentary Critics: Inaccurate Portrayal of Fees.”) “Thousands of things were written about how terrible the program was,” he said, “but it got people talking about retirement readiness.”