PANC 2013: The Ultimate 401(k)

"Auto" everything, financial wellness and retirement readiness are key.

There are few 401(k) plans today that have participation and deferral rates that will properly equip their plan participants for an adequate retirement, speakers said at “The Ultimate 401(k)” panel at the PLANADVISER National Conference in Orlando, Florida, on Monday.

What holds them back is the fact that, as indicated by a poll from the PLANSPONSOR National Conference earlier this year, 80% of plan sponsors have no goals whatsoever to measure their plan’s success, said Alison Cooke Mintzer, global editor-in-chief of PLANADVISER and PLANSPONSOR. Further, she said, the PLANSPONSOR Defined Contribution (DC) Survey shows that less than 5% of plan sponsors consider their participants’ retirement readiness.

However, the fact that the majority of plan sponsors view participation rates as a key metric is testament to the work of retirement plan advisers, said Scott Colangelo, managing director, qualified plan advisors, at Lawing Financial Associates. “We’ve been so focused on automatic enrollment and participation rates,” Colaneglo said. “We’ve drilled it into them.” The next step for the retirement plan industry, Colaneglo said, is to talk about “diversification, deferral rates and the percentage of participants on track for a secure retirement.”

The discussion is only starting, Colangelo said, predicting that, in the near future, having a de facto “ultimate 401(k) plan that sets participants on a successful path to retirement will become a much bigger topic.”

According to Edward O’Conner, managing director of Morgan Stanley Wealth Management, the first thing advisers should do when trying to convince plan sponsors to offer more robust 401(k)s—with higher participation rates, proper allocation, higher deferral rates, automatic escalation, re-enrollment and holistic financial wellness seminars—is to circle back to the statistic that shows 80% of plan sponsors have no goals or benchmarks for their plan. Set goals, O’Conner advised.

“We are spending a lot of time and rubber on the road and not moving the needle,” O’Conner said. “We need to lay down some goals and get them to evolve, to think about participant outcomes. That’s our responsibility—to drive the dialogue. Maybe we won’t be able to convince the plan sponsor in the first conversation or even the fifth conversation, but we need them to have the dialogue about the end metric that their plan needs to work towards.”

Advisers can start the discussion by talking about one key metric each year, O’Conner suggested. William Chetney, executive vice president of LPL Retirement Partners, thinks advisers should start by “setting expectations and timeframes,” and that “retooling plan sponsors’ thinking” will be critical work for advisers over the coming years because “retirement readiness is such a great need.”

"Gap analysis might turn out to be the magic wand, but [it] might take decades to push 401(k) plan participants to higher savings,” Chetney said. That should not be a deterrent to the retirement plan industry, however: “We own the unique space to have the retirement readiness conversation across the work lunchroom table.”

Plan sponsors might respond more favorably to the idea of an “ultimate 401(k)” if advisers made the argument that it will give them more fiduciary protection, Colangelo said. If the higher cost of matching contributions in plans with higher participation rates is the issue, O’Connor said, then it is the adviser’s job to lay out cost-effective, stretched-match designs that aim to boost deferral rates while keeping the employer’s costs down.

Plan sponsors also take more notice of the value of higher 401(k) participation and savings rates when shown medical costs by age bands, and how much more costly it would be for them to have older employees who can’t afford to retire, Colangelo said. “If you show them that their company won’t be viable long-term if they don’t get employees prepared, they pay attention,” he said.

So what does an “ultimate 401(k) plan” look like? In an interactive poll of the panel’s audience members, 68% said it would have automatic enrollment, automatic increases and default into a qualified investment such as a target-date fund (TDF)—in other words, “'auto' everything.” Another 10% said an “ultimate 401(k) plan” would include automatic enrollment and automatic investments. Only 6% of the audience members believed it should have just automatic enrollment. However, 10% said such a plan should have no automatic features.

When the audience was asked what is the best asset allocation for an “ultimate 401(k),” the overwhelming majority believed in a professionally managed fund, with 30% voting for an off-the-shelf target-date fund, 35% for a customized TDF, 17% for managed accounts, 16% for target-risk funds and 2% for "other."

Employee education about holistic financial health is also key, the speakers said, and the audience agreed. In an audience poll, 83% said an “ultimate 401(k) plan” should have both one-on-one and group meetings each year. Only 6% believe in group meetings alone; 4% are for just one-on-one meetings; and 7% are not in favor of any educational meetings.