Greater Expectations
Members of the editorial team recently selected this year’s PLANSPONSOR Retirement Plan Sponsor of the Year Award finalists. We look for plan sponsors that offer strong plans, rely on best practices in design, and couple those things with good governance. This year, what I found surprising was how many plans had yet to embrace automatic features—or had only half embraced them, say by using automatic enrollment but not automatic escalation.
As we go to the printer, the Securing a Strong Retirement Act—aka SECURE 2.0—passed the House in true bipartisan fashion (414-5). A provision of note is that the bill mandates automatic enrollment, with automatic escalation, in new 401(k) and 403(b) plans. Although it provides grandfathering for existing plans, I think the features’ endorsement makes it hard to argue that those plans don’t need such design. After all, we know it works and that most people don’t opt out.
But looking at the Retirement Plan Sponsor of the Year award entries, I was also surprised by some of the advisers on the plans—for both good and bad. Some plans were weaker than we liked to see—plans with extremely well-known advisers, who talk a lot about best practices. Plans I’d consider needing improvement. Alternatively, there were amazing sponsors being incredibly creative with how to engage their employees and inspire them to contribute more. We also found many amazing and, until then, unfamiliar to us, advisers behind those plans. I admit, seeing well-known adviser names attached to plans that lacked baseline best-in-class plan design was disappointing.
Advisers’ role is to help their plan sponsor clients think through what design features will have the most significant impact on retirement readiness. The biggest factor in success, besides access and enrollment? Contributions.
Deferral rate escalation and other plan features are discussed less regularly than, say, investment benchmarks. Design isn’t a regular topic for most advisers’ quarterly committee meetings. But I’d argue that it should be. While much is made of fees and funds, how much money participants save in the plan—through their own or their employer’s contributions—is more critical to their success than which target-date fund they save in.
I can only speak for myself, but as a judge across all our awards, I want to hear from plan sponsors how their advisers get behind ideas that are more creative than “adopt the best share class.” Quarterly review of the investments is important from a due diligence and fiduciary governance perspective, but so are the regular reviews of participant data and thoughtful changes to plan design—including adding auto-features and implementing re-enrollment where lacking.
Our most recent PLANSPONSOR Participant Survey, as well as other surveys, continue to stress how much trust employees put in their employer and the advisers to whom they turn for guidance about their finances. I think plans that auto-enroll low and then let the deferral rate stagnate are potentially less helpful than doing nothing. When participants are automatically enrolled at 2% or 3% and not engaged into an escalation program, an implicit message is that this is an acceptable amount to save.
Your plan sponsor clients know they need help. Consider that only 36.3% of all sponsors agreed that most of their employees will achieve their retirement goals by age 65. Meanwhile, 59.4% agreed that their company “has a responsibility to improve the financial wellness of” its employees. I think advisers need to determine where each client fits into those statistics and how they can increase the certainty its participants will achieve their goals; they should be willing to suggest ideas for how they can help improve those workers’ financial health. It will be appreciated.