Opportunities Abound for Micros

The micro-plan market, identified in the 2021 PLANSPONSOR Defined Contribution (DC) Plan Benchmarking Report as plans with less than $5 million in assets, cannot be assumed to be simply a smaller version of its larger brethren—it faces challenges unique to the plan, and sponsoring-company, size.

About one-third of the report’s respondents are micro-plan sponsors: 5.1% of the plans are of under
$1 million in DC assets, and 29.2% are of $1 million to $5 million in DC assets.

Some of the most effective plan design—such as the use of automated features, employer-plan match add-ons and systematic withdrawal plan options—is underutilized or not offered in this market. For instance, only 22% of the $1 million to $5 million plans, and 17% of the under $1 million plans use auto-enrollment vs. 43% of the respondents’ plans overall. Auto-escalation follows in line, with 6% and 7% of the two sizes of micros, respectively, vs. 22% of the plans overall.

The significance of these factors, as most advisers know, cannot be underestimated. In doing research for its paper “Automatic Enrollment: The Power of the Default,” Vanguard found that, over time, 90% of participants who are automatically enrolled in a plan increase their contributions, either automatically or on their own. In plans with auto-enrollment but no automatic increase, after three years, one-third of participants overrode their employer’s default and raised their own deferral rates, and one-quarter overrode their employer’s rate, raised their deferral and signed up for auto-escalation.

Micro plans also lagged larger plans in fiduciary best practices such as getting plan investments reviewed on a quarterly basis and having an investment committee to monitor investment costs. While plans overall increasingly have added an investment committee, a large gap in doing so remains between the micro and larger plans. Forty-one percent with $1 million to $5 million and 51% with under $1 million have no investment committee.

An adviser might suggest to clients in this market that they outsource some tasks to him or ask him for fiduciary training. On average, about half as many micro-plan sponsors get fiduciary training as sponsors of larger plans get.

Skilled advisers can be of significant service in this area by educating micro-plan sponsors about their responsibilities. They can help these clients, particularly with complex areas of fiduciary responsibility such as monitoring fees and investment options. Without more support, these sponsors can miss opportunities available to improve plan outcomes.