Re-Orientation

Employers have many choices when it comes to designing a defined contribution (DC) plan. Questions about the goal of the plan help inform decisions related to what features should be included, what investments to offer, and what procedures to put in place to help the responsible plan fiduciaries fulfill their duties. But how do the plan sponsors making such decisions arrive at the “right” ones for their organization? Obviously, the answers are found through hard work and with help from experts such as those in the adviser community. However, other tools are increasingly becoming available in the industry: notably, research and trend reports.

PLANSPONSOR magazine’s annual defined contribution survey is one such report, and the 2014 edition provides insight into the breadth of characteristics found among defined contribution plans across five ranges of plan assets: micro plans, with less than $5 million in assets under advisement (AUA); small plans, with $5 million to $50 million in AUA; midsize plans, with more than $50 million up to $200 million; large plans, with more than $200 million up to $1 billion; and mega plans, with $1 billion-plus. The results provide metrics and new insight related to dozens of plan design elements—both in aggregate and across 50 separate employer industries—that can help sponsors understand how their plan compares both with peers’ and the industry’s leaders’. Sponsors and advisers able to understand and apply such data have the potential to improve participant outcomes, which can lead to higher levels of value and satisfaction.

Bigger and Better

The one trend obvious from almost every measurement we took is that larger plans typically have better outcomes and higher adoption of key plan features than do smaller plans. For example, average deferral rates steadily increase with plan size, rising from 6.1% in micro plans and 6.2% in midsize plans, to 6.6% in large plans and 7.7% in mega plans. Lesser, but similar, increases are also seen among participation rates, which step from 74.2% in micro plans to 78.1% in small plans, to 80.0% in large plans and to 80.8% in megas.

Although many factors can affect such outcomes, the survey provides clues as to how plan design decisions can play a role in driving better results. Take a look at one of the most influential plan design features: automatic enrollment. While 40.0% of all plan sizes have auto-enrollment, there is a marked difference between the number of large and small plans that have adopted it. Two-thirds (65.2%) of mega and 61.9% of large plans have the feature, versus 19.2% of micro and 42.3% of small plans. As for

re-enrollment, 25.5% of all plans re-enrolled participants in the past 12 months, although the percentage jumps to 52.1% of mega and 43.2% of large plans, and falls to just 7.9% of micro, 25.6% of small and 35.9% of midsize plans.

Automatic escalation, which many view as another key cornerstone to growing deferral rates, is offered by 25.5% of all plans, but breaks out as 52.1% of mega plans compared with 7.9% of plans that have less than $5 million in assets. Similarly, larger plans are far likelier to offer immediate enrollment—77.1% vs. 18.2%—allowing employees to begin saving sooner.

Company matches have become more widespread, with 71.8% of all plans employing a match—although a span of more than 25 percentage points exists between the mega plans with this feature (85.1%) and the micro plans (59.6%). Across all plan sizes, the most common match is less than 50% of the first 6% of an employee’s salary. As expected, given the various other features offered by large firms, the contribution from mega plans is more generous, with the most frequent match being 51% to 99% of the first 6% of an employee’s salary (29.9%). Conversely, among micro plans, the most typical match scales down to less than 50% of the first 6% of salary, used by an average of 34.9% of micro plans. 

Just under a quarter of all companies (24.7%) estimate that all or nearly all—90% or more—of their employees contribute enough to take total advantage of the full employer match.

Due to all of these factors, larger plans have higher account balances. While the average account balance among plans of all sizes is $84,166, it rises systematically as plan assets increase, with an average of $71,483 in micro plans, $85,515 in small plans, $85,334 in midsize plans, $93,226 in large plans and $115,093 in mega plans.

“Few people disagree with the notion that larger plans have some advantages over smaller plans,” says Brian O’Keefe, director, research and surveys at Asset International in Boston. “But that doesn’t mean smaller plans lack the tools to be successful. History has shown that ‘leading practices’ are first adopted by larger plans and then move down-market. Trend data like that found in the DC Survey can help identify mainstream practices and develop a road map for change.”

Set Priorities

However, simply adding new features to a plan is no guarantee of long-term success. “Trend surveys such as the DC Survey contain a wealth of information, so prioritizing where and how to focus one’s energy can be challenging,” says O’Keefe. “I often tell people that these numbers are not the answer but an entry point to a conversation. The answer is in the discussion, not the data.”

To support this, O’Keefe notes that sponsors of mega plans are only marginally more confident than are micro-plan sponsors that their employees will achieve their retirement goals by age 65, despite the general “strength” of their plans’ designs. In fact, among plans of all sizes, the percentage of sponsors that agree with the statement, “Most of your employees will achieve their retirement goal by age 65” is abysmally low across the board. Of course, it ticks up among mega plans—but just by slightly over 2 percentage points compared with micro plans. Overall, the average is a meager 8.8%. Among micro plans, it is 9.4%; small plans, 7.6%; midsize plans, 9.6%; large plans, 9.2%; and mega plans, 11.6%.

The 2014 Defined Contribution Survey explored a few areas of plan governance, specifically the frequency of provider, investment and fee reviews, as well as whether the plan has an investment committee and an investment policy statement (IPS).

Overall, smaller-plan sponsors do a reasonably good job of keeping pace with the industry in terms of monitoring their products. As to reviewing investment options, 76.2% of micro plans review investments on a yearly basis. However, quarterly reviews are the norm for nearly half of mega and large plans—at 49.8% and 49.9%, respectively. The range of sponsors performing reviews of administrative fees on an annual basis is fairly narrow, from 66.4% for micro plans to 70.5% for mega plans.

One variable that displays room for improvement is the presence, or not, of an investment committee, as only 45.0% of micro plans have one, vs. 93.9% of mega plans. Equally alarming is the discrepancy observable between plans that do and do not have an investment policy statement—only 43.6% of micro plans have one—roughly half the 86.2% of mega plans. Advisers can play a critical role in making sure smaller plans adopt formal procedures.

Small Stuff

Although larger plans do many things “right,” smaller plans do some things “right” as well. On average, micro plans are less likely to offer loans than mega plans, 70.1% vs. 90.2%, or hardship withdrawal provisions, 84.9% vs. 91.7%. Smaller plans offering such provisions also report that participants are less inclined to use them; the percentage of participants with outstanding loans is 10.8% for micro plans vs. 20.5% for mega plans, while micro plans have about one-third as many participants making hardship withdrawals as do mega plans—0.9% vs. 2.6%. These outcomes were achieved despite the fact that mega plans are far likelier to proactively take steps to prevent leakage: 80.7% of mega plans have placed limits on the number and/or amount of loans, compared with the 53.6% of micro plans that have done the same thing. Micro plans also have a higher incidence of safe harbor provisions (55.7%) than mega plans (39.5%).

O’Keefe sees such data as evidence of a strength enjoyed by smaller plans: “Larger employers struggle to get consistent messaging to all employees, but smaller plans—with less-widely distributed work forces—have the ability to communicate more openly and effectively with employees. This can be a significant benefit when evaluating and making changes to the plan.”

Apples and Oranges

With many different sources for thought leadership and industry trends, both sponsors and advisers should take care to ensure that the insights and conclusions drawn from such analyses are not comparing “apples with oranges.” Work force demographics such as employee tenure, average salary and education can vary significantly by industry and, as a result, reflect different trends.

For example, the average participant account balance ranges from $181,176 at law firms down to $33,875 at religious/social service organizations. However, more religious organizations offer matching contributions than do law firms (56.5% vs. 48.8%) and have a higher percentage of plans giving an “above average”—greater than 3%—effective match rate (54.2% vs. 16.2%). But law firms are much likelier to offer nondiscretionary or profit-sharing contributions (82.6% vs. 54.5%) and to have more progressive plan design elements such as true-up match provisions (23.9% vs. 8.7%) and fee equalization policies (13.2% vs. 3.0%).

With so much data and so many perspectives available, advisers must stay aware of the current trends affecting their clients and all areas of the industry—and be able to translate those trends into conversations that drive action.

Methodology

The PLANSPONSOR 2014 Defined Contribution (DC) Survey results incorporate the responses of retirement plan sponsors from a broad variety of U.S. industries and plan sizes. Between late June and early September 2014, approximately 50,000 survey questionnaires were sent to defined contribution plan sponsors from the PLANSPONSOR magazine database, as well as to client lists supplied by DC plan providers; 4,426 total usable responses qualified for inclusion in this report.

Want more trend data? Purchase our 2014 Plan Benchmarking Report for a complete breakdown of overall industry trends across nine assets segments. For more information on the 2014 PLANSPONSOR Defined Contribution Survey, the 50 industries covered in the PLANSPONSOR Industry Reports, and the 2014 Plan Benchmarking Report, please contact Brian O’Keefe at: bokeefe@assetinternational.com.of retirement plan trends

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