The latest research from Cerulli Associates identifies topics where there are, as researchers put it, “surprisingly different perspectives” among key defined contribution (DC) plan industry stakeholders; Cerulli believes that these areas of misalignment may offer opportunities for plan providers, advisers, and consultants to drive new solutions.
As Jessica Sclafani, director at Cerulli, explains, researchers contrasted survey data of 401(k) plan sponsors’ stated priorities with recordkeepers’ perceptions of plan sponsor priorities. The comparison clearly shows that plan sponsors and recordkeepers might not be on the same page in thinking about topics related to improving the quality of the investment lineup, minimizing fiduciary risk while avoiding litigation, and reducing plan administration costs.
For example, data indicates that recordkeepers may be underestimating the importance plan sponsors assign to “improving the quality of the investment lineup.” While 27% of 401(k) plan sponsors identify improving the quality of the investment lineup as a top priority for the 2018 plan year, only 4% of recordkeepers identify this topic as a top priority for plan sponsors.
When examining how 401(k) plan sponsors and recordkeepers evaluate the success of a plan, Cerulli finds that they both look at the same metrics; however, there are noticeable points of divergence in how these metrics are stacked against one another.
“As another example, the research reveals that less than half of sponsors believe that employees are solely responsible for their own retirement savings and investing decisions, but greater than three-quarters of participants feel that they have sole responsibility for these decisions,” Sclafani notes.
As the Cerulli reporting lays out, reducing plan administration costs is a priority across plans of all sizes. This contrasts with the topic of “minimizing fiduciary risk/avoiding litigation,” which 13% of micro plans versus 20% of mega plans identified as a top issue, and is apparently more of a mega market concern.
The research suggests some plan sponsors “may need to pay greater attention to metrics that relate to decumulation when gauging plan success.” A potential obstacle here is the multiple assumptions that income-oriented measurements generally involve and their associated challenges.
According to Cerulli, the most commonly used metrics to benchmark plan success—namely, participation rate, average contribution rate, and percentage of participants taking full advantage of company match—are associated primarily with the accumulation of savings. Metrics associated with the decumulation of savings, such as retirement income replacement ratio (26%) and average projected shortfall or surplus (25%), rank noticeably lower on the list of 401(k) plan sponsors’ considerations.
“Again, some plan sponsors may need to adjust their definitions of plan success and pay greater attention to metrics that relate to the decumulation phase,” Sclafani says.
Another potential obstacle is explained as follows: “Automatic enrollment and automatic escalation simplify participant decisionmaking and can help employees overcome years of nonparticipation in 401(k) plans and failing to increase contributions as their pay levels rise. However, the employees who need to save the most are often most resistant to automatic enrollment and automatic escalation features.”
Indeed, the data shows participants with fewer investable assets are more likely than others to oppose automatic enrollment. Plan participants in favor of automatic enrollment are naturally far more likely to save at least 6% to 10% or more of their pay for retirement.
In many cases, these resistant individuals are against automated features on principle, Cerulli finds, identifying most closely with the statement, “It’s not the employer’s right to decide.” Fortunate for plan sponsors and recordkeepers, evidence also shows targeted education programs about the impact of automatic enrollment and automatic escalation are generally quite effective, especially when they break down in dollar figures how much asset accumulation individuals may be missing out on.
Looking specifically at recordkeepers, beginning with “improving the quality of the investment lineup,” it appears that recordkeepers significantly undervalue this topic as a priority for plan sponsors, with a 23% difference between the percentages of plan sponsors who select this option as a top priority versus recordkeeper results.
“Given the increased use of intermediaries in the DC plan market, recordkeepers are generally not as influential as they once were in shaping the investment menu,” Cerulli posits. “However, this data implies that recordkeepers, at a minimum, should ask their 401(k) plan sponsor clients how they view the plan’s current investment lineup and potentially offer data and anecdotal insights into what other plan sponsor clients are considering as it relates to the plan menu.”
“Amount of in-service withdrawals taken” ranks fifth among recordkeepers and eighth among plan sponsors. Cerulli argues this data indicates that recordkeepers place more emphasis on monitoring leakage from the plan, such as loans, hardships, and other in-service distributions, compared with plan sponsors. While plan loans and leakage can be sensitive subjects for plan sponsors to broach with their participant population, there may be opportunity for recordkeepers to emphasize to plan sponsors the potential impacts of plan leakage and suggest campaigns to address the issue. That said, Cerulli also points out that “average loan balance” is ranked last by recordkeepers, while plan sponsors rank it fourth, “perhaps showing that plan sponsors are more keenly focused on loans, as opposed to talking about plan leakage in broader terms.”
These findings are taken from the first quarter 2018 issue of The Cerulli Edge – U.S. Retirement Edition; much more data is available. Information on how to obtain Cerulli research is available here.