RESEARCH | May 11, 2010

2009
Plan Size Comparisons – Size Matters

Benchmarking a plan against comparable ones gives you a true indicator of succe

Reported by PLANADVISER | Art by Benchmarking a plan against comparable ones gives you a true indicator of succe

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Benchmarking a plan against comparable ones gives you a true indicator of succe

Benchmarking a single retirement plan to industry averages can be useful, but it also can be like comparing boutiques to supermalls; averages can be deceiving if you do not winnow out the differences attributable to plan size. For example, segmenting the results of PLANSPONSOR’s 2008 DC Survey into plan sizes finds, some things—such as participation rates (all sizes in the low to mid-70% range)—show negligible differences among plan size, but other data vary significantly.

No difference is more striking than the adoption of automatic enrollment. Overall, the feature enjoyed an uptick across all plan sizes (to 29.8%), but the numbers vary widely according to plan size. The percentage is notably higher (45% have adopted) at plans with more than $200 million in assets, but only about a third as prevalent among micro plans, those with less than $5 million in assets. Default investments for automatic enrollment also vary: While stable value and money market funds do not enjoy qualified default investment alternative protections, a full third of micro plans still use either as their plan default, nearly twice as often as small plans (those with up to $50 million in assets), and five times more likely than among the largest programs.

Participant eligibility is another point of variance: The majority (67.8%) of large plans allow employees to participate in the plan immediately upon hire but, in micro and small plans, that is not the case (17.2% and 28.0%, respectively). Particularly in micro plans, it is much more common to make employees wait six or more months to join (49.1%)—only 6.4% of large plans require that long.

Large and mid-size plans also were more likely to have an investment policy statement (IPS) (85.6% and 87.6%, respectively) than small (77.3%) and micro plans (51.3%). Micro plans were less likely to have an investment committee (only 55.5% did), while that is rare among other plans sizes (only 18% of small, 7.4% of mid-size, and 9.1% of large plans do not have a committee). Moreover, at least on a self-reported basis, the larger the plan, the more likely the plan sponsor is to be vigilant about monitoring compliance with that document.

When it comes to an understanding of plan expenses, one-quarter (25.7%) of micro plans admitted that they did not know the approximate average expense ratio of the plan investment options. Just 14.7% of small plans, and 7.9% and 7.3% of mid-size and large plans, respectively, said they did not know that expense ratio.

One area of consistency among plan sponsors of all sizes: the focus list of priorities when selecting a DC plan provider. Regardless of plan size, “quality of service to participants’ was ranked most important, followed by “quality of service to plan sponsor.’ However, after that, there are some differences among plan sizes: Both mid and large plans say “reasonableness of fees’ is third, while that criterion doesn’t appear in the top five priorities for the small and micro plans.

While some differences among plan sizes might be predictable, others are not. Regardless, this information can help you determine more accurately whether your clients’ plans are hitting the mark—and what prospects might be in need of your attention.—Ellie Behling

**Importance of each item to you in selecting or evaluating a DC provider**
	Overall	Micro	Small	Mid	Large
Quality of service to participants	6.65	6.60	6.65	6.74	6.67
Quality of service to plan sponsor	6.50	6.49	6.50	6.55	6.48
Investment performance	6.38	6.49	6.40	6.29	6.09
Financial strength	6.27	6.33	6.28	6.26	6.12
Variety of investment options	6.17	6.21	6.21	6.20	5.91
Reasonableness of fees	6.16	6.13	6.09	6.34	6.21
Provider's Web site	6.10	6.05	6.09	6.21	6.15
Transparency of fees	5.85	5.76	5.77	6.07	6.02
Market image/reputation	5.76	5.76	5.77	5.78	5.71
Industry knowledge of account managers	5.73	5.69	5.76	5.76	5.69
Industry knowledge of vendor's sales force	5.41	5.52	5.45	5.30	5.18
Recognizable "brand name" funds	5.36	5.45	5.41	5.28	5.06

**How often do you formally evaluate your DC provider?**
	Overall	Micro	Small	Mid	Large
Annually	29.0%	35.2%	30.0%	18.8%	20.2%
Every 1-3 years	28.4%	29.8%	39.3%	26.7%	22.2%
Every 3-5 years	22.8%	14.9%	23.3%	31.6%	33.9%
Every 5+ years	10.8%	6.1%	10.4%	16.4%	18.3%
Never	9.1%	14.0%	6.0%	6.5%	5.4%

**How often do you formally review costs/fees?**
	Overall	Micro	Small	Mid	Large
Annually	71.4%	61.4%	76.3%	78.9%	76.9%
Every 1-3 years	17.4%	21.7%	15.3%	14.4%	14.9%
Every 3-5 years	5.0%	6.0%	4.4%	3.8%	5.1%
Every 5+ years	1.7%	2.4%	1.1%	1.7%	1.3%
Never	4.6%	8.6%	3.0%	1.2%	1.8%

**What is the participation rate in your DC plan among eligible employees?**
	Overall	Micro	Small	Mid	Large
Average	73.8	71.9	75.3	73.9	74.7
Median	80	78	80	80	80

**When are employees eligible to participate in the plan?**
	Overall	Micro	Small	Mid	Large
Immediately upon hire	33.1%	17.2%	28.0%	51.5%	67.8%
Within 3 months	25.3%	20.8%	29.4%	30.9%	21.6%
After 4 to 6 months	10.5%	12.9%	12.6%	5.6%	4.1%
After more than 6 months	31.2%	49.1%	30.1%	12.1%	6.4%

**Do you use automatic enrollment?**
	Overall	Micro	Small	Mid	Large
Yes	29.8%	15.6%	33.6%	41.9%	45.4%
No	70.2%	84.4%	66.4%	58.1%	54.6%

**What is the default investment for automatic enrollment?**
	Overall	Micro	Small	Mid	Large
Stable value fund/GIC	9.2%	15.8%	11.0%	5.1%	5.1%
Target-date fund	44.3%	24.8%	38.8%	54.6%	58.3%
Risk-based lifecycle fund	14.1%	5.6%	17.3%	11.9%	16.4%
Company stock	0.2%	0.4%	0.4%	0.0%	0.0%
Balanced fund	15.6%	17.9%	15.9%	16.7%	12.5%
Managed account	5.0%	9.4%	4.2%	4.8%	3.3%
Money market fund	5.7%	17.9%	5.3%	2.4%	0.9%
Other (please specify)	5.9%	8.1%	7.1%	4.4%	3.6%

**Have you implemented automatic deferral increases for participants?**
	Overall	Micro	Small	Mid	Large
Yes	13.6%	6.7%	12.6%	22.2%	25.4%
No	86.4%	93.3%	87.4%	77.8%	74.6%

**Does your company have an investment committee for the DC plan?**
	Overall	Micro	Small	Mid	Large
Yes (internal employees only)	55.6%	35.8%	63.5%	69.5%	71.0%
Yes (includes non-employees)	15.8%	8.7%	18.5%	23.1%	19.9%
No investment committee for DC plan	28.6%	55.5%	18.0%	7.4%	9.1%

**Do you have a written investment policy statement (IPS) for the DC plan?**
	Overall	Micro	Small	Mid	Large
Yes	71.0%	51.7%	77.3%	87.6%	85.6%
No	29.0%	48.3%	22.7%	12.4%	14.4%

**If so, how closely is compliance with the IPS monitored?**
	Overall	Micro	Small	Mid	Large
Very vigilant	51.9%	41.1%	49.3%	60.0%	64.9%
Somewhat vigilant, rely on vendors	42.6%	49.0%	45.2%	37.1%	33.1%
Not very vigilant	4.7%	7.9%	4.8%	2.7%	1.8%
Not concerned	0.8%	2.0%	0.7%	0.2%	0.2%

**How many investment options are *offered* in your defined contribution plan?**
	Overall	Micro	Small	Mid	Large
Average	18.8	19.2	18.5	17.6	19.6
Median	16	16	17	16	15

**How often do you formally review the investment options?**
	Overall	Micro	Small	Mid	Large
Quarterly	31.1%	11.8%	31.2%	54.3%	57.2%
Twice a year	16.0%	12.2%	20.6%	18.9%	12.0%
Annually	37.5%	49.1%	39.2%	20.7%	20.6%
Every 1-3 years	8.3%	14.0%	5.3%	4.1%	6.0%
Every 3+ years	1.9%	3.1%	1.4%	0.4%	1.8%
Never	3.3%	7.6%	0.9%	0.7%	0.7%
Other (please specify)	1.6%	2.1%	1.4%	0.9%	1.8%

**What is the approximate average expense ratio of all the plan investment options?**
	Overall	Micro	Small	Mid	Large
Less than .25% (<25 bps)	13.3%	16.8%	10.4%	10.4%	15.3%
.25-.50% (25-50 bps)	18.9%	14.8%	18.6%	19.1%	28.6%
.51-.75% (51-75 bps)	17.4%	9.2%	15.7%	27.4%	29.8%
.76%-1% (76-100 bps)	21.1%	15.6%	25.0%	29.1%	16.5%
1%-1.5% (101-150 bps)	11.4%	15.2%	14.3%	5.6%	2.0%
1.6%-2.0% (160-200 bps)	1.2%	2.2%	0.8%	0.5%	0.5%
2.1%-2.5% (210-250 bps)	0.4%	0.5%	0.6%	0.0%	0.0%
More than 2.5% (More than 250 bps)	0.0%	0.0%	0.0%	0.0%	0.0%
Don't know	16.3%	25.7%	14.7%	7.9%	7.3%

**Which investment vehicles are you currently using for your DC plan?**
	Overall	Micro	Small	Mid	Large
Mutual funds	88.2%	85.2%	88.9%	93.8%	88.6%
Separate account	15.0%	11.9%	14.7%	12.0%	25.8%
Managed account	23.6%	23.6%	24.9%	21.0%	23.0%
Commingled pool	6.2%	4.4%	2.8%	6.4%	18.2%
Collective trust	9.7%	2.5%	6.6%	18.0%	25.1%
Other	3.9%	2.3%	3.2%	5.5%	7.6%

**Do you currently offer any of the following types of investment options in your plan?**

Employer stock	9.5%	1.2%	3.8%	14.6%	36.2%
Self-directed brokerage	15.2%	6.2%	13.4%	26.4%	28.8%
Real estate	13.3%	11.5%	15.9%	14.0%	10.9%
Alternative investments*	1.8%	1.9%	1.6%	1.5%	2.2%
Target-date funds	39.9%	24.3%	42.2%	52.0%	58.4%
Risk-based lifestyle funds	22.2%	16.6%	25.5%	24.8%	24.5%
Managed accounts	20.7%	19.5%	21.8%	18.4%	23.0%
ETFs	1.0%	1.2%	0.8%	0.9%	0.9%
None of the above	29.5%	49.4%	24.8%	14.7%	9.3%

*Hedge funds, venture capital, private equity

**What types of asset allocation/lifestyle/lifecycle funds are available?**
	Overall	Micro	Small	Mid	Large
Target-date funds—from one firm	45.2%	31.3%	46.3%	52.4%	57.7%
Target-date funds—from multiple firms	21.7%	18.8%	22.8%	26.8%	20.1%
Don't know	34.4%	50.7%	32.3%	22.8%	23.9%

Do you believe that your recordkeeper is offering you the most appropriate target-date funds available?

Overall Micro Small Mid Large

Yes 58.2% 49.3% 60.2% 63.5% 62.6%

No 3.9% 2.7% 3.1% 5.5% 5.6%

Not sure 37.9% 48.0% 36.7% 31.0% 31.9%

When adopting a target-date fund series, do you evaluate each individual fund?

Overall Micro Small Mid Large

Yes 60.5% 56.9% 59.1% 64.4% 63.9%

No 39.5% 43.1% 40.9% 35.6% 36.1

**Does your organization match the participant's contribution?**
	Overall	Micro	Small	Mid	Large
Yes	72.8%	63.7%	77.0%	77.0%	76.8%
No	27.2%	36.3%	23.0%	23.0%	23.2%

**If so, how much is the approximate maximum match?**
	Overall	Micro	Small	Mid	Large
More than 100% of 6% of salary	5.4%	6.5%	4.4%	4.9%	6.0%
100% match on 6% of salary contributed	9.6%	9.1%	7.0%	11.2%	15.1%
Between 51%-99% of 6% of salary	25.7%	19.9%	25.2%	27.1%	36.9%
50% match on 6% of salary contributed*	28.5%	29.4%	29.3%	29.7%	23.7%
Less than 50% of 6% of salary	30.8%	35.1%	34.1%	27.1%	18.2%

*effective 3%

**How long before participants are 100% vested in the match?**
	Overall	Micro	Small	Mid	Large
Immediately on enrollment	29.6%	25.7%	26.4%	36.9%	37.3%
6 months	0.9%	1.3%	0.8%	0.8%	0.4%
1 year	5.6%	5.6%	4.3%	6.0%	8.0%
2 years	3.3%	2.4%	2.7%	4.2%	5.7%
3 years	12.9%	9.1%	12.5%	15.2%	19.3%
4 years	4.0%	2.7%	4.7%	4.2%	4.4%
5 years	25.3%	28.5%	26.8%	21.3%	19.1%
After more than 5 years	18.5%	24.8%	21.7%	11.3%	5.8%

**Does your plan use the services of a financial adviser?**
	Overall	Micro	Small	Mid	Large
Yes	61.2%	65.5%	63.1%	55.3%	51.8%
No	38.8%	34.5%	36.9%	44.7%	48.2%

**Is financial/investment advice offered to participants in your DC plan?**
	Overall	Micro	Small	Mid	Large
No	28.8%	25.2%	24.7%	36.9%	39.7%
Yes, through a financial planner/adviser	26.7%	35.9%	30.0%	14.6%	8.5%
Yes, through a third party	9.5%	5.4%	6.8%	11.5%	23.8%
Yes, through our DC provider	31.6%	30.4%	35.0%	34.3%	24.1%
Yes, through another source	3.3%	3.1%	3.6%	2.7%	3.8%

**Are plan participants able to borrow against their 401(k) or make hardship withdrawals?**
	Overall	Micro	Small	Mid	Large
Yes, loan provision included	78.4%	70.5%	79.6%	86.6%	87.6%
Yes, hardship withdrawal provision included	74.4%	65.9%	75.8%	85.4%	82.4%
No	37.9%	48.0%	36.7%	31.0%	31.9%

Methodology

In July and August 2008, approximately 35,136 survey questionnaires were sent to defined contribution (DC) plan sponsors from the PLANSPONSOR magazine database, as well as client lists supplied by DC providers; 5.973 total usable responses were received by the close of the survey on September 10, 2008. Market segments are defined as follows: micro (<$5MM), small ($5MM-$50MM), mid (>$50MM-$200MM), and large (>$200MM).

Illustration by Jonathon Rosen