For advisors serving the DC market, knowing what plan sponsors hope to accomplish by making DC plans available to their employees can be the edge that helps them win a case or keep a client. A new report from JP Morgan Asset Management tackles that question.
In “What Plan Sponsors Want from Their DC Plans – and What They Are Doing About It,” a report based on the firm’s 2013 defined benefit contribution plan sponsor survey, JP Morgan surveyed nearly 800 plan sponsors with assets ranging from less than $1 million to more than $1 billion. The survey ran in December 2012 and January 2013.
Plan sponsors are “clearly committed” to achieving a variety of goals through DC plans, according to the report. These goals serve both employers and employees: recruiting and keeping qualified employees and demonstrating concern for them, as well as helping employees prepare for retirement. In fact, more than three-quarters of plan sponsors seek to accomplish the latter.
However, the news is not all good:
• A mere 25% of the plan sponsors that responded consider it a top-three goal of plan communications to promote participants’ understanding of how much they are on track to receive in retirement from their accounts.
• Only a bit less than half measure the success of the plan by the percentage of participants whose account balances are on track to provide them at least 80% of their salary in retirement. Many more look at whether employees and participants are satisfied and how the investments of the plan funds are performing.
• Only 11% base the decisions they make about plan design on maximizing the number of participants who have adequate retirement income. And just over half of plan sponsors consider their plans to be highly effective in providing employees with financial security and allowing them to retire at the normal age for doing so.
The study found that plans generally are not innovative. It does call it “encouraging” that most large plans have adopted target date funds and automatic enrollment, and almost half have adopted automatic contribution escalation. Still, the study notes that adoption rates for plan sponsors overall is far lower.
What to Do?
JP Morgan says three factors highlight what plan sponsors should do:
1) Employees would rather not make all their own decisions.
2) Promoting an understanding of the amount of income participants are on track to receive in retirement can be a powerful factor in motivating participants to save and invest well.
3) Participant assets that default into a plan’s qualified default investment alternative during a re-enrollment do not increase plan sponsors’ fiduciary risk.
Given these factors, the study says, plan sponsors should:
• understand participant behavior;
• stay on top of developments in plan design;
• be informed of plan sponsor best practices; and
• take advantage of policy changes designed to offer them protection in their role as fiduciaries.
The study suggests that employers need to strengthen their plans to satisfy employees now and also when they are retired. It also argues that plan advisors have a crucial role in helping plan sponsors design plans that address participants’ goals and incorporate more innovation, as well as better educating participants and encouraging them to save and invest.
John Iekel is a writer/editor for ASPPA and its sister organizations, including NAPA Net.
