There’s been a lot of discussion recently about whether the "ideal plan" is realistic. Based on the percentage of small and mid-size plans, where the most help is needed, using all aspects of the ideal plan, the concerns are real. But what’s the alternative?
To recap, the ideal plan includes:
- Auto enrollment and reenrollment
- Deferral at 6%
- Auto escalation at 1% up to 12%
- Stretch match
- QDIA — professionally managed investment like TDF
Why aren’t more plans using the ideal plan? Let’s start with logic. Auto enrollment can increase costs if there is a match. At a low deferral rate and without auto escalation, auto enrollment can blow up the economics of the plan for the record keeper and potentially raise fees for everyone. Employers are reluctant to “force” workers into a plan, especially lower paid ones, fearing that they are being too paternalistic. Another concern is increased work by administrators.
Solutions include the fact that the stretch match (25% of the first 12% versus 50% of 6%) will reduce costs immediately since not everyone will go to 12% right away. Worst case: reduce the match for everyone, which may hurt a few (generally the higher paid workers) but would benefit many. If we can get the CFO to realize the economic benefit to the bottom line of older workers being able to retire on time, increasing the match may become less of a problem.
In reality, when plan sponsors are presented with the ideal plan at TPSU programs, the concerns are generally answered by plan fiduciaries who have implemented parts of the ideal plan. So the real reasons include the fact that they have not thought about it or they are plagued by inertia — just like their participants. Face it: Plan sponsors are reactive, not proactive. This is why so many of them regularly conduct RFPs and benchmarking for their record keepers and money managers yet so few do the same for their advisor — no one is pushing them. All of which provides a unique opportunity for experienced plan advisors to distinguish themselves. And do plan sponsor who don’t care about outcomes or don’t want to engage in their plan sound like attractive clients?
So what’s the alternative to the ideal plan? Assuming we believe that we have to do something different if we want to change results (or admit our own insanity), the only alternative I can think of is a government-run, low-cost MEP akin to the federal government’s Thrift Savings Plan or some form of Social Security.
Do you have a better solution? Share your thoughts in the comment box below.
