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Why Aren’t More Plan Sponsors Adopting the ‘Ideal Plan’?

After 100 educational programs conducted by The Plan Sponsor University (TPSU) in a little over two years, it’s clear that few if any plans have adopted the “ideal plan” — even though the benefits are enormous and the risks are low. So what’s keeping employers from moving forward?

The “ideal plan” includes:

  • Auto-enrollment and reenrollment at 5%-6%

  • Auto-escalation at 1%-2%/year (preferably in conjunction with raises) up to 12%

  • Stretch match

  • QDIA: a professionally managed investment like TDFs
  • For a 30-year-old making $45,000, the results are profound: After 35 years, that employee would have just under $1.5 million in her account, compared with just over $500,000 under a “normal” plan. When these numbers are presented at a TPSU program, there is a collective gasp in the room.

    So what’s the resistance? For auto-enroll, the concerns are complaints from employees, extra work and the fear of appearing too paternalistic. But almost every plan sponsor attending a TPSU session that uses auto-enrollment has reported very few employees complaining (less than 1%) and less work, not more. And paternalism is a hollow excuse — not only do most employees welcome auto-enrollment, some even expect it.

    Costs are a real issue, ameliorated by the stretch match. But the worst case is that companies can just lower the match.

    Though some HCEs might get hurt, a non-qualified plan may be the answer. The 401(k) plan is really most beneficial for middle income workers; and the “pain” of a lower match for HCEs is really inconsequential compared with the benefit of auto-enroll for others.

    As we noted last month, the DC industry cares more about outcomes than plan sponsors do. This will continue until we can show the CEO the benefit of having a healthy DC plan. But assuming that the “ideal plan” does not increase cost, liability and work (arguably, it can lower the last two), what’s the real reason that only a handful of small and mid-sized plans are using it? It comes down to two simple reasons:

  • Inertia. Like their participants, plan sponsors are plagued by inertia. For most HR and financial professionals at small and mid-sized companies, retirement is just one of their 10-plus responsibilities. In addition, most don’t fully understand their DC plan, so they are reluctant to pull the trigger.
  • Plan advisors. Of the 250,000 advisors getting paid on a DC plan, about 25,000 are “core” advisors with at least $25 million DC AUM — so the remaining 225,000 advisors may not even understand the “ideal plan” themselves. Furthermore, as advisory fees shrink, forcing advisors to service more plans, they may be too busy to implement the “ideal plan.”
  • But if advisors want to maintain their margins, they have to go beyond fees, funds and fiduciary. Showing how the “ideal plan” can limit liability and boost company viability without increasing fees or work might be a good and relatively easy way for experienced advisors to show their value.

    What’s your take? Start a discussion in the comments box below.

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