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More Plans Moving to Tiered Basis Compensation Method

While the most commonly used advisor compensation method remained flat basis points, more plans are electing a tiered method, according to a new report by Ascensus.

The report, “Inside America’s Savings Plans,” shows that flat basis points declined by four percentage points, from 91% in 2011 to 87% in 2016, while tiered basis points increased from 4% in 2011 to 8% in 2016. In addition, the report suggests that with a tiered approach, advisors do not have to reprice or renegotiate as often because the fee schedule allows them to systematically adjust their average compensation.

Meanwhile, Ascensus further says that, “In light of regulatory developments and the need for pricing transparency, more financial advisors are considering the shift to a fee-based service model.” The report shows advisor compensation by plan asset size and by participant count, broken down by commission-based and fee-based median basis points. The largest difference for advisor compensation by plan asset size is in the $5-10 million range, with a 13 basis point difference (38 bps for commission versus 25 bps for fee based). The biggest difference by plan participant count is in the 51-100 range, with a 9 basis point variation (46 bps for commission versus 37 bps for fee based). Most of the other ranges showed slight differences in median basis point levels.

The report also finds that retirement savers are adopting a more proactive approach, but most are unsure how much they should be deferring from their pay. For example, while Millennials overall are beginning to outpace older generations in terms of saving, younger Millennials under the age of 25 have the lowest overall average deferral rate at just 3.2%. According to Ascensus’ Retirement Outlook Tool, only 35% of employees are on track to meet their retirement goals.

To address low deferral rates, Ascensus suggests that “employee education and financial wellness tools can make a major impact,” including personalized communications illustrating how current savings decisions will translate in the future. The report notes that, after receiving a targeted communications, employees who chose to enroll in their company retirement plan deferred, on average, 6.24% of their pay in 2016.

Once savers become aware of their shortfall, they tend to take steps to increase their retirement savings efforts, the report further explains. After using the Retirement Outlook Tool, 55% of participants who previously were not deferring to their plan started contributing at an average rate of 8%, the study shows.

Automatic features also continue to prove their worth as effective tools in combating inertia and procrastination with retirement savings. Plans that opted for auto enroll on Ascensus’ platform achieved higher average participation rates than those not using auto features – 78% versus 69%. Moreover, plans with both auto enroll and auto increase features had the highest average plan participation rate, coming in at 80%.

In looking at how many employees continued in their employer’s plan after being auto-enrolled at the default rate, the report found a substantial number stayed in the plan, with 63% remaining at the default rate and 26% actually increasing their savings rate.

Not surprisingly, an employer match also creates a strong incentive to save and can play a major role in contributing to overall retirement readiness. The report shows that plans that fund a match versus those that do not have an 18% higher average participation rate.