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READER POLL: Design Innovations Have Slowed, Not Plateaued

Industry Trends and Research

A recent survey by the Plan Sponsor Council of America suggests that some plan design feature adoption rates may have plateaued. This week we asked NAPA-Net readers to share their experiences.

Well, PSCA’s 62nd Annual Survey of Profit Sharing and 401(k) Plans, reporting 2018 plan activity, found that while the number of plans using a default deferral rate of 6% of pay (rather than the traditional 3%) increased from 23.8% in 2017 to 29.7% in 2018, the number of plans with automatic enrollment has actually slipped – from 61.2% in last year’s survey to 60.2% in 2018.

However, nearly half (45%) of this week’s respondents said that, in fact, “it seems as though everybody who plans to implement automatic enrollment already has. Although that may be a function of their client set. As one reader noted, “In my book of business the ones that want to adopt it have, and it's something we talk about with every new client.”

On the other hand, more than a third (36%) noted that while the trend has slowed, it hasn’t plateaued – and half as many (18%) said there was still a lot of interest in automatic enrollment. 

“Some clients are not interested in either the potential for increased match cost or increased administrative burden associated with automatic enrollment and will therefore not elect to implement,” explained one reader. “A small subset of employers do not like the paternalistic aspect of automatic enrollment and will not implement.”

“We continue to have interest, theoretically, to automatic enrollment,” noted another reader. “However, operational issues drive the decision to implement. In some cases automatic enrollment has been taken out of the plan design because the plan sponsor cannot properly administer it. In other words, HR/Payroll personnel turnover, and recordkeeper issues (they don’t/can’t send reports that track who should be auto-enrolled) have led to costly cleanup/self-correction and thus, plan sponsor has gotten rid of auto-enrollment features and/or not implemented because they would rather just have more ‘simple’ design of regular enrollment. We also like recordkeepers who can still have a ‘proactive’ immediate enrollment and auto-enroll as a secondary/safety net feature, and not all recordkeepers have this capability. Thus, we typically won’t recommend auto-enrollment if it requires lengthening the general eligibility to the plan.”

Deferral Data

As for trends in the deferral rate, for a plurality (46%) of respondents“6% is the new 3%!” “We never recommended 3%,” noted one reader.“We have been slowly increasing the 6% to a larger number, but generally only when the client matches at an amount in excess of 6%.”  Or, as another observed, “Thank goodness for the studies & data that show the same rate opt out no matter the %!”

For roughly one-in-five (18%), “it’s been above 3% for awhile now,” and for another quarter (27%), “3% is still the standard, but we’re starting to talk about increasing it.” As one reader explained, “It is not necessarily 3%, but you do not have any other choices. I see 3%, 3.5% (QACA), and 5% mostly. Also, there are clients with automatic escalation. Regardless, those are the standards with no one thinking about making changes.”  Another commented, “Unless cost/budget is issue, we align the auto-deferral rate to the match rate. (Thus, 4%, 5% 6%, etc.) This prevents ee feedback of the employer is ‘short-changing’ me. However, some CFOs and budget constraints lead to attitude of 3% is entry, an employee must engage for the other match amount. We still have much payroll issues and recordkeeper concerns regarding implementation of auto-escalate. There is broad support for auto-escalate that is elected by employee.”

For the remaining 10%, “3% was still the standard for most.”  

Roth Rates

Turning to Roth adoption, the PSCA survey found that while nearly a quarter of participants (23%) elected to contribute to a Roth when given the opportunity (a 30% increase in three years), and while nearly 70% of plans now provide a Roth 401(k) option – the number of plans offering a Roth option has plateaued, from 69.6% a year ago to 69.1% in this year’s survey.

The sentiments here were a bit different in reader experiences; for more than half (55%), while the trend to adopt Roth was seen as slowing, it wasn’t plateauing, and another one-in-ten commented that there was still “a lot” of interest in Roth. “The majority of our clients have added it with some still considering it,” commented one reader, going on to explain that “there are still plenty of plans out there that don't know about it yet.”

“…the ability to administer Roth in payroll (execution) and employee confusion/communication is biggest barrier to adopting Roth as a money type,” explained one reader. “Most of our plans have it, so trend has slowed.”

The remaining 27% noted that, at least from their vantage point, everybody who plans to implement a Roth option – had. Indeed, another 9% said their clients had all already embraced a Roth option.

“Among our clients, so few participants have shown an interest in Roth coupled with the number of lump sum distributions at termination where Roth provided no benefit and the increased administrative hassle in payroll software plus the inability to effectively educate a personal planning issue in a group plan has led us to only recommend addition when the client feels there is a demand from their employees,”according to another reader.

Top Topics

Finally, on a somewhat related topic, with 2019 behind us, the implications of the SECURE Act upon us, and the 2020 election ahead, we asked readers what would be topping their list of topics for Q1 meetings with plan sponsors/committees.

Perhaps not surprisingly, “SECURE Act implications” topped the list, cited by 90% of this week’s respondents.

A (distant) second was “education plan,” cited by half, while “investment review” was noted by just four-in-ten.

The rest of the topics:

38% - Service metrics

29% - The markets

20% - Litigation trends

Other topics cited were the state IRA programs. “In addition to SECURE, the CALSavers program, which is now live and mandatory. Our clients with plans are exempt, but there is interest to know what it is,” noted one reader. “Fraud protections for employee assets within the plan,” was another topic.

As for plan design issues generally, “Extensive efforts to get employees to truly engage in retirement readiness through a variety of tools including projection reports with shortfalls being sent to participants have been largely unsuccessful and clients have generally lost interest,” commented one reader.

“Clients with strong plan metric, don’t generally adopt auto-enroll because their strong HR teams are achieving high level engagement (90%+ participation/8%+ contribution rates). On the flip side, much of plan design is driven by what can be outsourced (accurately) to recordkeeper and implemented properly. Expensive cleanup for operational errors have driving much plan design discussion and decisions.”

“I read your top stories every week in regards to class action suits,” noted one reader. “Risk management in 401(k) plans is a huge concern today. I recently wrote a blog on fiduciary insurance, which is something I would like to see all our clients consider in 2020.”

Or, as another reader noted, “The Secure Act will no doubt lead to a few new innovations; we just don't know what those are yet.”

Speaking of the SECURE Act and its implications, we’ve added THREE sessions to the NAPA 401(k) Summit specifically related to that topic. It’s information – and an advisor experience – you can’t afford to miss!

Register at https://napasummit.org

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