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READER RADAR: Alternative Approaches Draw Differing Degrees of Interest

DC Plan Design

In recent weeks, there has been a lot of discussion (and even some legislative encouragements) toward some new (or, in some cases, not-so-new) plan design considerations. This week we asked readers what they thought about these alternative approaches.

That’s right—in recent weeks bills have been introduced to support the use of annuities as a default investment alternative and to deploy automatic reenrollment of individuals who may have previously opted out of participation. Meanwhile the notion that asset types like private equity and cryptocurrency could be vital means of bringing more interest/value to defined contribution plans has bubbled up—and managed accounts, a hot topic not so long ago, seem to have plateaued—for the moment at least. 


First up: re-enrollment of workers who had previously opted out of automatic enrollment.

38% - Already recommending it.

28% - Not on my “to do” list.

24% - Thinking of recommending it.

10% - Planning to recommend it.

One of the most effective tools in our toolbox for what is be our top two priority (Fiduciary first, enrollment/deferral second).

I always have this discussion with clients and discuss the pros/cons, but most are opposed to this feature. A few have added it. I’m not sure I would say that I ever “recommend” it. I present it with a neutral bias.

Only if participation is under a certain percentage based on mutual goals

We do it for health insurance each year...

In the recent past, and in the few plans we did this, it caused such an uproar from employees (that surprised us all) that I’ve become gun-shy. The gist of the uproar was, “We already told you we didn’t want to be in the plan... stop haranguing us.” Full picture though, we have 95%+ participation rates and there are so few who opt out. I would be open to reenrolling every 5 or so years though.

I just left a client’s quarterly plan review meeting yesterday with $15 Million in assets. We have taken them from a 67% participation rate to a 100% participation rate (280 eligible/participants) in 2 years leveraging Auto-enrollment and Re-enrollment. I took a larger client in Oklahoma City 7 years ago ($57 million dollar plan) from a 57% participation rate to a 92% participation rate doing the same thing.

Typically any clients I have brought it up to have shut it down immediately.

Concerned it may not be done accurately by HR department.

This is such a small population and many employers believe once someone has made an affirmative election, annual encouragement and reminders is their only responsibility. The other reason why not to do it that I get a lot, “just one more thing on a very long list” for HR and finance professionals.

i think this is a breach of a participants’ rights. if they do not want to participate we shouldn’t be forcing their hand.

In the Intermountain West there is a heavy dose of “libertarianism” and getting plans to adopt auto-enroll features over the last several years was a bit challenging, but we have one them over to a large degree. However, the employers with whom I have discussed reenroll find the idea “oppressive” and overly paternalistic.

Can’t think of much of a downside...

Auto enrollment is great, but if we reenroll employees who have already opted out, what happens during the next down-turn? Do we look greedy as an industry?

A lot of our clients already do this annually.

Depends on the client and on the recordkeeper’s capabilities.

Not for all clients but have it in place for a few

This is always a good way to increase participation. However, automatic enrollment seems to work really well for us, so I would recommend this for plans with poor eligibility and those without automatic enrollment.

Managed Accounts

43% - Not on my “to do” list.

32% - Already recommending it.

17% - Thinking of recommending it.

8% - Planning to recommend it.

Similar to re-enrollment, I’ve had conversations with all my clients about managed accounts, and share the philosophical side of this vehicle. I try to maintain a neutral bias here as well. Several have added them, but several more have passed due to the belief that the average participant (if invested appropriately) is not going to understand the long-term implications of adding 40-50 bps in fees annually.

We have a few, but not the regular choice

We don’t recommend it. We explain it—all the pros and cons of it. Committee makes the decision.

Not a fan, view them as another example of industry providers developing products to generate more revenue.

Interesting the interest has plateaued. Great opportunity on the upside, but it’s harder work when the market is down (and participants need the help the most)? Am I being too cynical?

Not enough information about them yet to “Qualify” the value of the services offered.

Typically “too” expensive

Not with any regularity, it needs to fit the sponsor and the provider they’re with. This is very much, like most things we do, customized to the client.

Depends on the product and IPS and open architecture capabilities. is there truly alpha that is net of fees and a reason to use them?

I have had managed accounts in many of my plans for years. I have met with literally hundreds of plan participants using the service and met with dozens of plan sponsors offering the service and I cannot think of ONE time that I have received positive feedback regarding managed accounts from either a plan participant or a plan sponsor. A lot of negative feedback in terms of the cost relative to the benefit but not a single positive comment. Further, in a world of fee compression it makes no sense to me to add a service that often costs more than the combined percentage/dollar amount of what I charge as an advisor and the recordkeeping fee. Finally, until there is plan level data to demonstrate and benchmark the plan level benefit of the service, I will be working to minimize usage in plans and avoid adding it to new business.

The problem here is that the added fees managed accounts are a fairly obvious target for litigation, and their highly customized nature makes it difficult to prove that they actually work. So pretty much a nightmare scenario for a fiduciary...

Currently recommending for some, but not all, clients.

Cost is still a function here

Not a good fit for everyone—being selective in thinking about it

We manage risk-based model portfolios for most of our clients in addition to offering a TDF suite. We do this for no additional charge. If a participant chooses to use the recordkeeper’s managed account solution, that is up to them.

This seems so self-serving for advisors who are also building the managed models. We highlight the RK’s managed account services as one of several options for employee participants.

Still have issues with it as a default investment.

It is recommended through the TPA.

Private Equity as a Stand-alone Investment Option on the DC Menu

Yes, despite the occasional headline:

90% - Not on my “to do” list.

9% - Thinking of recommending it.

1% - Planning to recommend it.

0% - Already recommending it.

It’s hard to think that either I or my participants will be able to be a well informed consumer of private equity options. They don’t have an accepted “risk profile” that mutual funds do. All would be good on the upside, but defending the downside will be challenging. As a 3(38), I don’t believe I have anywhere close to a prudent skillset to evaluate and defend against private equity. I would be curious as to the split of 3(21) vs. 3(38) who actually do this.

Would love to find a way to make this fit, it’s an incredible opportunity.

I do not consider private equity a prudent investment for the average DC plan participant.

Unless a client specifically brings it up, I don’t have much of a reason to introduce it.

Discussions about this, but not implementation. More education to committees and not a strong conviction in offering a dedicated PE fund/option so far.

Outside the box of standard investments and a bit unnecessary to offer.

I don’t believe the benefit is worth the potential burn.

Nope. Hard pass.

Illiquid, non-transparent, expensive, risky investment option. Not exactly what we need when plan sponsors and participants struggle to understand the basics of investing.

High-fee, illiquid investments in this litigious environment? Hard pass.

Expensive, high risk and imprudent for the typical plan participant.

Not for the lay investor; this is too much risk for someone to properly understand

This is a worthy investment choice, but it is not going to be considered for our DC plan.

Private Equity as Part of a Commingled Investment Choice, Such as a Target-date Fund.

72% - Not on my “to do” list.

23% - Thinking of recommending it.

4% - Already recommending it.

1% - Planning to recommend it.

I don’t consider “hiding” an imprudent investment meeting the fiduciary standards we uphold.

Need more info about it

Still need to solve valuation problems and liquidity.

Not needed

If it’s in the off-the-shelf TDF situation, ok.

More palatable than a stand-alone, but still not recommending it.

Kind of a non-issue for me; like any alternative asset class, if it helps the TDF deliver better risk adjusted performance, than sure. But, just like retirement plan fiduciaries don’t dictate to mutual fund managers the particulars of what they invest it, such fiduciaries would not do this for TDF fund managers, either.

Hiding an expensive, high risk and imprudent investment choice in a derivative doesn’t change our viewpoint.

Perhaps this could work inside a target date with proper diversification, but for the lay investor this is too much risk for someone to properly understand. It could lead to more “Enron” type investing

I could envision this as a piece of a target-date fund’s investments. After all, these funds have slices of many different investments. However, this is not expected to show up on a “to do” list in the near term.

Cryptocurrency as a Stand-alone Investment on the Investment Menu

88% - Not on my “to do” list.

11% - Thinking of recommending it.

1% - Planning to recommend it.

0% - Already recommending it.

Curious the 3(21) vs. 3(38) split on this. As a 3(38), I do not have a prudent skillset to evaluate and defend against crypto.

WAY too dangerous to the common investor who doesn’t know how it works

Hell no! There’s not enough room to share all of my thoughts on this, but to be brief, it remains unregulated (which in and of itself fails our criteria as a CEFEX certified firm), it has endless exposure to breakdowns in cybersecurity, and by definition it lives in a world of speculation, not investment at this point, although I will concede that blockchain opportunities could be deemed investments.

Having an unregulated in any way investment as part of a core retirement investment strategy for any plan or participant gives me pause as a fiduciary advisor. I think we need to have more analysis tools to better understand the investment cycles and the correlation coefficients of crypto currencies before we add them to a retirement plan investment menu.

No, no, and no

Similar to commodity and even sector funds, most 401K investors wouldn’t know the risk/reward (nor does anyone really)... specifically the risk.

This can be accomplished via an SDBA.

Too volatile.

In my opinion, a very volatile area that can be problematic. Saving participants from themselves can be more important than offering the new shiny penny. Until this is proven as a viable and less volatile option, I am not apt to recommend and does not even exist in a 40 Act fund at this point, just a Bitcoin Futures ETF which is a terrible way to invest IMHO.

I would like to add access to cryptocurrency assets in a low cost, diversified index fashion primarily to overcome the hurdle placed by some employees to save in to their retirement plan given their strong interest in Cyrpto. I would love recordkeepers to have the ability to limit exposure to that asset class (and other higher risk categories) to a certain percentage determined by the plan sponsor.

Nope. Hard pass. So. Many. Risks. in the Wild, Wild West: scammers, price volatility, 51% issue, no safeguards, lack of regulatory oversight, state and international law issues, the permanence of trading (i.e., no way to unwind or suck it back into your account if you realize you just sent it to North Korea), reporting and transparency issues if not using certain wallets, validity and security of wallets, plan distribution issues, loans, earning additional currency and recordkeeping of it, due diligence issues. This is way worse than penny stocks. Investors can do it on their own, outside their 401k, and take their own risks.

Prudent long term investment. This doesn’t meet that standard as of now.

Absent federal regulation of crypto, this seems like a legal impossibility, at least in ERISA plans.

Absolutely not, as long as it remains unregulated and a punching bag for cyberattacks.

Any mere non-dollar foreign currency is not an appropriate investment for a plan menu.

Not for the lay-investor this is too much risk and too much hype—the regular “Joe” investor may see this as the latest, greatest craze and direct an inappropriate portion of assets to this one investment.

We’ve had some inquiries from clients but don’t have any who have gone down this path. In general, clients feel like this is too risky and want to stay away from it.

Personally speaking, this should never show up in a DC plan investment menu. From a plan sponsor perspective, it will also not be on our list of recommended investments.

Annuities as a Default Investment Alternative (Proposed Legislation)

37% - Troublesome.

29% - An interesting idea.

28% - Unnecessary notion.

6% - Urgently needed.

Even though it makes assets inside 401k plans more sticky, it creates a huge long tail. I believe it is an unnecessary revenue grab by 401k industry that moves us from group participant planning to individual participant planning. I want to learn less about the “Annuity” and more about actual participants who are (or would be) annuitizing a 401k annuity product. The target participant demographic appears to be participants with less money than a financial advisor wants as a personal client. Generalizing that this participant demographic is less financially educated and assisted... is an annuity feature the right balance between expense, retirement income outcome and 401k advisor cost/benefit engagement with those participants? Do I or my sponsors really want to be responsible for a “long tail” of retirees inside of my group qualified plans? Do I really want to have that participant demographic leave the group and become individual clients of mine? If we set up and charge them up with a “forever” investment, who is going to “forever advise” this participant group when they retire?

Should be clear path for this option. DC plans looking more like DB plans is needed and inevitable for significant populations.

Maybe, I think the noise far outpaces the reality (what’s actually available on platforms) at this point, but as product offerings evolve, mature, and are more readily available, we’ll take a look at them. We like annuities as a component of the individual wealth portfolios we advise on when we deem it suitable to the individual’s goals, objectives, and risk tolerance levels.

May be a good thing, however I ask… If Reg BI and the Fiduciary Rule are effective, is this necessary? Is this a new way for insurance carriers to get their products with potentially high costs back into the investment menu mix?

Need to be able to get FULL TRANSPARENCY about the “products.” The knock on annuities is the lack of that transparency around fees, etc.

Not sure this is needed for accumulation portion.

Educating sponsors and the industry in general with income options, including annuities should be more widely done before we get into default investing. This just seems another potential marketing scheme to tie up and make money sticky for either advisor, recordkeeper or both with irreversible negative consequences, if the fit, which is already difficult to do for the masses is incorrect.

This opens the door for proprietary recordkeepers to come in and strong arm participants to keep their money there.

Perhaps something like Hueler with several options at institutional prices.

I have had annuities as an available option in many of my plans for years. The challenge with the annuities is that there is a reason that retail annuities pay a high commission to advisors: they take a lot of time to sell and then re-sell every year when the client forgets how they work and why they are in one. I spend a multiple of time with each plan participant who chooses an annuity in the plan relative to participants who do not, and earn the same percentage either way. To promote greater use of guaranteed retirement income products in plans (which is a great idea and a noble goal), the recordkeepers and insurance companies will need to figure out how to make the selection, use, and explanation easier for plan participants. Otherwise there is a disincentive for those of us charging either a flat fee or flat percentage to support options that are so much more complicated and time consuming.

I don’t dislike this idea any more than I dislike managed accounts as an option for QDIA—why would you automatically default someone into something with higher fees? But I can understand where it might be useful for certain groups of employees (where in reality, they would have been better served by a pension!).

Depends on the structure. A fixed rate annuity alone as a QDIA would probably not provide the needed growth of value over a 20-40 year period. But if there were an investment component (e.g., some kind of variable annuity), it would be worth looking at.

Let’s see, most are high-cost vehicles with liquidity issues, and all lack cost transparency. What could possibly go wrong?

Given the cost structure of most annuities, it makes more sense for annuities to be purchased at the time of distribution rather than during the accumulation phase for most participants.

Years ago, annuities were “required.” Then we moved away from them. A mixed approach might be interesting.

Assigning additional costs to a forced offering is never a good idea.

Although we generally like annuities in a broader investment portfolio/strategy, the industry appears to be quite a ways away from actually delivering something suitable to the participant.

Need to wait for the market to catch up with regulations. Few stand-alone products available.

I like the idea of annuities being available but not having them as a default. They are complicated and need some good conversation with interested participants. I could maybe see them as a default for participants over a certain age, maybe 50. But, why would I default a 30-year-old into one??

This will greatly confuse participants (and fiduciaries) but I also think it’s a good idea. My wife is an RN and would need an annuity to help her manage our finances long-term if something happened to me.

How to get out of it and how to move RK and what are the evaluation standards

There is some participant interest here, but not much. This has been pushed by those of interest, such as insurance companies, politicians and some in the retirement industry realm. Let’s see how much interest we get once the DOL’s lifetime income disclosures go live. My guess is “little."

Annuities/Lifetime Income Options as Part of a Target-date Fund Glidepath

46% - Not on my “to do” list.

38% - Thinking of recommending it.

10% - Planning to recommend it.

6% - Already recommending it.

I’m on board, just want better product options at this point.

Not recommend. Explain... once we understand it. So much talk. So little details (thus far).

Another concept that sounds good but need more information about the “products.”

Still not sure it makes sense in accumulation phase.

It’s on my radar and there are better solutions in the market now than there were before, but we still have far to go. Again, educating clients and sponsors and ourselves is first goal. I do believe, if you’re going to offer it, it should be part of an automated sleeve of either a target-date fund or other professionally managed portfolio. Left to their own devices, the take-up rate is woefully low. I would not implement inside a target date indiscriminately though, income options are only the right fit for some participants, definitely not all.

Will always depend on participant circumstances

Until there is a low-cost option that is easily understood by plan participants I will approach warily. I would also submit that any conversion to annuity or managed account at the end of a career/target date series should be handled like an auto-enroll: give the participant at least 30 days notice with an EASY opt out.

Education issues, but it’s possibly viable.

Seems like an intriguing idea on paper when compared to the current hodgepodge of TDFs that not only do not assist with decumulation, but even wildly diverge on investment allocation during the decumulation period. However, need to see the particulars (how much is the cost? is the cost transparent? are there any liquidity issues?) before diving in .

Don’t want younger participants to pay unnecessary annuity fees.

Once, again, this has been pushed by those of interest, such as insurance companies, politicians and some in the retirement industry realm. Keep pushing.

Other Comments

We concluded this week’s reader poll—as we do most—by giving readers a chance to weigh in on “trends, the take up (or not) of new product/design trends, the need for new product/design trends, your take up of new product design trends, new product/design trends that are needed but aren’t being recommended/embraced, and/or life in general.” Here’s what they said:

Building an actual “unregulated” emergency fund into recordkeeping products. Something like “the first $3,000 of your balance is in an emergency fund that is not regulated by ERISA/DOL,” then the rest is in qualified assets. Participant can draw that down anytime without technical issues. Future contributions refill that nonqualified emergency bucket first, then begin building as qualified assets. This is different than the current proposed legislation and can be a product-driven solution as that portion of the “401k” account is outside of ERISA. The key would be automation of correctly designating contribution types at payroll.

ESG is a liberal “feel good” waste of time.

I understand the push to create better products and designs to help participants manage their savings once they begin to use it… i.e., lifetime income/annuities... but there is still a LOT of unknowns about these as a whole and still portability issues. The legislation’s intent is good but only if the providers offer transparent products. I don’t think unique assets classes like crypto and private equity do anything but to help the few and far between savvier investors. The average 401K investor would not know how to identify if those are a good fit for their investment strategy. Those types of things can be used in Self-Directed Brokerage Accounts for those who choose do something outside a core menu.

I am sorely disappointed that the major recordkeeping providers won’t add on an emergency savings vehicle integrated with the plan. The participants need it desperately, the plan sponsors desire it, and many of us as fiduciaries to the plan participants want to support it as part of helping allocate the next employee dollar. The recordkeepers would help all of us by figuring out how to monetize that offering and integrate it with the 401(k) as they have done with HSAs.

What bothers me is that some “trends” are not really trends at all, outside of a marketer’s imagination. For example, 401(k) plan adoption of in-plan annuities is still next-to-nothing, but somehow that is still a trend. And managed account adoption is not exactly taking the world by storm, either.

ESG is a hot topic. Lots of discussion, few additions to plans.

New is not always better.

NFT as plan investment

I find it ironic that I am one of the youngest in the industry yet I am against all of these shiny new toys based on my experience with real blue-collar plans and salt-of-the-earth participants. The big firms that preach financial wellness are clearly blind that working America still lives paycheck-to-paycheck and cherishes their money.

Thanks, as always, to everyone who participated in this week’s Reader Radar poll! 

P.S.: Many of these trend topics are sessions at the upcoming NAPA 401(k) Summit—don’t forget our #riskfree registration!