As Shakespeare’s Antonio states in The Tempest, “what is past is prologue” — that is, all that has happened before can be expected to prompt future events. But that may not be the case when it come to the 401(k) marketplace, says the Plan Sponsor Council of America’s Jack Towarnicky.
In a blog post following up on his presentation at the 2018 NAPA 401(k) Summit in which he shared highlights of the organization’s recently completed 2017 Annual Survey of Profit Sharing and 401(k) Plans, Towarnicky, PSCA’s Executive Director, offers four new trends that he believes may emerge.
While he does expect some past trends to evolve, assuming the current statutory and regulatory framework continues without significant change — which he acknowledges is a “big assumption” — Towarnicky also anticipates that plan sponsors may consider and pursue different strategies over the next 10 years.
Beyond New Hires
Past trends like increases in automatic enrollment, automatic escalation and higher default contribution rates will continue, but once plan sponsors identify contribution and participation gaps among longer-tenured employees, Towarnicky expects the nature of automatic features to expand to those who were hired before automatic enrollment was adopted.
Target Maturity Models
Noting that many of today’s participants did not experience the market collapse of 2008-2009 and believing that a market correction may be on the horizon, Towarnicky suggests that plan sponsors may want to reconfirm equity weightings with participants in TDFs. “Some investment managers maintain significant equity weightings in 2020 target date funds. As a result, plan sponsors may not want to wait for the next market correction ‘surprise,’” he says.
He notes that an alternative some will pursue is to change their QDIA to a series of target maturity models, explaining that such options often feature less cost, an active/passive blend, an open architecture structure and white label/non-proprietary investments, along with fully transparent allocations.
Roth Features
While expecting the trend of adding Roth features to continue, Towarnicky observes that there may be a significant increase in participants using Roth over the next 10 years. Since the majority of American households will pay little or nothing in income taxes in 2018, he suggests that Roth contributions (and/or Roth conversions) “might be fortuitous.”
He explains that, because those who are automatically enrolled are often lower paid, shorter service and younger workers, many will be in the lowest income tax bracket of their careers, implying that it would be advantageous for these workers to take advantage of a Roth option. “We’ll know this is a new trend should plan sponsors decide to change their automatic enrollment default from pre-tax contributions to Roth contributions,” Towarnicky states.
Competitive Advantage, Not Retirement Outcomes
Finally, coupling the tenure/turnover trends of employees with plan qualification requirements, Towarnicky observes that “it seems clear that more plan sponsors will conclude, in the future, that broad-based benefit plans like the 401(k) are not differentiators of talent.”
As a result, he suggests, some plan sponsors may change how they define success for their 401(k) plan from an “industry standard” or “competitive” 401(k) plan, or a plan mostly focused on “successful retirement outcomes/preparation,” to a “competitive advantage” definition under which the metric is the effectiveness of the 401(k) within a total rewards strategy versus what would be achieved by a comparable level of spend on salary, incentives and other benefits.
Towarnicky plans to identify other 401(k) plan trends in Part 2 of this series.
