At the second TRAU Group Study Session, where more than 40 C(k)P candidates gathered recently at Transamerica’s downtown Los Angeles headquarters, advisors and industry professionals were asked the same questions as the C(k)P candidates who gathered in Boston a month earlier — questions related to improving participant outcomes, what’s working and what’s not working.
Based on the answers to those questions, candidates designed the ideal 401(k) plan — keeping in mind the economic realities of plan sponsors, the government and participants, but without regard to existing regulations.
What’s Not Working
• Auto enrollment at 2%-3% without auto escalation
• Administrative burdens on employers
• The cost of matching contributions
• Cultural and demographic mismatches among participants, providers and sometimes advisors
• Failed discrimination testing
• TDFs that go to cash at age 65
• Portability of in-plan retirement income
• Education
— One size fits all
— Investing 101
— Paper handouts
— Material branded by vendors
• Lack of trust in the plan advisor
• Lack of trust in the financial services industry
What’s Working
• Auto enrollment with escalation
• Matching 25% to 12% vs. 50% of first 6% — sends proper message to participants about deferral rates
• Plans that have participation rates over 80%
• Showing actual, real life examples of benefits and features
• Starting slowly with reluctant employers to show the benefits of auto plans in driving behavior change
• Finding and focusing on receptive employers
• Plan sponsor peer pressure, which can come from benchmarking
• Companies that aspire to be bigger
• Avoiding TDFs for smaller plans and safer QDIAs for first-generation workers, who are savers, not investors
• Auto plan features, especially for companies with many locations
• Customized plan design and communication
• Hiring third parties to help provide education and enrollment support
• Different conversations with the CFO and HR
• Customized pricing based on company needs, like for one-on-one advice
• Technology at enrollment, e.g., iJoin
• Glide paths, time- and risk-based and LDI
• Show retirement income needs vs. just trying to save more
• Capital preservation funds vs. retirement income
• Segmented education by:
— Ethnic groups
— Salary
— Age
• Focus on opinion leaders
• Make the education relevant and co-branded by the plan sponsor
The Ideal 401(k) Plan
• Make 401(k) plans mandatory for employers with 25-plus employees
• Require employers to put a percentage of their benefits budget toward retirement, perhaps as a match
• Eliminate or severely limit plan loans
• Loosen discrimination testing
• Raise audit requirement to plans with more than 100 participants
• Participants must pass a financial literacy test to opt out of packaged products
• Hybrid pricing vs. revenue sharing
• Limit retail share classes based on plan size
• Deferral rates should be based on income replacement needs
• Limit opt-out frequency
• More tax credits for healthier plans
The results of the LA session were very different from the Boston session. While the Boston group preferred to nudge participants and employers, the LA group moved closer to mandatory, DB-like plans. The results also raise some interesting questions. For example, forcing employers to create a plan and make a match might improve outcomes for participants in those plans, but would it limit hiring or push employers to hire more part-time or 1099 employees? If companies are forced to create a plan and participants have limited investment options in a fully automated plan, what’s the role of the plan advisor?
What does your ideal 401(k) plan look like? Leave a comment in the box below.
