Members of the Defined Contribution Institutional Investment Association (DCIIA) recently collaborated on a white paper outlining what they regard as best practices for DC plan design, investments and monitoring.
While it may seem obvious to experienced DC plan advisors, the white paper can be helpful when trying to persuade plan sponsor clients to make changes that affect outcomes based on what others are doing and professing. While plan sponsors may want to incorporate best practices, relatively few want to be on the leading edge, preferring to follow what others are doing to make sure they stay safe from litigation and/or criticism.
Here are some suggestions from the study regarding plan design, investments and monitoring:
Plan Design
- Immediate eligibility – get workers accustomed to DC deductions from the beginning.
- Auto-enrollment – plans with auto-enrollment average 81.4% participation, compared with 63.5% without. And don’t forget re-enrollment for current non-participating workers.
- Stretch match – rather than 50% of 6%, match 25% of 12% which signals the optimal deferral rate. And express the match in dollar amounts, not percentages.
- Provide an additional match for safe harbor plans.
- Loans and withdrawals – limit loans to one at a time; institute waiting periods; educate participants.
- Roll-ins – encourage consolidation of old IRAs and DC accounts.
Investments
- QDIA — professionally managed investments
- Document process – have an investment policy statement
- Open architecture
- 10 or fewer core funds including the QDIA
- Active and passive – select by asset class
- CITs and multi manager white label funds
- Retirement Income and alternative funds
Monitoring
- Participation rate: +90%
- Deferral rates: 10-15%
- Diverse asset allocation – target participants with low number of funds
- Fees
- Income replacement ratio
