At The Plan Sponsor University (TPSU), the final session of our program is designed to engage groups of mostly small and mid-size plan sponsors to create the “ideal” 401(k) plan.
Almost all of the approximately 100 classes held over the past two years at local colleges and universities around the country ended up with the same “ideal plan.” Yet fewer than half had implanted any of the features and less than 10% used all of them. Why?
First, let’s review the “ideal plan” created by the nearly 1,500 DC plan sponsors who participated in these sessions:
- Auto enrollment (with re-enrollment and maybe remapping)
- Deferral starting at 6%
- Auto-escalation capped at 12%
- Stretch match in dollar amounts, not percentages
- Managed investments as the QDIA — 95% TDFs
This is the plan that Profs. Benartzi and Thaler envisioned more than 15 years ago when they pioneered the “Save More Tomorrow” concept. With all due respect to advisors who hang their hats on education and financial wellness, the “ideal plan” design delivers more than 80% of the benefits with less than 20% of the work. The hard work of education and advice should not be ignored — but it should be implemented only after the easy work is done.
Rather than focus on what the ideal plan design should include, we showed the results of previous programs laying out the “ideal plan” and then let those plan sponsors who used all or parts of it discuss what resistance or concerns they experienced prior to implementing their “ideal plan” — and then what really happened. Remember, adults don’t learn by listening, and they don’t trust experts, so we set out to let those who were using the “ideal plan” convince the others.
So what’s the resistance? Beyond inertia and procrastination, and the fact that many CFOs from small and mid-sized companies don’t really care about creating a good DC plan (yet), the concerns included increased costs, the fear of being too paternalistic and worries about more work. We addressed costs by lowering and stretching the match if needed. Very few if any participants complained about being automatically enrolled — in fact, some expected to be. And with auto features available from most record keepers, there’s actually less work.
We emphasized how a poorly implemented “ideal plan” can blow up. Enrolling at a low deferral rate can take too long and ruin the economics of the plan for the record keeper. Auto enrollment without auto escalation is like peanut butter without jelly. And keeping the match at 50% of 6%, the most common formula, sends the wrong message about how much people need to be saving.
