Would You Move Your 401(k) to a State Plan if Given the Opportunity?

A surprising number of plan sponsors answered ‘yes’ to this question, but not necessarily for the reasons you might think.

The LIMRA Secure Retirement Institute recently followed up on a 2016 survey that found that more than half (55%) of plan sponsors said they would be “very” or “somewhat” likely to consider transitioning from their current DC plan to a state-managed solution. The latest survey seemingly validates the degree of interest LIMRA found among plan sponsors in 2016.

In “An Ongoing Story: Plan Sponsors, Defined Contribution Plans, and State Retirement Programs,” LIMRA finds that 60% of plan sponsors are either very or somewhat likely to discontinue their existing DC plan and enroll employees in a state program if given the opportunity to do so.

The report cautions that, “With states (more than 30 as of this writing) and some local governments exploring whether to require that more employers offer workplace savings plans — and whether to play some role in facilitating and administering the programs — more employers may soon have no choice in the matter.”

These latest results are based on an online survey of 571 DC plan decision-makers (shared or sole) in organizations with 10 or more employees conducted in the fourth quarter of 2017. The primary DC plan for these employer respondents consisted of 82% 401(k), 9% 403(b) and 9% profit sharing.

“The willingness of DC sponsors to even consider participating in a state mandated plan was surprising, especially given how strongly employees themselves feel about key aspects of the DC system that wouldn’t be part of state-managed programs (such as the possibility of employer contributions, investment diversity and higher contribution limits),” notes author Deb Dupont.

Side Effects

When asked what they think would happen to participation if their company substituted a state-run retirement program for their current DC plan, a sizeable percentage believe participation would increase. According to the findings:

  • 32% believe participation would increase;
  • 37% believe it would stay the same;
  • 15% believe it would decrease; and
  • 16% said they are unsure.

Interestingly, the survey found that those who have greater familiarity with and did more research about state programs were more willing to transition to a state-sponsored plan from an existing DC arrangement.

As for the reasons for switching, the sponsors were mostly in agreement about how important various considerations are to them. When given a possible list, respondents cited the following reasons as either somewhat or very important:

  • Free up resources for other benefits (88%)
  • Reduce administrative burden (88%)
  • Reduce oversight burden (87%)
  • Employees would be just as happy (86%)
  • Reduce fiduciary liability (86%)
  • Lower plan costs (86%)
  • Reduce legal liabilities (83%)

The report notes that a slight outlier is the thought that states might be better suited to manage retirement savings than are specific employers. While nearly 80% report that this is an important consideration, a smaller percentage cited this reason as “very important.”

When broken down by employer size, resonating most strongly with the largest employers were freeing up resources and reducing administrative burden. The smallest employers, however, feel most strongly that governments should not be involved in private sector retirement savings programs.

Both the largest and smallest employer respondents feel equally that reducing fiduciary liability is a very important consideration, but larger organizations are more focused on reducing plan costs, the report notes.

No to Switching

Meanwhile, sponsors that say they are not likely to transition to a state program report that maintaining control of the program is a very important reason — cited by 86% of these respondents as being either somewhat or very important. What’s more, nearly as many indicate that worker benefits are an employer — not state — responsibility.

Also high on the list for not switching are the competitive advantages a plan gives the employer (80%) and that employees prefer an employer-managed plan to a state alternative (82%).

The size of an organization comes “heavily into play” when sponsors view the “burden” of plan administration, according to the report. It notes that, of those sponsors not likely to switch, 48% from the largest organizations feel strongly that administration does not constitute a large enough burden to make the change, compared to just 28% from the smallest organizations that feel the same.

In the report’s closing thoughts, the author warns that, “Willingness [to switch] in general should be considered a red flag to the existing DC industry and its stakeholders, particularly record-keepers and advisors.”

“High willingness to transition, despite the service provider being a primary influencer, means that the industry needs to do a better job of messaging and guiding existing sponsors – directly addressing the reasons why sponsor would be open to state programs – if it wants to retain (much less grow) DC business,” Dupont further notes.

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