What constitutes an “ideal plan”? That’s what The Plan Sponsor University (TPSU) asked plan sponsors. NAPA Net Editor-in-Chief Fred Barstein, who also founded TPSU and serves as its CEO, recently told Neuberger Berman what they had to say. Their responses centered on enrollment, investments and administration.
There was broad support for automatic enrollment, although employers with high employee turnover, in the retail sector, and that already have a 90% participation rate were not as excited about it. Barstein said that TPSU does not consider auto-enrollment at 3% likely to yield an adequate amount for retirement, so it looked at 6% as the starting rate, increasing to 10% through auto-escalation.
He said there was consensus that auto-escalation should go to 10%. But that entails costs, especially if an employer matches employee contributions. But what is the right match? It was typical for companies that have it to match 50% of the first 6% of an employee’s contribution.
But matching is a double-edged sword of sorts — it can add to balances and encourage participation and saving in companies without auto-enrollment, but it also can inhibit saving. There was a consensus that employees often limit the percentage of income that goes to their 401(k) at the level of the employer match.
How can a plan mitigate that effect? Provide a 30% match of the first 10% of income an employee puts in. Another tip is to tell an employee how much the match will be. For example, suppose an employee who makes $50,000 puts 10% away ($5,000), and the employer matches that at 30%; that employee will be getting $1,500 from the employee. “Give them a post-dated check for $1,500 and you will see people deferring up to the max on the match,” said Barstein.
The plan sponsors also addressed how funds are invested. There was strong sentiment that target date funds are good for the significant majority but that the way information is provided and participants make choices about target date funds online can lead them to an “all or nothing” choice. For others, there was a consensus that participants should be able to choose from among seven to nine investments, and that a brokerage window should be available to the very few who want to assume that risk.
There was a sharp division on retirement income — not all companies were willing to take on responsibility for being involved with their participants after they left the company.
No one likes loans, said the plan sponsors, but their dislike was not so intense as to reject them outright. They did say, however, that if there are loans, participants should be limited to one at a time.
Plan sponsors also were ambivalent about employee education. Barstein said that no one thought any of the employee education efforts right now are “tremendously effective”; at the same time, however, they did not think there should be no education at all.
But they were much more passionate about their own education. “There’s a hunger out there for fiduciary training of the investment committee and the benefits committee members,” Barstein reported. He hailed that as “an opportunity for plan advisors to create a formal training program to help their fiduciaries, to protect themselves and the company, but also design a plan where their employees have the best chance of retiring successfully.”
