Analysis Finds DC Plan Health Improving

By using some best practices, plan sponsors have moved the needle toward more plan participants taking action to reach an 80% income replacement goal, Wells Fargo data shows.

By Rebecca Moore | June 22, 2017
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An analysis of Wells Fargo’s bundled recordkeeping business, representing four million participants, finds that plan health has been improving.

Defined contribution (DC) retirement plan participation has increased 18% over the past five years, according to Wells Fargo’s Driving Plan Health report. Millennials have seen the biggest gains. The percent of savers with a total contribution (employee and employer) rate of 10% or higher has increased 9%.The percent of participants investing in a diversified portfolio has increased 15%. Older employees are the least likely to be diversified.

For its plan health index, Wells Fargo has named certain participant behavior goals: All eligible employees participate in their DC plans; participants are contributing at least 10% of pay, including employee and employer contributions; and participants are invested in diversified investments, such as a target-date fund (TDF), managed account or a comprehensive advice program, or if a participant self-directs his investments, he is invested in at least two different classes of equity funds and one fixed income fund and has less than 20% in company stock.

The Plan Health Index is the percentage of eligible employees who meet the goals for all three savings behaviors. The Wells Fargo analysis finds a 40% increase in the Plan Health Index over the past five years.

Mel Hooker, director of relationship management at Wells Fargo Institutional Retirement and Trust, who is based in Charlotte, North Carolina, tells PLANSPONSOR, aside from automatic enrollment, total match is one of the key drivers for both participation and contribution rate. “Employees see that as an opportunity to take advantage of ‘free money’ which drives up participation and contribution rates,” she says.

Hooker suggests plan sponsors take a look at their match formula to make sure employees have the opportunity to take advantage of the match and get to a 10% savings rate.

Other factors that drive contribution rates are company stock and communication campaigns. Hooker says offering company stock can drive participation and contribution rates similar to a company match.

However, she warns that company stock can have a positive and negative effect for plan participants. The analysis found company stock is more heavily invested in by Baby Boomers. While it is a driver of participation and contribution rates for all generations, Wells Fargo sees a lack of investment diversification among Baby Boomers because of a high concentration of investments in company stock. “Looking at any one of the three goals, each has drivers that move them independently,” Hooker says. “Plan sponsors should dive down into plan design to make sure it is doing what they want it to do. For example, is offering company stock a mover of all goals?”

Wells Fargo says each of the three key savings behaviors it monitors helps a participant’s ability to reach an 80% income replacement goal.

NEXT: Some best practices