Independent investment and advisory firm Arnerich Massena released the second in a series of white papers covering retirement plan best practices for plan sponsors. The latest edition focuses on plan design.
The firm states the paper “examines the factors that you should consider as a fiduciary when making decisions about plan design, looks at how other plans handle different options, and identifies some best practices.”
It covers a variety of topics including plan enrollment and eligibility, employer match considerations, automatic options, loans and withdrawals, Roth contributions, fee equality, bundled versus unbundled approach comparisons, and traditional versus discretionary consulting.
The white paper serves as a guide through different aspects of plan design beginning with setting enrollment parameters. It draws data from a 2015 study by the Profit Sharing/401(k) Council of America, which notes that 57.5% of plans use auto enrollment, the average default deferral rate is 3%, the most common Qualified Default Investment Alternative (QDIA) is the target-date fund (TDF).
Data from the 2016 PLANSPONSOR Defined Contribution (DC) Survey reflects this finding noting that 65.7% of plans across all industries use some type of TDF. The survey also found 41.7% of plans across all industries use auto-enrollment, the overall default deferral rate is still 3%, and 35.3% of all plans have some type of auto-escalation feature whether they be opt-in or opt-out.
“Many of the decisions plan sponsors make when designing their retirement plan have long-term and powerful effects on their employees’ retirement savings,” says Terri Schwartz, managing director of institutional services and business development at Arnerich Massena. “To make those decisions, they need to be aware of all the options and what their peers are doing in the marketplace. Our goal with this paper is to help employers make the decisions that will lead their participants to retirement readiness.”
The paper notes that although auto-features have significantly driven plan participation, they can have unintended consequences, which can be reversed through plan-design updates. The paper points out that “Studies have shown that in plans with automatic enrollment and a low default contribution rate, participants tend to save less — even those participants who might otherwise have saved more.
A default contribution rate of 3%, for example, could result in a majority of participants saving 3%. The default rate can serve as an implicit recommendation, and it plays into participant inertia. However, this effect can be countered in a variety of ways: choosing a higher default rate, including an employer match, and implementing automatic deferral increases.”
The white paper "Plan Design Best Practices: Plan Design" can be found at arenerichmassena.com