In “Getting Beyond Ordinary—Managing Plan Costs in Automated Programs,” T. Rowe Price notes that many plan sponsors have turned to automatic program features to help employees achieve better retirement outcomes. However, others have been reluctant to fully embrace these features, perceiving that more comprehensive automatic programs will result in unacceptable cost increases. This perception can become reality if other plan design elements are not taken into account and adjusted to meet plan and company cost objectives.
The paper contends plan design can be structured to manage costs to the desired level generally by changing or adjusting employer contributions, vesting and/or eligibility.
According to the report, in looking at possibilities for modifying the employer contribution design, there are four potential types of changes:
- Change the match percentage while leaving the basic structure intact by changing the match percent or changing the deferral percent eligible for a match;
- Change the structure of the matching formula by applying a different match to different groups of employees or by changing which deferrals are eligible for the match;
- Change the timing of when the contribution is made such as moving to an end of year contribution with a last day rule; and
- Move to a different type of contribution such as a profit sharing or nonelective contribution.
There are three primary ways to alter vesting design:
- Create multiple vesting schedules—one for each type of contribution that is utilized such as a different vesting schedule for a match versus a profit sharing or nonelective contribution;
- Change the timing of when vesting occurs for new contribution types and/or new hires such as lengthening the time on a cliff vesting or shifting to an incremental vesting schedule over a longer time period; and
- Change the method by which vesting is calculated by utilizing hours of service versus elapsed time of employment.
In addition, there are three primary ways to alter eligibility design:
- Change who is eligible for each type of contribution utilized such as increasing tenure or age requirements for a profit sharing contribution;
- Change the timing of eligibility such as a provision for a new hire to immediately participate in the plan but not be eligible for a company contribution for a year; and
- Change the nature of eligibility calculations such as moving from an elapsed time to an hours-of-service method.
A previous paper from T. Rowe Price discussed how advanced use of automatic features in plan design can achieve improvement in plan success measures (see “Improving the Automatic Plan Design”).“Getting Beyond Ordinary—Managing Plan Costs in Automated Programs” is here.