Ten years out there is clearly a big push still unfolding in the retirement planning industry related to the expansion of automatic plan features enshrined in the Pension Protection Act of 2006 (PPA).
Jim McCaughan, CEO of Principal Global Investors, suggests that plan features such as auto-enrollment and widespread use of automated asset-allocation solutions have been an important first step to improve retirement outcomes generally in the U.S., but in the 10 years since PPA, we’ve learned these features must be supplemented with education and other efforts around the basic rules of investing and saving.
According to the McCaughan, it is essential for the long-term success of the DC system for plan sponsors to continue to practice PPA-derived “nudge economics,” automatically and consistently pushing employees into participating in savings plans. While sponsors have increasingly adopted auto-enrollment, researchers and experts point to other auto-features that also deserve consideration.
According to Tim Coyne, operations manager for The Retirement Savings Plan of the City of Baltimore and one of the 2016 PLANSPONSOR Retirement Plan Sponsors of the Year, there are several plan design features made possible by the PPA that have not caught on as much.
“These include re-enrollments and automated deferral increases,” Coyne explains, adding that in an important sense these two features are almost required to ensure good outcomes once a plan sponsor has taken the first step of auto-enrolling participants. “Often you see automatic enrollments at 2% or 3% or less of salary automatically differed per year, which is not enough to ensure success without being tied to fairly aggressive automatic deferral increases, we all know.”
As McCaughan, Coyne and others explain, where the widespread embrace among plan sponsors of PPA-enabled auto-enrollment into pre-diversified qualified default investment alternatives (QDIAs) has fallen somewhat short is with respect to three primary populations. First are those people who were already invested in a retirement plan prior to the implementation of PPA automations, who had the wherewithal to enroll themselves but could still likely benefit from being swept from an individually constructed portfolio into a professionally managed QDIA. The second group are those with access to a DC plan at work but, for whatever reason, did not take the progressive step of joining the plan—who would otherwise have been automatically drawn into the plan had they simply been hired later, post PPA.
“These are both circumstances where targeted re-enrollment makes a lot of sense,” Coyne adds. “We have had tremendous success utilizing targeted re-enrollments in the City of Baltimore to help populations in this position.”
The third and final group is also the most vexing—those who lack any access whatsoever to a 401(k) or similar DC plan at work. Unfortunately, PPA-based auto-features don’t have much of a chance of helping this group of people working for employers who are unwilling or unable to deliver tax-qualified retirement savings opportunities. This is in large part why an increasing number of states are making some kind of push to deliver state-based auto-enrollment retirement accounts of one type or another to the uncovered private-sector population.
Automation’s role in the last decade
Drew Carrington, who leads Franklin Templeton Investments’ U.S. large market institutional defined contribution (DC) business, says the PPA clearly had a “major day-to-day impact on the retirement planning space,” driving employers towards automation and making them more mindful about their ethical and practical responsibilities for preparing their employees for a successful retirement. What has made the PPA an even more powerful driver of change in recent years, Carrington adds, is the explosion in use of data-based automation technology within the portfolio management context.
In terms of the role auto-features have specifically played post PPA, the numbers are quite impressive given the otherwise very slow-moving nature of the marketplace. In 2009, once all PPA features had been effectively implemented, automatic enrollment had been installed in 30.8% of all plans; this has progressed to reach 41.1% by the start of 2016. Selecting for “mega plans” with more than $1 billion in assets shows an even greater penetration of auto-enrollment today—at 65.6%.
Largely as a result of auto-enrollment, participation in DC plans among eligible employees is up strongly, climbing from 72% in 2009 to nearly 77% today, with mega plans again noticeably outperforming the average, at 80%-plus participation. As readers will likely know, mega plans in the U.S. actually cover a majority of all current retirement plan participants, further demonstrating the strong influence of auto-enrollment after the PPA.
Use of automatic deferral increases jumped even more since 2009, PLANSPONSOR data shows. That year just 15.5% of plans utilized automatic deferral increases in some form, while today the number is 38.3% overall—and an impressive 71.8% of mega plans.
Critically, the embrace of automation has not reshaped the advisory and consulting sides of the market as much as some anticipated. For example, advisers are working with more plans today than they ever have—completing more services for more diverse types of clients than was the case prior to the full implementation of PPA. In 2009, 62.5% of all plans worked regularly with at least one adviser or consultant. Today the number is 71.7%, with some truly impressive growth figures for advisers in the less-than-$5 million market. In fact, that statistic has risen considerably in just the past year, with 65.9% of small/micro plans working with an adviser in 2015, compared with 52% in 2014.
Automation’s role in the next decade
Looking ahead, John Galateria, head of the North America institutional business for J.P. Morgan Asset Management, predicts the hard-won progress made by plan sponsors and their service providers in the decade since PPA “can absolutely be capitalized on to build a truly sustainable and successful DC system.”
“One the list of top priorities right now are fees, litigation, core menu simplification, the benefits of white labeling, TDF glide path evaluation, unbundling of large plans for more transparency, alternatives in defined contribution plans, retirement income security, the growth/transfer of wealth to the Millennial generation, and the power of auto-features and re-enrollments,” Galateria says. “These are the issues our advisers tell us they are tackling on the ground and discussing with plan sponsors and other providers every day—and they are also a very big focus here in the home office.”
Adding an eleventh item to the list, Galateria also cited the ongoing efforts by more than half of state governments to introduce automatic workplace savings schemes.
“With so much disruption to overcome, it’s increasingly becoming clear that bold thinking and courageous action on the part of advisers are needed to push the industry to the next level of performance,” Galateria adds. “It’s up to the folks [working in the DC industry] to solve the retirement challenges our nation faces. We know that the we can’t leave it up to individual investors to do it themselves, or for the government to step in with real solutions that are going to be effective.”
Echoing the sentiment of many other industry staff and leadership, Galateria concludes that all of these factors present a “real risk of slowing or halting the progress the industry has made by enshrining automation in the 10 years since PPA.”
“We have heard clearly from all the advisers today that their plan sponsor clients are really laser-focused on their litigation risk under ERISA,” he says. “Many are holding off on plan design updates and other moves they feel would be the right thing to do, simply because they’re confronted with so much perceived litigation risk. We have to find a way to move forward, beyond this challenge, if we want to build successfully in the next decades on the legacy of the PPA.”