Setting the New Standard
PLANSPONSOR honors 29 firms with new Best in Class 401(k) designation
By definition, the phrase “best in class” denotes the highest current performance level—one that may be used as goal to be equaled or exceeded. Like all benchmarks, especially in an industry as continuously evolving as that of employer-sponsored retirement plans, the standards for “best in class” are subject to change. For example, a 401(k) plan that might have been called superior just a few years ago may lack features that would be expected in today’s best plans.
This year, we introduce a Best in Class 401(k) Plan designation, given to 401(k) retirement plan sponsors that meet the highest standard of excellence, as deemed by PLANSPONSOR’S research and editorial team. Recipients of the 2015 Best in Class 401(k) Plan designation were selected from the almost 4,000 401(k) plans that responded to PLANSPONSOR’s annual Defined Contribution (DC) Survey.
Each 401(k) plan participating in the survey was evaluated and scored on its usage and implementation of more than 30 criteria related to plan design, oversight/governance and participant outcomes. Plans needed to have certain features to be considered, such as an above average participation rate, use of automatic escalation and an employer contribution—discretionary or nonelective. Other criteria were not mandated but did earn the plan additional points, such as auto-enrollment, short eligibility schedules and immediate vesting.
The 29 plans we recognize here as “best in class” represent diverse industries and participant demographics. However, they still share many attributes—for example, all offer both matching and profit-sharing/nonelective contributions. As one might expect, the winning plans also consistently topped their peers in terms of outcomes and the prevalence of participant-friendly practices, featuring higher average deferral rates, more available advice and regular fee benchmarking.
Past Best Practices
Brian O’Keefe, director of research and surveys at Asset International in Boston, recalls that before the Pension Protection Act of 2006 (PPA), employers were uncomfortable “forcing” employees to save. “The best plans were often viewed as those that used creativity and choice to achieve higher participation,” he says.
According to O’Keefe, this meant a large selection of investment options and personalized communications. This was seen in the 2006 PLANSPONSOR Defined Contribution Survey, where the average number of investments offered by a 401(k) plan was 25; this decreased to 21.4 in 2010 and 21.5 last year.
Employers also embraced the notion of using 401(k) plans as a means to “attract and retain” employees, he adds. For that reason, companies made larger contributions but drew out vesting schedules and eligibility timelines, as doing so aligned with that goal. In 2006, the DC Survey found 28% of plans offered immediate eligibility, and in 2014 that percentage rose to 31%. On the other hand, in 2006, two-thirds (66%) of plans had vesting schedules that spanned more than three years; today just 43% of plans do.
Between the years of 2007 and 2012, plan sponsors started adopting practices that had been approved by the PPA. “If features such as auto-enrollment and target-date funds [TDFs] solved common problems and reduced risk, they were often put in place,” O’Keefe says.
PLANSPONSOR DC data reflects this period when plan standardization began. While 17% of sponsors surveyed in 2006 used auto-enrollment, 30% were using it by 2010; by 2014, that number had increased to 41%.
“The bad financial markets in 2007 and 2008 made plan sponsors sheepish about forcing participants into automated savings, so defaults were set low,” he says. Ensuing fee lawsuits also reminded investment committees of the importance of a strong fiduciary process that may include use of investment policy statements (IPSs)—a best practice that has stayed consistent; 63% of sponsors surveyed in 2006 employed one, as did 65% in 2014. Use of an investment committee remained similarly steady.Best Practices Now
Many of those sponsors who have not yet adopted the plan design initiatives made popular by the PPA are exploring and implementing them today. Still, such plan design features are much more prevalent at midsize and larger plans than small and micro plans, notes Quinn Keeler, senior vice president of research and surveys at Asset International in Stamford, Connecticut.
“Plan design such as automatic enrollment is more helpful at larger companies where one-on-one enrollment assistance is not feasible,” she says. “Our DC Survey shows that participation rates haven’t fluctuated—or improved—that much since the PPA, so now plan sponsors are looking to improve other metrics, such as deferral rates.”
However, the industry is already searching for its next set of benchmarks, focusing on whether participants will have enough money saved for retirement, instead of just how much they defer. Says O’Keefe: “Strategies that put employees on the path toward maximizing their savings—such as auto-escalation, immediate eligibility/vesting and stretch matches—have all taken root.”
“Plan sponsors don’t yet seem to believe their participants are properly prepared for retirement,” Keeler observes, “but perhaps, as the readiness measures become more available, sponsors will have a better sense of what design features they need to improve participant outcomes.”
As the industry evolves, so will PLANSPONSOR’s Best in Class criteria and scoring methodology, which will be reviewed annually and changed as necessary to properly reflect industry best practices.
On the pages that follow, PLANSPONSOR is pleased to announce its inaugural selection of companies for its Best in Class 401(k) Plan designation and to offer snapshots of each of the 29 winners. —Judy Faust Hartnett