While the defined contribution (DC) retirement plan system works well for employees at large companies, workers at many small companies can expect very different savings opportunities. This has led to legislation that would allow small employers to group together to offer multiple-employer plans (MEPs).
Rick Irace, became chief operations officer (COO) of the Ascensus retirement division—a recordkeeper that focuses on small plans—three years ago, after working for a midsize to large plan provider for over 20 years. “Many small businesses I speak with are concerned that they might need to spend a great deal of time administering their plan,” he says. “This is clearly not the case. Financial advisers and third-party administrators [TPAs] are helping take away the administrative burdens that a small business owner may think he has.”
When asked to compare small plans that offer retirement plans, to large plans from a plan design perspective, Irace says, in recent years, more small businesses have been realizing the tax benefits of offering a retirement plan and leveraging benefits to attract good employees in a competitive market.
He says several design features, and expectations, have moved down-market in the small business space. These are streamlining plan administration, increasing investment diversification and improving participant outcomes. The choice to use automatic enrollment and digital tools is now made by 98% of new Ascensus clients, for instance. Looking back just a few years, Irace recalls a lot of paper in the small plan market. “Going paperless means much less administration work for the sponsors and having participants enroll online or on their mobile phones is incredibly convenient. The technology is available for small businesses to use intuitive plan design.”
Irace adds that there is now more universal usage of target-date funds (TDFs). “At the end of 2017, we had 25% of all retirement assets on our platform invested in target-date funds, versus just over 3% at the end of 2011, adding diversification to participant accounts, creating better outcomes and lowering costs. Automatic feature usage has skyrocketed from where it started to where it is now—our numbers show auto-features are boosting retirement outcomes with an average participation rate of over 80% which is 10-15% higher than small plans that do not have auto features,” he says.
Re-enrolling employees who initially deferred, defaulting participants to a qualified default investment alternative (QDIA), and adding an automatic escalation piece have become more commonplace in smaller plans, according to Dan Peluse, director of retirement plan services at Wintrust Wealth Management in Chicago. “This is the best way for plan sponsors to hit the restart button and redesign their plan to be most effective.”
Peluse says one of the reasons smaller plans were not doing this before was a lack of data. “In the small market plans it’s always good to have other experiences that are similar to what their plan may go through and there wasn’t a lot. It was the mega plan market that was taking a more progressive approach to design initiatives.”
Peluse stresses that what allowed the retirement industry to have more thoughtful conversations about these types of design modifications is the data from plan providers. “Five years ago, our large plans had success measures readily available that helped us drive plan design. Now plan sponsors of all sizes have access to this data. We can figure out what would improve the plan considering their employee demographics and based on that data and the trend of that data what changes we need to make in terms of design, education and communication to drive plan effectiveness.”
He says that in the past, small plans had to do some digging to find data that was meaningful while larger plans could gain access in an easier way. “There were multiple platforms offered by providers—one that catered to a larger plan sponsor and one that catered to small markets. Over time, providers have modified all platforms to look and act similarly, to allow access to identical data.”
Irace says small business owners expect the same service quality and service culture as a large-market plan and simultaneously they have a better understanding of their own role. Their mindset has changed in a major way which includes an understanding of what it means to be a fiduciary. They have a better sense of the scope of their responsibilities. They are leveraging more than ever their financial advisers and our service teams to stay compliant.”
They don’t look for any less service because they are a small business,” Irace adds. “They want the same service as they provide in their small business.”
If data is now available to plans of all sizes, what is the difference between a small plan and a large plan? Peluse replies, “I’d say on the surface, operationally, there isn’t much of a difference anymore. It varies according to the service model that the plan requires depending on the capacity or capabilities of an organization.”
What’s different for an adviser is that we take on a more assertive role in the areas of participant education, plan design and investment concerns. We spend a lot of time with small plan sponsors. They may not have a formalized investment committee while larger plans may have individuals who are well-versed on some of those subjects. They may not have a human resources team internally with the capacity to spend a lot of time on plan design.