Lessons Learned from 403(b) Peers

June 29, 2012 (PLANSPONSOR.com) - Silvia Frank, program manager at Trinity Health, says 403(b) plan sponsors should share experiences and support each other in creating the best program for participants.

The Plan Sponsor Council of America’s 2012 403(b) Plan Survey webinar addressed lessons that can be learned from the experiences of those sponsors responding to the survey. One quarter of 403(b) plan sponsors indicated they made changes to their plans in the past year, which PSCA president David Wray said is a very positive sign that companies are continuing to improve their plans.  

The survey results, released last month (see “403(b)s Show Culture of Continuous Improvement”), show the primary improvements 403(b) plan sponsors made were to investment lineup (39.3%), plan design features (23%) and employer or participant contribution arrangements (24%).  Aaron Friedman, national non-profit practice leader at The Principal, which sponsored the survey, said this offers an opportunity for advisers and consultants, as it means plan sponsors still need help.  

Wray noted that over time, the number of eligible participants has been steady around 84%, and the number of participants with an account balance has increased to 75%. Sixty-four percent of participants made contributions to their plans in the past year, which is good news because participants have continued participation and contribution during volatility of the market.  

However, Friedman cautioned that having an account balance does not necessarily mean it will be adequate in retirement, so sponsors must continue to encourage employees to save. Frank added the stats show an opportunity for plan sponsors to focus communication efforts on plan participation. 

The adoption of automatic enrollment in 403(b) plans continues to increase, and the survey shows the most common default investment is target-date funds and the most common default deferral rate is 3%, just as in 401(k)s.    

Friedman said 2% to 3% for auto deferrals is not really adequate, as the overall savings need to be around 11%. Plan sponsors may think if they use a higher default deferral percentage, there will be a lot of opt-outs, but, according to Friedman, studies show that is not true. There is a 15% opt-out rate for plans that start deferrals at 3% versus a 19% opt-out rate for plans that start deferrals at 6%. In addition, among employees enrolled at 3%, only about 32% get up to the 11% savings target, but at 6%, 62% of employees get there.  

The survey shows 20% of organizations have 26 to 50 investment options available. Friedman noted that numerous studies in economic behavior show the more choices participants have, the less action they take. At about 10 to 12 investment options, participant elections tend to go down. He thinks sponsors can get away with six, while Wray said small plan sponsors may even get away with offering three.  

Frank posed the question, how can a plan sponsor, especially a small one, have the resources to monitor such a large number of funds? She contended it cannot be done, and thinks as time goes on, the marketplace will see offerings decrease to a manageable number of funds that can be adequately monitored.  

While the survey finding that more 403(b) plan sponsors monitor their investments regularly, still less than half (48%) do so. According to Friedman, a best practice is to do due diligence when selecting investments and review the investments regularly. He said most lawsuits fall apart if the plan sponsor has governance procedures in place.