Over time, American Woodmark Corp.’s 401(k) investment menu had grown to include more than 30 options. That complexity, plus a lack of automatic enrollment, meant many new hires neglected to sign up; those employees who did take the initiative to participate often flocked to too-conservative or too-aggressive asset allocations.
The catalyst for change came with American Woodmark’s decision to freeze its pension plan in April 2012, says Richard Hartman, corporate benefits manager at the kitchen and bath cabinet manufacturer and distributor, which is headquartered in Winchester, Virginia. Shifting to the 401(k) as the primary retirement benefit for employees “gave the plan committee the opportunity to really look at the DC [defined contribution] plan,” he says. The $85.7 million plan has 4,580 participants and a 5.4% average deferral. It matches 100% of the first 4% an employee contributes.
Last January, the investment lineup was simplified. “We overhauled the entire menu and implemented three tiers of investments, based on the level of engagement that participants want,” Hartman says. The three levels and their investments include target-date funds [TDFs] for the “Do it for me” group, model portfolios for the “Help me do it” group, and a menu of 15 passive and active mutual funds for the “Do it myself” types.
American Woodmark wanted participants’ investment lineup to offer them a balanced overall asset allocation, Hartman says. He was familiar with academic and industry research data “illustrat[ing] that maybe 8% of someone’s return over time is due to fund selection,” he says. A simplified investment menu, as well as reduced consulting expenses, led to a reduction in total plan costs of about 45%.
American Woodmark also made plan-design changes. Automatic enrollment for new hires began last January, with a 4% initial deferral into Vanguard Target Retirement Funds.
The company had not implemented auto-enrollment earlier in part due to the economic uncertainty it faced—its business outlook ties in closely to the housing market. But after adding the feature, participation nearly doubled—from 34% in 2012 to 61%. Also, existing participants got re-enrolled into the Vanguard target-date funds, and only about 5% opted to choose their own investments instead. Overall, about 95% of participants now fall into the “Do it for me” group and utilize the target-date funds.
Hartman already has a second phase of change in mind. American Woodmark may implement auto-escalation, and the company has started thinking about possible changes to its match, to encourage higher deferrals. “We may go back and auto-enroll all employees who aren’t enrolled,” he concludes.
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