When examining plan design, there are two sets of considerations for plan sponsors. There are the plan design elements and decisions that govern how the plan will work for plan participants, and there are the fiduciary elements and decisions for which plan sponsors and other fiduciaries carry a significant responsibility. 

Both sets are important in determining the success of a retirement plan, but in different ways. Results of the 2017 PLANSPONSOR DC Survey: Plan Benchmarking indicate that some best practices in plan governance have stalled, and plan design decisions appear to balance both impact and cost. 

Plan Governance

According to survey findings, adoption of some perceived best practices in plan governance that are often cited as means to protect plan fiduciaries have leveled off. This may seem surprising to those who have seen the increase in litigation against plan sponsors. Why would fiduciary best practices decline if plan sponsors are aware of the litigation and interested in protecting themselves? 

One recognized best practice, the existence and use of investment committees, is trending down. Based on survey responses, nearly every defined contribution plan with more than $50 million in assets has an investment committee. By contrast, 16.6% of the $5 million to -$25 million segment do not have investment committees. With retirement plan menus becoming more complex, and with the increased use of alternatives and overlays, an investment committee broadens the bandwidth of a plan sponsor and helps it stay up to date on investment news. 

Investment policy statement (IPS) usage has been flat, with 65.9% of plans overall using an IPS; this means one-third of plan sponsors are without such a statement. Why is it so important? It forces a plan sponsor to define its investment goals, the “why” behind those goals and its intended process to achieve them. 

Given the uptick in litigation in the retirement plan space, Emily Costin, partner, Alston & Bird LLP in Washington, D.C., finds these survey results to be counterintuitive. 

As to the survey revealing a slowing of fiduciary best practices, she says, “The feature I would definitely have written into the plan, is a provision allowing the plan sponsor to delegate fiduciary duties. Often what occurs is the plan documents say the sponsor is the named fiduciary.” What this means is that the company is the fiduciary. “As a company has to act through people, if that fiduciary duty isn’t delegated to someone and there’s a fiduciary claim, the plaintiff is going to name the company and the top dog of the company. ERISA [Employee Retirement Income Security Act] allows for the delegation of duties but only if the plan documents say they can be delegated. To me, this is one of the most important things to have written in the plan documents,” she says.

Costin explains that there is a distinction between plan design and a plan sponsor carrying out its fiduciary duties. The decisions made about the design and then the drafting of the plan itself for compliance purposes is a settlor function belonging to the plan sponsor not the individual fiduciaries. “For that reason,” she says, “if a plan sponsor decides to implement a company match or automatic enrollment, or any plan feature, the sponsor puts the plan design feature into the language of the plan. Then it is required or ‘hardwired’ into the plan. Plan sponsors have wide latitude with what they want to do with their plan. The fiduciaries’ responsibility is to carry out what the plan documents say.”

Plan Design Elements

The second area of interest when evaluating survey results is what sponsors are doing in terms of plan design. Although a number of plan designs are generally accepted as contributing to participant success and outcomes, some of them seem to have stalled in their adoption. 

For instance, according to the survey, automatic enrollment has been between 40% and 43% for the past five years, and automatic escalation—a simple way to increase participant deferral rates—is in use at 33.6% of plans. While that is an increase, from 29.3% in 2014, Brian O’Keefe, director of research and surveys at Strategic Insight and the author of the DC survey, says, “The path has been anything but linear, and the percentage of plans with auto-increase amounts greater than 1% has dropped.”

Dominic DeMatties, a partner at Alston & Bird, also in Washington, says, “There is no single step a sponsor can take in terms of plan design that does more to increase the amount of savings than having automatic features. The participants who are defaulted frequently do not change those elections and end up with increased savings. Nothing else comes close to what the auto-features have accomplished.”

These are not fiduciary decisions, and, in fact, there are safe harbor ways to implement automatic enrollment and escalation, so why are the adoption numbers not higher? According to the National Compensation Survey of 2015, “[Because] a common way for firms to encourage workers to participate and contribute to retirement plans is to match some percentage or dollar amount of worker contributions, automatic enrollment likely increases employer costs. This increase occurs because, all else equal, previously unenrolled workers begin receiving matching employer contributions upon automatic enrollment.” In other words, plan sponsors may be reluctant to add features that increase company costs.

This perception may be in line with DC Survey results indicating that the percentage of companies reporting that their organization pays for recordkeeping fees today is 35.8% vs. 41.5% in 2013. At the same time, 14.2% of companies share plan costs with participants and 49.9% have participants pay entirely. In addition, the percentage of plans with immediate eligibility is slowly eroding—from 37.6% in 2013 to 36% this year, O’Keefe says. 

When asked about auto-escalation, DeMatties says the level of escalation comes down to the individual populations, and those who run the plan should know their plan’s demographics. He says, “I don’t get concerned about pushing the envelope because I’m confident there will be very clear communications to participants about how to opt out.”

Another plan design feature worth noting is Roth contributions, which jumped from 52.4% in 2014 to 68.5% this year. DeMatties says, “I think a lot of people are convinced that Roth 401(k) accounts can be beneficial for those at the lower income level who can afford to save—a participant may pay a low tax rate when investing in a Roth and then pay no tax later when the money and earnings are distributed. Roths can also be effective at the higher income levels because participants end up paying their taxes outside of the plan. Say, if your contribution level is $18,500, right at the 402(g) limit, you can effectively put away more than if you’d contributed $18,500 pretax, because the pretax contributions and earnings would be taxed when the funds leave the plan. But the middle is where most people are.