State of the Industry
Our latest findings on DC plans—for benchmarking a plan against its peers or just gleaning some new solutions
Every year since 1996, PLANSPONSOR has conducted a survey of defined contribution (DC) plan sponsors around the country. One of the largest of its kind, the PLANSPONSOR Defined Contribution Survey helps those in the industry, including sponsors and their retirement plan advisers, catch up on new trends in plan design and consider plan enhancements that are in the best interest of participants. Why benchmark a plan? When the sponsor sets a benchmark, it essentially establishes a baseline or standard against which to measure its plan. The sponsor can thereby see where the plan needs to improve, set new goals and increase its performance. Sponsors can also benchmark to determine how competitive their plan is against industry peers’—a metric that becomes even more important in a competitive hiring environment.
The reality is that sponsors do not always think about their DC plan in broad terms. The result of having a basic or minimalist plan can be employees working longer than expected and employers, at times, carrying the burden for this. Employees who fail to retire on time for insufficient financial assets will tend to have greater health care and disability claims and generate more workers’ compensation claims. These things, in turn, can negatively affect an employer’s balance sheet.
Sponsors can see by benchmarking that yesterday’s solutions may not be effective today.
The value of taking the pulse of the industry overall is to determine how trends emerging as industry best practices or industry concerns take hold in reality. For example, there has been a focus on increasing default deferral rates to ensure that participants are not being “hurt” by automatic enrollment provisions that might have them saving less than if they had affirmatively elected to participate. Instead of automatically enrolling participants at 3%, defaulting them at 6% to 12% is the emerging industry best practice. With most 65-year-olds today projected to live past 85, many Americans are underestimating their life expectancy and thus their need for retirement savings. However, that higher default rate is not yet the majority position in practice. Among those who responded to our survey, only 48% use a default rate higher than 3%.
Another concern attracting attention is leakage from the retirement plan—the withdrawal of assets from tax-advantaged status. The Bipartisan Budget Act of 2018 has simplified the taking of hardship withdrawals from a DC plan and, since the bill’s passage, such withdrawals have spiked. This is only adding to the plan leakage problem.
According to Kevin Barry, president of workplace investing at Fidelity Investments Inc., the number of such withdrawals taken in the first half of this year jumped 40% over those taken last year. At the same time, the rate of participants taking loans fell 7%. “This is a trend we were afraid we would see when the law was passed,” he says. “This is a big issue.”
Reductions in maximum loan amounts and number of loans, as well as the imposition of fees and higher interest rates on loans, can be written into loan policy statements to discourage further leakage. Sponsors can consider amending their loan policy to let participants keep paying back their loans after separating from the company. —Judy Faust Hartnett