SURVEY SAYS: PSNC Suggestions for Improving Participant Outcomes

I asked NewsDash readers which of these suggestions they think would be most effective? Readers were allowed to choose more than one.  

The top three suggestions selected by responding readers were increase automatic enrollment default deferral percent (60%), restructure employer match to encourage higher deferrals (55%) and target communications to specific employee demographics (45%).  

Thirty-two percent of respondents said decreasing eligibility waiting periods would be effective in improving outcomes for participants, and 21% said sponsors should establish a systematic withdrawal choice for participants.  

The least popular suggestions were using easy-enrollment tear-off post card mailers (11%), requiring participants who choose TDFs or managed accounts to allocate 100% to those choices (7%) and improving the encouragement of rollovers into defined contribution plans (7%).  

In the verbatim comments, several respondents expressed that restructuring employer match would create a backlash from participants, while others added suggestions for improving participant outcomes, such as eliminating sources of plan leakage (i.e. loans and hardships), mandating employer contributions and starting financial education early with children in school.  

My favorite comment was: “My #1 suggestion – IMPROVE THE ECONOMY. Hard to contribute to retirement savings when you can’t pay your mortgage, pay for meds, pay property taxes and utilities. Then when the average person has more disposable income, you can work on improving participation – offer match, communication, etc.” 

Verbatim  

On last 2 points: * Initial auto deferral can stay the same, with 1%-1.5% auto increase annually. A higher initial % would be less acceptable to participants. Auto increase is easier to sell and avoid opt-outs. * I have seen a match structured much like the suggestion. It backfires. To the participant, the first thing they will see is that the match on their current 6% deferral has been cut in half. It's a take-away. Even with a 10% deferral, the match equals only 2.5% of pay. Still a take-away. But most EE's at most companies can't save 12% until later in careers, if they are still there. They lose much of the potential value of time. Many will turn against the plan and possibly turn against the employer and go looking for better benefits. If you want to see results that don't include a take-away, consider this. Is it feasible to match a straight 50% match on up to the first 8% of pay? Participants still get 3% on a 6% deferral, and add a percent if they increase it to 8%. When they see their accounts growing nicely, it can give retirement savings a higher level of awareness in their financial lives. The closer they see themselves coming to their goal, the harder they will try to reach it. And it's easier to encourage a 10%, 12% or larger deferral, for those able to contribute at those higher rates. 

That restructuring employer match idea is brilliant (and maybe just a little bit evil!) Almost all our people are at the maximum employer match benefit (set at 100% of the first 6%), and this would penalize them unless they doubled their salary deferrals to get the same employer money! If we proposed that, I expect I would hear screams. 

As mentioned at the conference, we need to personalize the communication and make it meaningful to each employee. 

I would add to this list: increase adoption of automatic enrollment provision. 

Restructure of the employer match does put more responsibility on the participant, but it seems to me to be a very good option. Of course, I am a 12% deferral person and get a 100% up to 3%. Targeting young employees is needed. 

Encourage participation by having raffle or lottery style prizes. For each paycheck that the employee had a DC contribution, that would represent one chance to win. 

For small businesses, which are the most underserved and reluctant to start a DC plan, get rid of top heavy for the first X plan years. Some small businesses truly cannot afford a top heavy minimum contribution or a safe harbor match. It's outdated legislation. Get the DOL and IRS on the same page on a solution for allowing multiple unrelated employers to combine for economies of scale. It is working for the PEO industry! 

auto enroll and auto increase 

Allow companies to make it mandatory for new employees to join and participate in your company's plan at a certain matched rate. 

ENCOURAGE EMPLOYER MATCH 

We should start educating our children about long term investing and lifelong financial security-promoting habits. 

Better education about how to invest for the long term and inertia (auto enroll) may help. 

At least this will initially increase participation however, none will make an ongoing difference, You either want to participate or not. The resources allocated every year on this issue should be put to better use. 

Give employees information on what their retirement will look like if they continue on their current path. It may be a shock to many to see how little they will have, but better to find out now than when it's too late. 

Encourage Congress to refrain from any new/major legislation--plans are drowning under the regulations that have passed so far! 

There needs to be an overall public campaign toward financial literacy. The biggest savings hindrance is lack of education. 

how about severely restricting or even prohibiting loans and in-service withdrawals prior to age 59 1/2? the leakage is a huge problem. also, consider not allowing cashouts when changing employers - make them portable and keep the accounts intact 

Verbatim (cont.)  

MANDATE employER contributions!! 

Scrap the IRC 401(a)(4) regulations and make it so a DC plan is either comp to comp, percentage of pay or integrated with Social Security and not allow the HCE to receive a large amount while saying the NHCEs get so little. Cross-testing must go away. 

Generally speaking, I think the plans themselves are fine. Almost universally, they offer an exceptional vehicle for tax-sheltered retirement savings and an acceptable selection of investment types. The problem lies-again, generally speaking- with the participants' commitment to funding their retirement. Our country does not have a culture of 'saving now for future needs', and that hurts participants who save very little during their earning years, and/or take early distributions, loans or hardship withdrawals. We have some employees who earn very modest incomes but have managed to put aside several hundred throusand dollars in their 401(k) plan over time. Sadly, they are in the minority. 

The shift from DB to DC plans took the liability and risk away from the employer, and placed it squarely on the employee. I think to improve current DC plans and participant outcomes, the employer needs to allocate a comparable amount of time that would have been spent on DB plans, but designed around DC execution. 

Encourage more DB plans! 

First we need to improve the economy so we can give raises that will allow employees to be able to contribute to a plan 

Basing the match off of dollars rather than % of income would better favor low and middle income earners, and would probably make for complying with the ADP and ACP tests easier if a safe harbor 401(k) is not established. I also think participants have too much choice: a TDF or similar diversified asset is all a participant needs. Giving people a choice results in people investing all their money in a stable value fund, or investing it all in company stock. For that matter, company stock should not be an investment choice at all, and any funds offered should have expense ratios less than 1% (hopefully this will be the case after fee disclosures are rolled out). The bottom line is the less we allow people to make suboptimal choices about their retirement, the better. On that point, I think the best thing that could be changed about DC plans is to abandon the idea of the lump sum payment and effectively make DC plans participant funded DB plans. This mitigates the longevity risk associated with taking a lump sum distribution. 

High quality financial education on a regular basis. 

I selected "increase automatic enrollment default deferral percent" since it is the only one of your choices that does not require some sort of participant action, and therefore it is the only one which is likely to be effective. 

These types of changes to improve retirement plans so that participants will not only be able to retire but also have a sufficient balance so they don't outlive their money will only be effective if hardships, loans, and the ability to cash out one's account at termination are removed as options in DC plans. Too many employees use their retirement plans as bank accounts since they are able to access their money instead of leaving it in the plan and allowing it to grow and compound over several decades. If the goal is to improve DC plans so that employees can eventually retire, then retirement plans need to be changed so that once money is contributed to the plan it cannot be withdrawn (or loaned against) until retirement. 

Verbatim (cont.)  

Use graphics and photos more in Employee Communications Elimination participant loans and in-service withdrawals (except for hardship withdrawals). DC plans are retirement savins plans, not checking accounts. 

encourage higher deferrals, e.g., match 25% of deferral up to 3% of pay, 50% of entire deferral if over 3% up to 6%, 75% of entire deferral if between 6% and 9%, 100% if over 9% 

Those who have saved for retirement will likely find that they don't know how to make their money last. It's like giving someone a brand new sportscar, but no one has ever taught them how to drive - they are very likely going to crash and burn. Accumulation of assets for retirement is only the first half of the game. More focus on the second half is deparately needed. 

The only thing that will really work is if participation is not voluntary and you provide one-on-one guidance for asset allocation. 

Education is the number one thing that can help participants. It should start in High School as a requirement and continue into college, general education. People dont know, that they dont know. So sad. 

Enhancing technology to give participants a better picture of the path they are on and how to change the course so that they can get to the desired outcome. Without the road map, most people have no idea where they are going. 

Limit investment options to TDF or balanced funds only. 

Reduce or eliminate loan provisions. 

Other thoughts on improving participant outcomes: 1. Keep it simple 2. Consider "trimming" investment menu selections to simplify choice, and/or add 3(38) investment advice. 3. Annual increase in automatic enrollment percentage. 

Nothing in there about lifetime annuity guarantees. The most cost-effective answer, as it will always be, is defined benefit plans. 

all would help to some extent, but I picked decrease the waiting period - if you get the person involved immediately (before they "get used to" their paycheck) you are more like to get them at all! 

Need to make communications educational and personal to the individual employee by providing easy to understand personalized solutions. 

As long as the Fed continues its current policy of low interest rates , retirement for most will be an illusion. Nothing employers do will change that. 

Mailings aren't effective - even quarterly statements - aren't an effective way to communicate with participants. 

My #1 suggestion - IMPROVE THE ECONOMY. Hard to contribute to retirement savings when you can't pay your mortgage, pay for meds, pay property taxes and utilities. Then when the average person has more disposable income, you can work on improving participation - offer match, communication, etc. 

Verbatim (cont.)  

Force them in and then educate them! 

automatic annual increase on deferral annual/ semi-annual required attendence at on site enrollment meeting hosted by financial advisor/ plan administrator 

Do not allow employer stock investments in DC plans 

as an editorial comment, I'd be more interested in these results if people could only choose ONE "most" effective. Granted, different things will work better in different plans, different employee populations, and with different cost/liability constraints - and some plans have to first deal with getting people IN to the plan before they have the opportunity to get them to the right amount (which, of course, can itself vary widely). That said, I think the one thing that might actually be most effective, but is NOT on the list above - is that we need to start telling participants the truth (about things like fees, how much they will NEED to live on in retirement, and how much their savings rates will actually produce) - and we need to be willing to tell participants the "right" answer to the questions how much should I save and how should I invest. And we need to give some liability "cover" to those who are willing to be that forthright, so long as they do so prudently, and without self-dealing. The rest of these ideas strike me as just tweaking around the edges of the real problem(s). 

Auto enroll everone at 5%; Auto increase by 1% annually - up to max of 10% Repeat process annually Trustee direction of ALL employer contributions Take away daily valuation/trading 

None of the above will improve Small Business Plans-(50 or less employees). These are "mandates", and the solution is economic growth and less regulatory interference. 

At some level ALL of these COULD improve outcomes. But most seem to work only on the margin, and for slim segments of the population. What's striking to me is how old these "new" ideas are.