Editor’s Letter | PLANADVISER September/October 2017

Hiding in Plain Sight

Use a higher default rate for employees who were already participating in a retirement plan

By Alison Cooke Mintzer | September/October 2017

PA_EditorLetter_AliIn my last column (“Setting the Record Straight,” PLANADVSER, July/August), I wrote about the challenges our industry faces when narratives take hold that aren’t entirely true. My focus in that piece, a response to another website’s op/ed column, was defined benefit (DB) plans—how prevalent were they really, how many people qualified decades ago, and how much did they, or didn’t they, have to save for retirement?

As the editor of a publication that focuses on employer-sponsored retirement plans, I like to think I do a decent job of monitoring such misconceptions. However, I’ve become increasingly aware of many, more implicit assumptions threading through our articles and industry coverage, whether in the data included, papers quoted or the comments of industry sources. Some of these notions seem fairly innocuous at first, but once we, as reporters and editors, start to question them, we see how we could dig a little deeper and question a little further to bring you more complete—and valuable—information.

The most significant of these assumptions relate to plan design and participant behavior. We have for years discussed how plan analytics are evolving, and it is true that there are many more tools whereby advisers and plan sponsors can leverage data to improve their plans and make more informed decisions. Getting the right data is only half the battle, however. What I mean is this: What assumptions do you make when determining what data to consider?

For example, when advising plans using automatic enrollment, do you work with your plan sponsor clients to determine whether participants were previously enrolled in a defined contribution (DC) plan, or do you assume they are completely new to the work force? If the former, a plan might use a higher default rate, say 6%, considering that an employee had likely been participating at a rate higher than the 3% typically used for those just starting out. Or instead, should you consider what Dr. Punam Keller of the Tuck School of Business at Dartmouth College suggests and ask new hires to make an affirmative choice to participate, engaging them by asking what they were contributing at their past employer?

When it’s assumed that all participants come without former DC plan exposure, there is a risk that joining a new retirement plan will decrease some people’s savings rate instead of increase it. Plan analytics may look positive, as people stay in the plan to participate and maybe even increase their savings rate, but, for their personal retirement readiness, the numbers show the opposite trend.

A behavioral economist I met a couple of years ago was talking about maximizing data usage to improve retirement readiness at a particular retirement plan. I asked him what he thought about the view that retirement readiness assumptions were too low for people invested in multiple retirement plans. He responded that, because everyone cashes out, there was no reason to worry about prior retirement plans.

Yes, it is true that the industry has a problem with leakage, but do the vast majority of retirement plan participants cash out their plan account when they leave a job? I think not. In fact, when most employees leave a company, they’re moving from one job to another and probably don’t need the money—they likely took a job for similar pay and therefore don’t need to raid the retirement plan.

Much as the notion of “the good old days of pension plans” misconstrues what those plans really looked like, so does the discussion of employees and participants as if they are all new hires with their first job post-high-school or -college.

There’s an old saying, “When you assume, you make an ass out of you and me.” That’s not a pleasant thought, but it’s true probably more often than not—after all, that’s why the saying is in our vernacular. Our role is to bring you information based on fact, and we will continue to work hard to challenge the implicit assumptions inadvertently brought into our articles, and provide the proper context so, as advisers, you can provide the right guidance to your plan sponsor clients.