2008
Micro Plan Analysis – Room To Grow

Micro plans offer good plan designs, but have room for improvement

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Micro plans offer good plan designs, but have room for improvement

Advisers rarely “target" start-up plans, and with justification. After all, they generally have all the problems of an established program (and then some)—and, by definition, lack the assets that remain an integral compensation component for many advisers. Plans in the micro-market segment—those with less than $5 million in plan assets—have long suffered from the perception that they simply do not offer the same kind of upside potential of larger programs. However, for advisers who specialize in the micro-market space, the universe of potential clients gets larger every day.

The small-business arena presents many challenges for plan sponsors attempting to navigate unfamiliar waters. Although plan sponsors of all sizes routinely are confronted with a barrage of regulatory and administrative burdens, it is the rare small-business owner that has anyone on his or her payroll focused on such matters. Little wonder that more than half (60%) of plans responding to sister publication PLANSPONSOR’s 2007 Defined Contribution Survey with less than $5 million in assets use an adviser. The question is, what are the remaining 40% doing?

In many ways, the micro plans surveyed are on par with defined contribution (DC) plans overall. Micro plans surveyed have a 70.7% average participation rate, nearly identical to the 72.7% participation rate of plans overall (although plans that took the time to respond to the PLANSPONSOR survey are, in all likelihood, more informed and proactive than many). Micro plans also exhibited tendencies similar to larger programs in their monitoring and awareness of fees. When asked what the approximate annual cost for maintaining the plan (excluding any fees charged to participant accounts) and the approximate annual cost charged against participant accounts as investment management or other fees, micro plans responded in a fashion comparable to DC plans overall, although a few percentage points higher in the “don’t know" category.

Plan Design Features

Even before the 2006 passage of the Pension Protection Act (PPA), many plans had taken steps to embrace the automated plan design features given the green light by the legislation. However, micro plans have been slower to move in that direction. Only a scant 13.3% of micro plans use automatic enrollment, and 6.4% have implemented automatic deferral increases/contribution acceleration for participants. This hesitancy could, of course, simply reflect the tendency of smaller programs to lag in adopting new designs—or it might represent a concern about the additional costs attendant with increasing participation (particularly where a matching contribution is involved). It also could reflect an unwillingness of small-business owners to effectively impose participation on their workers—or, surely for some, all of the above.

Micro plans are less likely to offer a matching contribution than are DC plans overall (69.5% and 76.5%, respectively)—and when they do, they are offering smaller matches with longer vesting periods. More than half (55.7%) of micro plans make participants wait five years or longer to be 100% vested in the match, although nearly one-quarter (23.3%) offer immediate vesting upon enrollment.

In general, micro plan respondents make their employees wait longer than DC plans in general to be eligible for enrollment. Half of micro plans (49%) make their employees wait more than six months to be eligible to participate, compared to just one-third (32.8%) of DC plans overall.

Investment Options

Target-date lifecycle funds and target-risk lifestyle funds are popular in the micro plan segment, albeit less so than among respondent programs in the broader universe. Only about one-quarter of micro plans offer lifecycle funds, compared to 36.1% of plans overall, while just 17.7% of micro plans offer target-risk funds, compared to 22.3% of all DC plans responding to this year’s survey.

Micro plans offer 22.4 funds to their participants, compared to plans overall at 21.1. Not surprisingly, micro plans, which are frequently closely held, are much less likely than overall plans to offer employer stock (1.3% and 9.1%, respectively) and they are noticeably less prone to offer a self-directed brokerage account option than the broader universe of respondents (5.9% and 15.0%, respectively). They are, however, as likely as plans overall to offer exchange-traded funds (ETFs) (0.9%), and about as likely to offer managed accounts (24.0% of micro plans, 23.2% of DC plans overall), alternative investments such as hedge funds, venture capital, and private equity (2.3% and 2.0%, respectively), and real estate (12.2% and 14.0%, respectively).

Although nearly one-third of plans do not make this option available, micro plans are somewhat more likely than the overall universe of survey respondents to offer advice to their plan participants, most commonly a financial adviser outside the plan (31.6%) or through the DC provider (29.7%).

As for plan-level monitoring, half (51.4%) of all micro plans say they formally review the plan’s investment options annually. They are significantly less likely to do so on a quarterly basis, just 11.2% versus 28.4% of plans overall, and just 11.6% do so twice per year, compared with 16.5%. Most (60.2%) micro plans do not have an investment committee for the DC plan, though this could be explained at least in part by the size of the companies.

Only about half of micro plans have an investment policy statement (IPS), compared to 72.6% of overall plans. Even among those micro plans that do have an IPS in place, they are less likely to be vigilant about compliance with the statement; 45.1% of micro plans say they rely on outside vendors for compliance, 10.4% say they are not very vigilant and only periodically check IPS compliance, and 3.9% are not very concerned with such compliance. Still, 40.6% of micro plans claim to be “very vigilant’ about monitoring compliance with the statement, although that is significantly less than the 52.2% of DC plans overall that made that statement.

DC programs are as unique as the industry and geographic location in which they operate, and the workforce the plan supports. Traditionally, micro plans have not been seen as appealing to many advisers because the economics of serving the plan do not seem to be as compelling as those with larger programs. However, these programs frequently are more open to an adviser’s counsel, and can provide you with an opportunity to have a real impact while helping the program—and your relationship with the business principals—grow.

 

Survey Results

 

1. Does your plan use the services of a financial adviser?
Overall Micro
Yes 55.2% 60.0%
No 44.8% 40.0%
2. What is the adviser’s fee arrangement?
Overall Micro
% of plan assets (bps) 52.8% 57.9%
Per participant 10.3% 14.9%
Project-based 5.2% 3.2%
Monthly/annual retainer 21.9% 12.0%
Performance: investments 5.2% 6.0%
Performance: participation 1.6% 2.1%
Other 9.5% 10.3%
3. What is the participation rate in your DC plan among eligible employees?
Overall Micro
Average 72.7% 70.7%
Median 78.0% 75.0%
4. When are employees eligible to participate in the plan?
Overall Micro
Immediately upon hire 31.7% 16.9%
Within 3 months 25.0% 21.3%
After 4 to 6 months 10.5% 12.8%
After more than 6 months 32.8% 49.0%
5. How often do you formally evaluate your DC provider?
Overall Micro
Annually 27.5% 31.7%
Every 1-2 years 12.7% 16.1%
Every 2-3 years 15.3% 14.4%
Every 3-5 years 22.1% 14.8%
Every 5+ years 12.1% 7.4%
Never 10.3% 15.6%
6. What is the approximate annual cost for maintaining the plan (excluding any fees charged to participant accounts)?
Overall Micro
Less than 0.1% of plan assets (<10 bps) 34.2% 32.5%
0.1-0.25% of plan assets (10-25 bps) 22.4% 25.6%
0.26-0.50% of plan assets (26-50 bps) 8.3% 6.0%
0.51-0.75% of plan assets (51-75 bps) 4.3% 3.8%
0.76-1.0% of plan assets (76-100 bps) 3.5% 3.7%
1-1.5% of plan assets (101-150 bps) 2.9% 4.0%
More than 1.5% of plan assets (>150 bps) 0.7% 1.2%
No cost to plan (all fees borne by participants) 8.4% 5.1%
Don’t know 15.1% 18.0%
 
7. What is the approximate annual cost charged against participant accounts as investment management or other fees?
Overall Micro
Less than 0.1% of plan assets (<10 bps) 23.1% 25.4%
0.1–0.25% of plan assets (10-25 bps) 13.4% 12.9%
0.26–0.50% of plan assets (26-50 bps) 8.3% 5.5%
0.51–0.75% of plan assets (51-75 bps) 7.9% 5.1%
0.76–1.0% of plan assets (76-100 bps) 6.6% 5.0%
1.0–1.5% of plan assets (101-150 bps) 4.2% 5.4%
More than 1.5% of plan assets (>150 bps) 0.6% 1.2%
No cost to plan (all fees borne by participants) 17.5% 17.9%
Don’t know 18.5% 21.7%
8. How often do you formally review costs/fees?
Overall Micro
Annually 69.4% 61.6%
Every 1–2 years 11.7% 13.3%
Every 2–3 years 6.4% 6.8%
Every 3–5 years 5.3% 6.5%
Every 5+ years 2.4% 2.5%
Never 4.8% 9.4%
9. How often do you formally review the investment options?
Overall Micro
Quarterly 28.4% 11.2%
Twice a year 16.5% 11.6%
Annually 39.5% 51.4%
Every 1–2 years 6.0% 9.2%
Every 2–3 years 2.9% 4.3%
Every 3+ years 1.8% 3.1%
Never 3.0% 6.7%
Other 1.8% 2.5%
10. Do you currently offer any of the following investment options in your plan?
Overall Micro
Employer Stock 9.1% 1.3%
Self-Directed Brokerage 15.0% 5.9%
Real Estate 14.0% 12.2%
Alternative Investments 2.0% 2.3%
Target-Date Lifecycle Funds 36.1% 24.0%
Risk-Based Lifecycle Funds 22.3% 17.7%
Managed Accounts 23.2% 24.0%
ETFs 0.9% 0.9%
None of the above 31.6% 49.4%
11. Does your organization have an investment committee for the DC plan?
Overall Micro
Yes (internal employees only) 57.0% 31.4%
Yes (includes non-employees) 14.8% 8.4%
No 28.2% 60.2%
12. Do you have a written investment policy statement (IPS) for the DC plan?
Overall Micro
Yes 72.6% 53.2%
No 27.4% 46.8%
13. Do you use automatic enrollment?
Overall Micro
Yes 23.1% 13.3%
No 76.9% 86.7%
14. Have you implemented automatic deferral increases for participants?
Overall Micro
Yes 11.5% 6.4%
No 88.5% 93.6%
15. Does your organization match the participant’s contribution?
Overall Micro
Yes 76.5% 69.6%
No 23.5% 30.4%
16. If so, how much is the approximate maximum match?
Overall Micro
More than 100% of first 6% of salary contributed 5.2% 4.7%
100% of first 6% of salary contributed 9.1% 7.9%
51%–99% of first 6% of salary contributed 23.1% 18.6%
50% of first 6% of salary contributed 29.5% 27.6%
Less than 50% of first 6% of salary contributed 33.2% 41.2%
17. How long before participants are 100% vested in the match?
Overall Micro
Immediately on enrollment 28.8% 23.3%
Between 6 months–1 year 6.3% 6.7%
2 years 2.0% 1.5%
3 years 12.8% 8.2%
4 years 4.8% 4.6%
5 years 26.1% 30.1%
After more than 5 years 19.1% 25.6%
18. Is financial/investment advice offered to participants in your DC plan?
Overall Micro
No 34.9% 28.9%
Yes, through an adviser outside of the plan 23.4% 31.6%
Yes, through a third party 9.8% 6.6%
Yes, through our DC provider 28.5% 29.7%
Yes, through another source 3.5% 3.2%
19. Did you fail any of your discrimination tests in 2006?
Overall Micro
Yes 21.8% 17.9%
No 78.2% 82.1%