Advisers Can Help 403(b) Sponsors Boost Participation

Automatic enrollment, automatic increases, and default investments have not had as much traction in 403(b) plans as in 401(k) plans, but such features are becoming a trend particularly among larger plans, said Daniel Darby, regional non-profit market specialist for MassMutual Retirement Services, speaking at PLANSPONSOR’s 403(b) Summit. “I think when we look forward five years from now, it will be very much the norm,’ he said.

Those plans that have adopted automatic features show a low rate of opting out and about a 15% increase in participation, Darby said. Plans that are good candidates to add automatic enrollment have a match and room in the budget for a participation increase.

However, in the K-12 space, the match and the budget often aren’t there. Automatic enrollment might be a nice vision—but in reality automatic enrollment isn’t happening in that space, said Chris DeGrassi, assistant vice president and director, Education Market, at Security Benefit.

As an adviser, Janet Ganong, financial consultant at RBC Wealth Management, said one consideration is the plan culture. Some plan sponsors have told her it feels like they are forcing participation on employees. Ganong talks to sponsors about the fiduciary standpoint, and how automatic enrollment could take a lawsuit off the table.

Choosing a Default

When deciding which qualified default investment alternative (QDIAs) to roll participants into, one consideration is the sophistication and education of the participants, Ganong said.

Of the three options—balanced funds, lifecycle/target-date funds, and managed accounts—target-date funds are the most popular, and many participants will gravitate toward them. “It’s not uncommon to see half the plans assets invested in those vehicles,’ Darby said.

Progress is being made on these investments as well, Darby noted. Financial advisers are doing more due diligence on the underlying investments of target-date funds, and pressuring providers to offer more options. MassMutual and other providers are moving to do, he said.

Congress is also doing some examination of target-date funds, noted Alison Cooke, managing editor of PLANADVISER (see “Hearings on Retirement Security, 401(k) Resurface’). “This will definitely be an area where you will see a great deal of movement,’ she said. 

Voluntary Participation

For the many plans that have not implemented automatic enrollment, what are some ways to encourage employees to get into the plan? DeGrassi noted that participation in the K-12 space—where the plan is mostly supplemental to a pension—is only around 15% to 30%. Plan sponsors and their advisers face the obstacle of explaining why K-12 employees should participant in a supplemental plan. Furthermore, DeGrassi said it is difficult to get participants to default the right amount once they are in, especially when salaries are low.

To help combat those challenges, advisers first need to get management on board with efforts to boost participation. DeGrassi said it makes fiscal sense to management to help teachers retire, rather than stay on teaching and be paid more—employers are starting to realize they don’t want their tenured staff sticking around.

DeGrassi suggested asking management where they want participation to go, and if they don’t know, help them figure it out. He even recommended coming up with a syllabus for a strategy and using a report card to measure the results—which any school-minded person could appreciate.

Having a single vendor can be helpful in order to use targeted communication to help participation, Darby said. A single recordkeeper can warehouse data about participants, which can pinpoint demographic trends. From that data, an adviser can develop a communication campaign targeted to specific participants, and then track the results.

Fear is a stumbling block to getting people in the plan, but it can also be used to help, Ganong said. She uses statistics about poverty, or her famous example about cat food: There is more cat food sold in Florida than cats to consume it—meaning, there are some people who can only afford cat food in Florida. Once she scares participants, Ganong shows them how to save as simply as possible, and offers her business card to every participant. Similar to the concept in automatic enrollment of using inertia toward action, it is using fear toward action.