Analysis Reveals Drivers of DC Plan Health

An analysis of Wells Fargo’s bundled recordkeeping business, representing four million participants, finds that plan health has been improving.

Defined contribution (DC) retirement plan participation has increased 18% over the past five years, according to Wells Fargo’s Driving Plan Health report. Millennials have seen the biggest gains. The percent of savers with a total contribution (employee and employer) rate of 10% or higher has increased 9%.The percent of participants investing in a diversified portfolio has increased 15%. Older employees are the least likely to be diversified.

For its plan health index, Wells Fargo has named certain participant behavior goals: All eligible employees participate in their DC plans; participants are contributing at least 10% of pay, including employee and employer contributions; and participants are invested in diversified investments, such as a target-date fund (TDF), managed account or a comprehensive advice program, or if a participant self-directs his investments, he is invested in at least two different classes of equity funds and one fixed income fund and has less than 20% in company stock.

The Plan Health Index is the percentage of eligible employees who meet the goals for all three savings behaviors. The Wells Fargo analysis finds a 40% increase in the Plan Health Index over the past five years.

Mel Hooker, director of relationship management at Wells Fargo Institutional Retirement and Trust, who is based in Charlotte, North Carolina, tells PLANADVISER, aside from automatic enrollment, total match is one of the key drivers for both participation and contribution rate. “Employees see that as an opportunity to take advantage of ‘free money’ which drives up participation and contribution rates,” she says.

Hooker suggests plan sponsors take a look at their match formula to make sure employees have the opportunity to take advantage of the match and get to a 10% savings rate.

Other factors that drive contribution rates are company stock and communication campaigns. Hooker says offering company stock can drive participation and contribution rates similar to a company match.

However, she warns that company stock can have a positive and negative effect for plan participants. The analysis found company stock is more heavily invested in by Baby Boomers. While it is a driver of participation and contribution rates for all generations, Wells Fargo sees a lack of investment diversification among Baby Boomers because of a high concentration of investments in company stock. “Looking at any one of the three goals, each has drivers that move them independently,” Hooker says. “Plan sponsors should dive down into plan design to make sure it is doing what they want it to do. For example, is offering company stock a mover of all goals?”

Wells Fargo says each of the three key savings behaviors it monitors helps a participant’s ability to reach an 80% income replacement goal.

The Wells Fargo data shows the average participation rate for plans that automatically enroll new employees is 82%, compared to 88% for plans that include all employees in a re-enrollment. The participation rate for Millennials in plans with automatic enrollment is 84.9%, compared to 37.8%.

The most common default deferral rate is still 3%. However, a default rate of 6% sets participants up for greater success in terms of contribution rate, and does not materially affect opt-out rates. The average opt-out rate for plans with a 3% default rate is 11.1%, compared to 11.3% for plans with a 6% default, Wells Fargo says.

Some plan sponsors with high staff turnover are reluctant to implement automatic enrollment because it could lead to a high number of short-term, low-balance participant accounts, which can increase administrative costs. In these cases, sponsors may want to consider automatically enrolling only eligible employees who have completed one or two years of service, Wells Fargo suggests.

Nearly 90% of Wells Fargo DC plan clients offer some type of employer match (either a discretionary amount or a fixed formula) to participants in their retirement plans. For plans that offer a fixed match, on average about 46% of their participants reach the 10% contribution rate goal; for plans that don’t offer a fixed match, only 28% of participants meet the contribution rate goal. Wells Fargo also suggests using automatic deferral rate increases to help participants meet the 10% contribution rate goal.

“Trigger communications” are proactive communications sent to participants at key moments—milestone ages, positive actions and behaviors needing some attention—that suggest a next best step and congratulate them when they take actions toward helping achieve their retirement goals. Sponsors who take advantage of more of these communication and education campaigns average 44% of their employees contributing at 10% or more, compared to 31% for those who do not, the analysis found.

Having a qualified default investment alternative (QDIA) is a key driver to helping DC plan participants achieve diversification. Wells Fargo also suggests automatic rebalancing.

“The data shows plans are becoming healthier over time. This is due to plan sponsors taking advantages of the legislative changes of Pension Protection Act (PPA),” Hooker says. “We see a lot of movement by Millennials. Plan sponsors are winning at this stage by how much they’ve moved the needle.”

She adds: “If a plan sponsor is really clear on what it wants for it plan, it no longer has to guess: this report tells them how to move the needle. If plan sponsors look at every demographic and their plan designs, there are going to be changes that can be made.”