How Do You Know What Works in a Plan?

NEW YORK—How do plan sponsors assess the effectiveness of their plans? Alison Cooke Mintzer, editor in chief of PLANSPONSOR and PLANADVISER, asked panelists at PLANADVISER’s 2013 Top 100 Retirement Plan Advisers seminar here Wednesday to weigh in on outcome-based measurement.

According to the PLANSPONSOR Defined Contribution (DC) survey, 65% of plan sponsors said they look to participation rates. Deferral rates (25%), savings to the match (19%), advice tools (10%) and employee satisfaction surveys (18%) were other measures used to benchmark plans. However, more than a quarter (28.5%) of plan sponsors said they were not using any measures at all to assess plan effectiveness.

“There’s not a single piece of good news out of that,” Mintzer said. “More than a quarter have no success measures being used across their plans. There is no benchmark being used to measure the plan’s success or effectiveness.”

The question is, Mintzer asked, how do we get through to those plan sponsors? “How to determine whether a plan is successful or not is a key conversation for advisers to have with sponsors, she said.

“One of the realities is the inevitable disconnect between HR and finance,” said Steve Glasgow, senior vice president of Avondale Partners LLC. Plan sponsors often say they measure the plan’s success by making sure the adviser does not “break the bank,” Glasgow said, and making sure all the highly compensated employees are participating fully.

To measure a plan, Glasgow said, he would hope to ensure that all participants are saving at a healthy clip. The standard measures are the traditional ones: deferral rates, how much the plan has in outstanding loans and leakage.

Citing Shlomo Benartzi, the behavioral finance authority, Glasgow noted that participants need to adhere to a 90/10/90 formula: a 90% participation rate, a 10% deferral rate, and 90% of participants invested an asset-allocation option. “If we can get them to those numbers,” Glasgow said, “we’ll achieve what we set out to achieve.”

“We realized from reading e-business myths that we were working in the business, not on the business,” said Matt McLaughlin, senior institutional director of Graystone Consulting, a business of Morgan Stanley. “We weren’t tracking this information, measuring ourselves and our successes. We were so busy competing for new business, we weren’t keeping track of this data.”

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Keeping Track

The realization inspired Graystone to go into Excel and begin accumulating data on assets, deferral rates and participation rates, which helped them to do a self assessment. “We could see what was and what was not working,” McLaughlin said.

The results were surprising. “A lot of things we thought and HR thought were great were not so great,” McLaughlin said. Graystone then began to push plan sponsor clients to use auto-enrollment and found that auto features really do make a difference in plan outcomes.

The process of auto feature adoption has been gradual, McLaughlin said, but it is making inroads and learning ways to be creative. One client would not accept auto features because of the number of short-term employees and high turnover. Graystone was able to help the plan sponsor see that they could use auto features with participants earning $50,000 or more, and they increased caps on auto-enrollment.

Being able to put their hands on their own data has been a boon to business, McLaughlin said. “It’s been helpful to have a database across our books. It helps us with new clients; helps us assess ourselves.”

Mintzer asked the panelists if the concept of gap analysis has been helpful in making participants realize they are not saving enough.

“I love the idea of gap analysis,” Glasgow said, noting that the calculations sometimes do not factor in the individual accounts that have been in the plan for only a few years. “I like it, but I still see room for improvement,” he said. “Participants are more moved by, ‘What is my estimated income stream?’ ” Gap analysis does not say in today’s dollars, ‘Here is what you are going to have to live on in retirement.’ ”

“There is no way to calculate all the outside factors,” McLaughlin agreed. “Our job is to make clients aware of how important this is.”

There are multiple facets to consider, Mintzer pointed out. Getting participants to engage, getting plan sponsors to measure whether their plan is in fact helping people—“where do you have the conversation?” she asked.

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Auto Features

Mintzer noted that using auto enrollment without building auto escalation into the plan is self-defeating. To some plan sponsors, Glasgow said, auto increase is still a relatively new concept, and HR can be reluctant to adopt a feature they feel no one else is using. But McLaughlin said that auto increase has been accepted readily. “We still have not adopted auto anything because of the money,” he said. “We thought of looking at how much they spend on healthcare benefits versus retirement benefits--probably a ratio of $12 to $1.”

Glasgow noted that the appeal of wanting to help take care of participants can also conflict with a company’s cash flow needs, and fiduciary responsibility means the company needs to balance the two sides. “Everybody agrees, when we bring it up, that inertia is the issue you have to overcome,” he said. “Whether it’s deferral rates or participation rates, so many people never come back after the initial enrollment. We keep coming back to building plan architecture so people don’t have to come back to make decisions.” 

McLaughlin said that most of his clients use auto enrollment, but that companies that are not very profitable are reluctant to accept this feature.

“We’re still in the first three innings of this ballgame,” Glasgow said, adding that he tells sponsors he likes to see everyone auto enrolled at 10%, often a shock to the plan sponsor whose participants are at 3%. Statistics can be useful in these situations, Glasgow said, to show plan sponsors that if the match structure is fully matched at 3%, participants tend to gather at that point, whereas if it is 5%, they will accept a 5% savings rate. “If you say,’ to get the free money you have to go to 6%,’ then everyone does that,” he pointed out. “It gives participants a disincentive to change the deferral rate. We’re trying to be extremely aggressive compared to what we see in the marketplace.”

Sometimes a simple—and relatively affordable—solution works very well. Postcards are an especially effective way to reach participants, McLaughlin said. “We used to use postcards for direct marketing. People respond to the postcard—it’s the only thing that ever worked. We are huge fans of the postcard auto-enroll.”