IMHO: “Nigh” Five

However, in preparing for our recent PLANADVISER National Conference, I came up with five more (see “IMHO:  Fifth ‘Avenues’”).   

(1) Everybody isn’t going to do automatic enrollment. 

Without question, automatic enrollment has done much to shore up the retirement savings rates of American workers.  For plan sponsors and participants alike, the efficacy of an approach that doesn’t require participants to complete an enrollment form, deliberate over investment choices, set upon a desired rate of savings, or even darken the door of an education meeting has done much to get tens of thousands of workers off on the right retirement savings foot.  And, for the vast majority of workers, the ability to do the right thing without doing anything at all has not only been well-received, but much appreciated as well. 

Not that automatic enrollment as outlined by the Pension Protection Act (PPA) doesn’t have its shortcomings.  Arguably, the 3% starting deferral rate outlined in the PPA—and still adopted by the vast majority of plans—is better suited to avoid creating a financial burden on workers than to ensuring an adequate level of retirement savings; and some workers, in taking the “easy” path cleared by automatic enrollment, wind up saving at lower rates than they would likely choose for themselves had they only taken the time to actually fill out an enrollment form (see “IMHO: ‘Starting’ Points”). 

But at some level, automatic enrollment requires that the plan sponsor “impose” a savings decision on a participant, and even though workers can choose to opt out, many plan sponsors are simply disinclined to set aside the purely voluntary approach.  Many smaller programs that might once have been willing to go down that route as a means of avoiding trouble with the nondiscrimination tests have since found the solace required in adopting a safe harbor design.  But for many, perhaps most these days, it’s all about economics; simply said, the more participants, the more matching dollars—and considering the potential number of additional participants, those matching dollars could be significant, or significant “enough” in the current economic environment. 

PLANSPONSOR’s annual Defined Contribution Survey has, for the past several years, shown a flat or flattening adoption rate for automatic enrollment.  There’s no reason to think this will change in the short term. 

(2) Everybody who does automatic enrollment isn’t going to do it for everybody. 

Among the PPA’s provisions is a safe harbor for those adopting automatic enrolment—a safe harbor that effectively provides plan sponsors with protection identical to that afforded under ERISA 404(c ), so long as certain conditions are met.  Among those conditions is that all eligible participants be automatically enrolled and/or given the chance to opt out. 

And yet, PLANSPONSOR’s annual Defined Contribution Survey has found, for several years running, that two-thirds of plan sponsors that have embraced automatic enrollment have done so only for newer hires (see “IMHO:  A Prospective Perspective”).  Anecdotally, plan sponsors are reluctant to “disturb” workers who, at least in theory, have previously been afforded the opportunity to participate and decided not to.  Some are hesitant to “insult their intelligence” by doing so, and for others, it’s just the economic dilemma posed above.  The PPA doesn’t mandate going back to older workers, of course—but plan sponsors desirous of those safe harbor protections either have to, or have to be able to establish that they have.  There is also, of course, the issue of a plan design that, at least on the surface, is more attentive to the financial security of shorter-tenured workers. 

Still, the current—and apparently persistent trend—is to adopt this feature prospectively, and it will likely take an improved economy—or perhaps litigation—to change that dynamic. 

(3) Roth 401(k)s are going to continue to gain ground. 

The advantages of tax-deferred savings have long been part-and-parcel of the pitch behind 401(k) plans.  The notion is simple: defer paying taxes on your savings now, and they’ll add up faster, further fueled by the tax-deferred accumulation of earnings on those balances.  And then, the logic goes, you pay taxes on those monies as you withdraw them—years from now—and at rates that, post-retirement, will be lower. 

Plan sponsors have long been reluctant to push Roth 401(k)s; their pay-it-now concept on taxes at odds with the traditional tax deferral mantra, and their benefits often seen as skewed toward more highly compensated workers. 

However, these days, it’s hard to find someone willing to predict lower taxes in the future, even post-retirement.  Moreover, today’s younger (and not-so-highly compensated) workers may very well be paying the lowest tax rates they will ever experience. 

To date, most surveys indicate that the participant take-up rate on Roth 401(k)s remains modest, something on the order of what self-directed brokerage accounts have garnered (and in many cases, appealing to the same audience).  However, the preliminary results of PLANSPONSOR’s annual Defined Contribution Survey suggest that Roth 401(k)s are cropping up on a surprising number of plan menus.  It’s a trend that, IMHO, bears watching.   

(4) Plan sponsors will (continue to) measure plan success on things (they think) they can control. 

Plan sponsors have long measured the success of their defined contribution plans by the rate of participation in the plan.   More than just providing a sense of interest and/or the success of inspiring enrollment meetings, the rate of participation, certainly by non-highly compensated workers, has a significant impact on the plan’s ability not only to pass nondiscrimination tests, but to allow highly compensated workers to defer at meaningful rates.  However, in an era of automatic enrollment and safe harbor plan designs, the value of this metric has been muted or, in many cases, eliminated.   

There is, however, a growing discussion among providers that plan sponsors should begin—and in some cases, are beginning—to consider other metrics: things like rates of deferral, diversity of asset allocation, and even adequacy of retirement income.  That they are now able to consider such a shift in focus is a testament to a new and exciting generation of tools now available from the provider community, and they may well foreshadow a time in the not-too-distant future where those perspectives are shared with participants who may, for example, increase their current rate of deferral to ensure a higher level of retirement income, or adjust their asset allocation to preserve portfolio gains as they near retirement. 

However, it’s not clear to me that plan sponsors will choose to benchmark their plans on criteria that is so individualized and so far outside their control to influence.  Consider that about two-thirds of plan sponsors today still benchmark based on participation, and half that number examine deferral rates within various employee groups.  These measures may not provide a picture of what the plan will yield in terms of its ultimate goal, but they are indicative of things a plan sponsor can control or influence with plan design, and—for the foreseeable future, anyway—I’m guessing they will continue to be the measures of choice. 

(5) Plan sponsors want good retirement outcomes for participants—but don’t feel it is their responsibility to ensure them. 

Under the auspices of “best practices” and armed with some of the aforementioned benchmarking measures, some claim that fulfilling the plan fiduciary’s responsibility to act in the interests of plan participants extends to ensuring a good result.  Of course, some plan sponsors are reluctant to know the results of that benchmarking for just that reason: that, once apprised of those results, they will one day be held to account for them. 

Unlikely as that seems to me, one should never underestimate the creativity of the plaintiff’s bar.  The reality is that a voluntary savings system needs goals, and I think participants would save better if they understood more.   

It also seems to me that plan sponsors who know more about what is going on in their plan might do a better job as well.