Compliance December 30, 2015

N.J. Employers Could Be Forced to Provide Retirement Accounts

New Jersey is the latest state to make a move toward a state-run retirement plan for private-sector workers.
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The New Jersey Senate budget committee has approved a bill creating a retirement program for private-sector workers that are not offered employer-sponsored plans.

The “New Jersey Secure Choice Savings Program Act” would require employers with 25 or more employees that do not sponsor their own retirement plans to automatically enroll employees into a state-run program. Employees that do not opt out will automatically have 3% of their salary deferred into an individual retirement account (IRA), and can change the amount deferred, keeping in mind IRA contribution limits.

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The bill would establish the New Jersey Secure Choice Savings Board, which will oversee the program. Language in the act describing the board’s duties is similar to that of the Employee Retirement Income Security Act (ERISA). The act says board members will discharge their duties “solely in the interest of the program’s enrollees and beneficiaries,” and will invest with “the care, skill, prudence, and diligence under the prevailing circumstances that a prudent person acting in a like capacity and familiar with those matters would use in the conduct of an enterprise of a similar character and with similar aims.”

The committee’s approval of the bill in New Jersey comes after the Department of Labor (DOL) issued proposed guidance for states that want to create such programs. The rulemaking has a particular focus on helping states bring such plans into alignment with the procedures and requirements of ERISA, and also offers potential safe harbor protections for states implementing auto-IRAs.

Other states have already implemented state-run retirement programs for private-sector employees, trying to close the retirement plan coverage gap. But, a study for the state of California and its Secure Choice Retirement Savings Plan found that while the majority of workers surveyed say such a program would be good for them, a significant number still would not save or save enough.

Data & Research December 30, 2015

Investment Menu Reform Case Study

It’s more or less common sense that making retirement plan investment menus easier to use will lead to better outcomes, but a new paper strives to more carefully quantify the effect. 
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A new research paper by Donald B. Keim, the John B. Neff Professor of Finance at The Wharton School, University of Pennsylvania, and Olivia S. Mitchell, professor of insurance, risk management and business economics with Wharton’s Policy Pension Research Council, takes a deep dive into an interesting case study in which a real retirement plan sponsor fundamentally reworked its investment menu.  

Plan officials will by now be familiar with the tenants of streamlining a defined contribution (DC) plan menu—for example, eliminating multiple funds in the same equity asset class or re-enrolling unsophisticated participants into a professionally managed asset-allocation solution. In this particular case the plan menu was reduced considerably, “with almost half of the funds deleted from the lineup.”

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This streamlining process was intended to simplify the fund menu, researchers explain, “but it is important to note that the average characteristics of the menu of offered funds (e.g., expense ratio, within-fund turnover, systematic and idiosyncratic risk) were the same before and after the streamlining.” 

Even with a similar average risk profile and expense ratios, the paper clearly shows the reformed menu promoted better decisionmaking by retirement plan participants. Specifically, new allocations from participants post-reform exhibited “significantly lower within-fund turnover rates and expense ratios, and we estimate this could lead to aggregate savings for these participants over a 20-year period of $20.2 million, or in excess of $9,400 per participant,” the paper explains. 

After the reform, streamlined participants’ portfolios also held “significantly less equity and exhibited significantly lower risks,” mainly due to reduced exposures to systematic risk factors as compared with “non-streamlined counterparts.”

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The researchers also considered how participants contributed to the menu of funds pre-reform and what happened to their fund allocations, along with the costs and risks of the resulting portfolios, as a result of the “firm-wide DC plan streamlining effort.”

Interestingly, the participants who benefitted from this particular example of menu simplification “proved to be older, more likely to be male, and higher-income.” They also initially held higher balances in riskier funds and lower balances in safer balanced or target-date funds.

“Participants holding the deleted funds either reallocated their money to funds kept in the lineup in advance of the deadline to maintain a similar pre- and post-streamlining allocation, or were defaulted into target-date funds (TDFs) resulting in an allocation containing, on average, safer assets,” the report explains. “Only 9% of the streamlined participants elected the new brokerage window (taking only 0.4% of their assets).”

Overall participants adjusted their portfolio holdings fairly substantially, the paper concludes, ending up with “fewer funds, significantly lower within-fund turnover rates, and lower expense ratios … Also, after the reform and relative to the non-streamlined participants, streamlined participants’ portfolios generally exhibited lower diversifiable/idiosyncratic risk and less exposure to systematic/non-diversifiable risk factors.”

The full paper is available for download here. 

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