The Plan Design Spectrum

Why does a client’s retirement plan look the way it does? What role have you played in its design?

For many advisers, the answer comes down to how progressive or conservative the client’s company and investment committee are. (And no, I don’t mean politically—if we’ve learned anything in this election cycle so far, it’s that the words “progressive” and “conservative” may not mean what we think they mean.)

When you meet with new clients, what you’re asking is, what is the company’s, or committee’s, perspective about its plan offering? The reason why a sponsor offers a plan to employees is something that advisers, and provider partners such as recordkeepers, often ask plan sponsor clients. The question is asked to determine what type of plan design solutions, investment  choices and participant services will be the best fit for that particular company.

If the reason for offering a plan is simply so employees have a payroll-deferral savings option with more of a traditional plan design, maybe with no employer contributions or match level, many would consider that a conservative stance. On the other side of the scale, a progressive plan would be one that maximizes all sorts of automatic enrollment and stretch match designs, automatic investment solutions, advice access and, perhaps, even provides an income stream.

Whether it’s a defined benefit (DB) plan or a defined contribution (DC) plan, or other plan type such as stock or executive benefit program, before any plan can be constructed, the committee—and the adviser—should know its goal.

In an ideal world, every plan’s goal would be to help retirement plan participants get to retirement with enough saved to live adequately—though we know some companies might not share this goal and simply provide the plan to keep up with benefits offerings across the industry. Regardless of a plan’s goal, there are many different ways the company can choose to reach it. Plan contribution levels can be addressed by providing gap analysis reports, implementing automatic deferral escalation, launching postcard “easy enrollment” campaigns, adding stretch matches or increasing company contributions, to name a few examples.

At the most basic level, conservative is not necessarily “bad,” and progressive is not necessarily “good.” In fact, one company’s defined contribution plan might be conservative on its construct, without a match, because the company still has an active DB plan or other employee benefit offerings. Another company’s progressive DC plan might be the result of lack of access to such a pension plan or be driven by the employer’s paternalism.

Each committee makes a decision about where to be on the innovation scale for each plan design element. Realistically, there are few completely conservative or completely progressive plans. Rather, many plans are a balance of each. To continue the progressive and conservative analogy, the vast majority of plans are part of that “moveable middle.” This is where consultative engagement from an adviser can make all the difference. You can present a range of solutions that might allow a plan sponsor to think differently about its approach to plan design or implementation. From investment solutions and discussions about default alternatives and retirement income or distribution choices, to participant education and engagement opportunities, to loan availability within the plan—each element has many options that should be decided based on a careful review of participant and company behavior and needs.

Once the plan design decisions have been made, they can always be revisited as the company evolves. It is incumbent upon you to help ensure that goals are being met and that the plan design reflects the will of the committee. The most important thing, in my opinion, is not where a plan sponsor falls on the scale, but ensuring that you, as the adviser, have helped the committee understand the reasons  to make those decisions.