Are 403(b) plans evolving fast enough?

My community recently experienced a technology upgrade. We now have fiber optics for TV and ultra-high speed internet. While I don’t really have use for 1GBps internet speed today, I know this latest evolution enables future technology. Change is often a good thing.  

But not everyone sees it that way. Many neighbors have raised complaints on social media sites. I believe it mostly boils down to their discomfort with change. And I get it because we see it with 403(b) plans too. Traditionally 403(b) plan sponsors have been uncomfortable with change – at least much more so than their 401(k) plan sponsor counterparts.  

But while 403(b) plans have lagged in adoption of some plan improvements, they’re striving to catch up. According to the recent Plan Sponsor Council of America (PSCA) 2017 403(b) Plan Survey, 403(b) plans are showing improvements in automated plan features in particular. Automatic enrollment, automatic escalation and the default deferral percentages with automatic enrollment are up across the board:

• More than 1 in 5 (21 percent) now offer auto-enrollment, up from just 19 per cent last year.
• Default deferral percentages at 4, 5 and 6 percent are all higher than last year. And default percentages at 1, 2 or 3 percent all declined.  
• The number of plans offering automatic enrollment at 6 percent more than doubled to now more than 1 in 10 (11.7 percent).  

We believe this is a move in the right direction since studies show higher default percentages encourage greater savings and generally maintain relatively low opt-out rates.¹

Balancing employee choice
403(b) plans also added more choice, while at the same time making some decisions a little easier to navigate. Employees want choices in how and where they save. But while some choice is important, too many choices can become overwhelming. Plan sponsors need to know their participants and find the right balance. 

A third of plans (33.2 percent) offer choice allowing participants to make Roth after-tax contributions. Up from 28.6 percent last year.  While most would agree paying taxes now versus later can be mostly a wash, different people with different objectives want different options. In fact, the survey shows the percentage of participants making Roth contributions has increased. 

As we’ve been tracking every year via the PSCA survey, the number of investment options offered continues to become more manageable down to 26 from 28 last year. In this case by narrowing the options, employees often find making a selection a little less daunting. 

More improvement needed
While we see a lot of improvement and trends in the right direction, there’s more work to be done in the 403(b) market. If we really want to move the needle on retirement savings, plans need to continue adopting auto enroll with higher default rates. And while decreasing the number of investment options is good, 26 is still too many. It leaves participants with analysis paralysis, not a good thing. 

I know change can bring discomfort, but smart plan design will help participants better prepare for the uncertainties of their retirement. Much like my ultra-high speed internet positions us for the future. We may not know exactly what that future will bring, but we know we must prepare for it.  

Aaron Friedman is the National Practice Leader, Tax-Exempt, The Principal Financial Group and a member of PSCA's non-profit research committee. 

¹ 9% opted out of plan participation with a default deferral set at 3%; 14% opted out with a default deferral set at 6%.  Based on participants with services by Principal, 1/1/2014 through 12/31/2016

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