Are You Answering the Right Questions?

Trends and plan design initiatives to meet the needs of America’s ever-changing workforce.

At the 2019 NAPA Summit, I partnered with provocateur Doug Prince, CEO of ProCourse Fiduciary Advisors, and PSCA research committee member, to present results from PSCA’s 61st Annual Survey of 401(k) and Profit-Sharing Plans.

Here are some of the highlights from that April 2019 NAPA presentation:

Trends

Increased Employee Contributions. A 7.1 percent average deferral percentage: as more plan sponsors automatically enroll new hires using higher default contribution percentages and automatic escalation.

Employer Contributions Recovered From Great Recession. A 5.1 percent average employer contribution: PSCA’s next 401(k)/profit-sharing survey will reflect the many improvements to employer financial support that were made after the Tax Cuts and Jobs Act of 2017. Keep an eye out for the survey announcement!

Roth Offered in Most Plans. Roth is now offered in 70 percent of plans: quite a change from Congress’ initial intent to offer Roth as a temporary feature; it was only available from 2006 to 2010.

Automatic Features. 61.2 percent of employers deploy automatic enrollment features; however, most still limit them to new hires. Early adopters often used a default deferral rate of 2 percent of pay, which increased to 3 percent of pay following the Pension Protection Act of 2006. Today, most plan sponsors use a default contribution rate in excess of 3 percent.

Technology Comes to the 401(k). 43.6 percent of surveyed employers offer plans that use mobile technology – double the rate in 2014. Eligibility and Vesting. The percentage of plans with immediate vesting has increased from 29.8 percent to 38.5 percent. And most plans now fully vest workers after three or fewer years of service – reflecting a 76 percent increase, from 35.5 percent to 62.5 percent!

Design Initiatives

What is the purpose of benchmarking, anyway? Too many plan sponsors routinely focus solely on employers of a similar size within the same industry. However, at many firms, the majority of employees are neither recruited from nor lost to competitors for capital and customers. The questions to be answered for many plan sponsors are whether their plan offers the features that are the best at meeting the needs and desires of a diverse workforce, today and tomorrow, while employed and after retirement!

To that end, here are a few plan design initiatives that some plan sponsors are considering:

Improve Plan Loan Processing to 21st Century Capability. Most plan loans are repaid. However, most plan loans are outstanding at separation default. This occurs because the majority of plans have yet to add 21st Century online/electronic banking capability to not only foster repayment of loans outstanding at separation, but to provide term vested and retired participants the option to take a loan instead of a taxable withdrawal. Further, some are working on processes that would facilitate the capture of a new hire’s outstanding loan.

Anticipate Financial Emergencies. Some policy experts have proposed legislative changes to enable a plan to add a sidecar “bank” account so workers can save for an emergency. Instead of a suboptimal sidecar, some plan sponsors are adding after-tax contributions (if only for non-highly compensated employees) and Deemed IRAs.

Hardship Withdrawal Leakage. Some plan sponsors seek to curtail the expected increase in leakage from hardship withdrawals following changes to comply with the Bipartisan Budget Act of 2018.

Aggregation/Consolidation of Retirement Savings. Increasingly, plans are not only adding features designed to facilitate continuation of the account, but assisting participants who want to aggregate/consolidate all retirement savings into their plan.

Rethinking Target Date Investments. Today, almost $1 trillion of 401(k) assets are allocated to target-date funds. Target-date funds are not transparent – few know the actual allocation at any point in time. In response, some plan sponsors are considering no-cost target-date models that are fully transparent and offer greater customization.

Final Thoughts

A focus on the plan sponsor’s own workforce helps to tease out innovative plan design alternatives that best meet workers where they are. Many workers live paycheck-to-paycheck. For many, retirement is remote or unlikely. For many, monthly bills, college education, a mortgage and other current day needs all have greater priority. So, an individual account retirement savings plan that can “do double duty,” meeting a diverse workforce where they are today will maximize the perceived value of the savings plan and improve the workers’ benefits experience.