4 Best Practices for Implementing Automatic Features in Defined Contribution Plans

According to the SBS Retirement Plan Survey, approximately one-half of the responding retirement plan sponsors offer automatic enrollment. Offered in conjunction with automatic escalation, such features can positively impact participant behavior and improve retirement readiness. This article examines 4 best practices to be considered when implementing automatic features in defined contribution plans that can produce greater results per dollar of employer cost.

Background 

The utilization of automatic features in defined contribution plans has increased significantly since they were first introduced as part of the Pension Protection Act of 2006 (PPA). More plans are adopting these provisions, resulting in higher participation rates among employees. Although this is a positive trend, certain design features actually thwart the success that could otherwise be achieved. Specifically:

• relatively low default deferral rates result in lower savings; 
• automatic enrollment is often applied to newly eligible employees only, disregarding existing employees who are not participating; and 
• auto-escalate provisions, if used, are often applied on an opt-in basis rather than an opt-out basis, and at rates too low to achieve targeted savings levels. 

Using Investment Menu Design to Improve Participant Outcomes

Many participants lack the ability, time, and/or desire to effectively make sound investment decisions and manage their accounts on an ongoing basis. Traditionally, many plan sponsors felt their responsibility was to offer a broad range of investment options together with employee education. The results, all too often, were that participants were overwhelmed with choice and rarely availed themselves of the education. In recent years, the trend has been to limit the number of investment options and guide participant behavior. The investment menu structure may be just as important as the actual investment options themselves. An effective menu design will address the various participant behaviors:

Properly done, a well-designed investment menu can direct behaviors and give participants the confidence they need to feel comfortable with their investment decisions.

Read Improving Participant Outcomes: An Action Plan for Plan Sponsors and start developing your action plan to improve participant outcomes. If you have any questions, or would like to begin talking to a retirement plan advisor, please get in touch by calling (855) 882-9177 or e-mail us at sbs@hanys.org.

Using Plan Design to Improve Participant Outcomes

Plan sponsors should review their current plan design features and consider how they drive participant behavior. Studies have shown that participants will often choose deferral rates at a level to obtain the maximum employer match. By stretching out the matching formula, the employer cost stays the same but the employee is encouraged to save more. For example, a plan that matches 100% on the first 5% could move to a 50% match on the first 10% of salary. The employer cost remains constant at 5% while at the same time employees are motivated to contribute up to the 10% level.

It is important to limit participants’ ability to use the money for something other than its intended purpose: retirement. Plan sponsors should consider limiting, if not eliminating, loan availability within their plans. Participants rarely understand the true impact of taking a loan from their account—“borrowing from themselves” is a common justification employees use. Although the current economic environment may not be the best time to eliminate loans, it should be something to consider for the future.

Read Improving Participant Outcomes: An Action Plan for Plan Sponsors and start developing your action plan to improve participant outcomes. If you have any questions, or would like to begin talking to a retirement plan advisor, please get in touch by calling (855) 882-9177 or e-mail us at sbs@hanys.org.

What's Driving the Recent Stock Market Volatility?

January 2016 was a particularly difficult month for equity investors, with the major U.S. equity indices in correction territory. China's economic slowdown and negative earnings in the energy sector are the most commonly cited factors for the possibility of a global economic slowdown.

This paper, What's Driving the Recent Stock Market Volatility?, provides retirement plan fiduciaries and investors insight into the stock market volatility, including:

• the role of China and the energy sector as market drivers; 
• "dashboard" metrics showing where equity investors should focus their attention in 2016; 
• an analysis of the long-term relationship between corporate earnings trends and S&P 500 Index performance; and 
• an overview of the price/earnings (P/E) ratio and how much investors are willing to pay for those earnings. 

If you have any questions about this paper, or would like to begin talking to a trusted advisor, then please get in touch by calling (855) 882-9177 or e-mail us at sbs@hanys.org.

Participant Outcomes vs. Participation Rates: How to Succeed in Both Areas

Until recently, participant outcomes were not a great concern to most plan sponsors; even now, a relatively few number of plan sponsors use income replacement as a measure of plan success. A recent survey conducted by PLANSPONSOR magazine showed just 3.5% of plan sponsors use projected retirement income as a metric to assess their plans.1 Instead, the goal was to offer a plan with good investment choices, competitive fees, and a recordkeeping platform that would minimize the administrative burden on the employer.