NAGDCA Supports Auto Enrollment for State DC Plans

A report notes that DC plans for public-sector employees are no longer just supplemental due to changes in state DB plans.

Longer lifetime payouts, coupled with a volatile stock market that featured two major recessions in 10 years and a fixed income market that has been providing lower yields since 1980 have placed a tremendous amount of stress on the funding levels state and local defined benefit (DB) retirement systems, according to a report from the National Association of Government Defined Contribution Administrators (NAGDCA).

The report notes that many state and local governments have made significant changes to their DB plan designs and benefits. Public-sector defined contribution (DC) plans, once considered only supplemental, are now an important part of public employees’ retirement readiness.

Get more!  Sign up for PLANSPONSOR newsletters.

Due to their history of being viewed as supplemental, DC plans in the public sector have lagged behind their Employee Retirement Income Security Act (ERISA) counterparts in both innovation and participation. While participation in private-sector 401(k) plans has steadily increased with automation features, supplemental plans in the public sector have remained in the 30% to 50% participation range for decades. “[I]t is time for public-sector defined contribution plans to improve their plan design in an effort help public-sector employees achieve retirement readiness,” NAGDCA says in the report.

The report concedes that many states have anti-garnishment laws to prevent deductions from employees’ paychecks without their consent. However, 12 states have passed legislation to allow for auto-enrollment into public DC plans, and some public plan sponsors are in states that allow creative methods to circumvent anti-garnishment laws.

NAGDCA suggests by combining auto-enrollment with auto-escalation and increasing the initial default deferral rate, participants can significantly increase their savings over time. 

Case studies

The paper includes case studies. For example, the passage of H.B. 957 in Texas in 2007 authorized the automatic enrollment of newly hired state employees into the Texas Saver 401k plan. Beginning January 1, 2008, new hires and rehires with a break in service were auto enrolled at 1%. The participation rate pre-auto enrollment was 34%; in 2015 it was 56%. However, without auto-escalation of deferrals many participants remained at the 1% savings rate. The paper says with automatic deferral increases of 1% per year, capping at 6%, employees would have tripled their account balances.

In other case studies, NAGDCA found an auto-enrollment “stick rate” of more than 90%, even among employees that make less than $30,000 per year.

“Excuses for not beginning a savings program can be made at every phase in life—student debt, getting married, buying a house, having kids, paying for college, etc.—before you know it you are out of time. With so much burden of responsibility being placed on the individual today, it is imperative to change the system to better serve those that serve the public, by working to make auto-enrollment and auto-escalation programs available to all public sector employees,” NAGDCA concludes.

The report, “Using Auto-Enroll to Improve Participant Outcomes,” is here.

One-Third of Retirement Plans Audited in Past Two Years

Yet, retirement plan sponsors surveyed ranked regulatory compliance below investment volatility and retirement benefit costs as a top plan governance concern.

More than half (53%) of retirement plan sponsors surveyed by Willis Towers Watson ranked investment volatility as one of their top three current retirement plan risks, while 49% ranked retirement benefit costs as a top concern.

Regulatory compliance was the third top concern (47%), even though the survey revealed that nearly one-third (31%) of respondents have had their retirement plans audited by the Internal Revenue Service or Department of Labor. Larger employers reported an even higher audit rate. Roughly half of employers with at least 25,000 employees have faced an audit over the past two years.

For more stories like this, sign up for the PLANSPONSOR NEWSDash daily newsletter.

“The fact that one in three retirement plans have been audited should send a wake-up call to many plan sponsors,” says David Speier, senior retirement consultant at Willis Towers Watson. “Regulatory compliance is a top concern, and there is room for a fair number of employers to improve the management of this risk. Proactive reviews of plan operations and compliance processes, for example, should be given a much higher priority at organizations that do not have a structure in place to conduct proactive reviews.”

The survey found 44% of plan sponsors have not conducted an operational compliance review of their defined benefit (DB) plans in the past two years, while 42% have not conducted a similar review of their defined contribution (DC) plans. About one-third of respondents indicated that limited budgets and resources prevented them from conducting a review over the past two years.

Half of sponsors have separate committees for plan administration and investment governance.  Plan sponsors understand that training is a critical component of a strong governance framework. More than half of members are formally trained, either when they join the committee (26%) or on a scheduled basis (36%).

Other findings of the survey include:

  • Almost nine in 10 DC plan sponsors engage a third-party adviser to assist with investment options offered to participants.
  • Thirty-three percent of DB plan sponsors fully or partially outsource at least one aspect of their investment services, and 26% of DC plan sponsors do so. Manager selection and implementation activities are aspects that are most frequently outsourced.
  • More than half of DC plan sponsors monitor the following at least quarterly or more frequently: investment managers, investment goals and objectives, participant asset allocation, fees and expenses, and participation and contribution rates.
  • Very few employers surveyed (2%) have faced fee and stock drop lawsuits over the past two years.
The Willis Towers Watson U.S. Retirement Plan Governance Survey is based on responses from more than 300 U.S. retirement plan sponsors representing a wide range of industries. The survey was conducted in February and March 2016.

«