2018 PSNC: Small Plans, Big Results

Creative and cost-efficient strategies to motivate employees at small companies to engage in their retirement plan.

At the 2018 PLANSPONSOR National Conference, the 2018 PLANSPONSOR of the Year in the $10MM – $50MM category and two industry leaders offered pointers on how small retirement plans with a low budget and few staff can offer a best in class plan design.

Dan Peluse, director of retirement plan services at Wintrust Wealth Management pointed out stats from a 2017 Matthew Greenwald, American Center Investments survey called “Start Your Engines” as a framework for the panel discussion. He noted that survey respondents like employers to motivate them to plan for a successful retirement. For instance, eight in 10 participants want a nudge from their employers, plus pre-retirees would prefer a 3% match to a 3% increase.

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Cheryl Braun, director of human resources for United Hardware Distributing Co. explained the thought process behind the company’s successful plan design.  She said the company initially implemented auto-enrollment in 2008 at a 3% default deferral rate and after experiencing few opt-outs, raised the default to 6% in 2013. “We chose 6% because that’s the threshold that the company match is based on, and we want our employees to fully maximize their savings,” Braun said. “Because the plan matches 40% of 6% plus a discretionary contribution, we don’t feel the need to implement correlating auto-escalation. Instead we educate employees on utilizing the online feature where they can voluntarily elect to set up their own automatic increase.”

It used to be that, after the twice yearly mandatory education meetings, employees had to go online or make a phone call to sign up,” Braun said. “Now, there’s paper at the meeting to sign up to for auto escalation. Participants just have to sign and date it. Two-thirds of United Hardware’s 327 employees work at its distribution center in Milbank, South Dakota, in warehouse jobs heavy on physical labor. They don’t have computers they can go back to and log in, and many of them might not have that at home, either.

“We touch on different topics at the meetings, and we throw out our positive plan stats such as our average contribution which is 8%. Stats like that motivate those not contributing at that rate.  Plus the cost of the education programs is minimal compared to the benefits received. Another advantage is that our adviser has been consistent. Participants see the same consistent face every six months. They’ve built trust in that regard.”

Jonathon Schultheiss, head of corporate retirement division at Gate City Advisers recommended plan sponsors consider using a stretch match that simply raises participant contributions. Instead of offering 100% up to 3%, offer 50% of a 6% contribution, for example. “This is behavioral science. Plan participants want to get what is matched. They think, ‘What the employer matches is what I’ll do.’” And there is no additional cost to the employer.

Peluse said, “no two companies are the same demographically. Each has its own plan design challenges.”

Schultheiss described a strategy using gamification to win a plan over that would not use auto features. “We offered the opportunity for employees to receive a ticket for every increase they make in their plan. Every year at the benefits meeting we have about 100 changes. Participants who receive a ticket can win televisions, a half day PTO and more.”

A day of golf and lunch is offered to some plans that Peluse advises as an incentive to those who increase their automatic escalation. “There are many creative ways to get there,” he said.

Tax Reform, Other Factors Leading DB Plans to Increase Funding

Nearly two-thirds (62%) of respondents to a survey say they are "very likely" to transfer some or all of their pension obligations to an insurance company once their DB plan becomes well-funded.

The Tax Cuts and Jobs Act is prompting many defined benefit (DB) plans to accelerate their contributions, since they can deduct these contributions at 35% until mid-September, CFO Research and Prudential found in an online survey of 127 financial executives whose companies have a DB plan. After that, the new tax rate of 21% kicks in, and it will not be as advantageous for the plans to deduct contributions at this lower rate.

“We are seeing a number of companies accelerating pension contributions, driven in part by changes in the tax law,” says Rohit Mathur, head of global product and market solutions in Prudential’s pension risk transfer business. “We are also noticing an increasing interest in pension risk transfers among plan sponsors.”

While the new, lower tax rate will reduce tax deductions for pension contributions, it will also boost companies’ profits, and benefit them with more money that they can contribute to their DB plans. In fact, 64% of respondents say they are likely to use the savings to increase funding to their DB plan.

The new tax law also includes a provision allowing U.S.-based multinational corporations to repatriate earnings at lower tax rates than the 35% they would have paid in the past. Companies can take advantage of a one-time repatriation of cash at the rate of 15.5% and 8% for non-liquid assets. Twenty-four percent of respondents say they will take advantage of this provision.

The survey also found that 29% of the finance executives plan to use the excess funds from the law to minimize liability risk through such efforts as boosting retiree health care funding.

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Seventy percent of the executives say that the recent changes in the mortality tables are creating longevity risk for their organizations.

Nearly two-thirds (62%) say they are “very likely” to transfer some or all of their pension obligations to an insurance company once their DB plan becomes well-funded.

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