Administration February 2, 2022

Plan Design Strategies to Boost Retirement Outcomes for Low-Income Participants

Sponsors have a toolbox of plan design and benefit approaches they can use to boost retirement outcomes for low- and moderate-income earners.

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Plan sponsors’ best available plan design and benefits strategies to boost retirement outcomes for low- and moderate-income (LMI) participants are instituting automatic features, offering emergency savings options and implementing financial wellness programs, according to industry sources.

Adding auto-enrollment features to employer-sponsored defined contribution (DC) retirement plans borrows an idea from behavioral economics to take advantage of active choice by removing a barrier for workers to enroll, says Rich Johnson, senior fellow and director of the Program on Retirement Policy at the Urban Institute, a Washington, D.C.-based think-tank for economic and social policy research.

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“Research has shown overwhelmingly that the best way to get lower- and moderate-income workers to participate in a plan is to just automatically put them in the plan,” he says.

“The most important thing that 401(k) plan sponsors can do to boost retirement savings by moderate- and low-income workers is to institute automatic enrollment,” he adds. “We know that a lot of low- and moderate-income workers fail to sign up for [retirement plans], because they just don’t get around to it, and by automatically enrolling workers—giving them the option to decline enrollment—that breaks down that barrier.”

An Employee Benefit Research Institute (EBRI) webinar held last month compared several generations’ access to retirement plans, net worth, student loan incidence and debt at the same ages to provide a clear total retirement picture. EBRI research found there are differences in retirement plan access across generations and attendant retirement savings gaps among demographics.

Indeed, Hispanic workers have lagged other groups in retirement savings, research has shown. Legislative efforts have attempted to boost retirement plan participation overall, including the 2019 Setting Every Community Up for Retirement Security Enhancement (SECURE) Act, but gaps still remain, especially among LMI workers. 

Auto-enrollment must be paired with additional features and plan sponsors’ ongoing examination of participation in the employer-sponsored retirement plan, Johnsons says, because once an employee is auto-enrolled, it’s critical that person saves at a deferral rate that will accumulate sufficient savings.

On the other hand, setting the auto-deferral rate too high can hurt participation, Johnson notes.

“A better strategy might be to start at relatively low rate and then have automatic escalation so that every year the contribution rate would increase by a percentage point, until it reaches a certain level,” he explains.

Employers can also examine their match rate to encourage higher deferral rates, as research shows that many participants contribute to the retirement plan up to the level at which the maximum contribution match is reached. “The higher the level at which the match ends, the more that can get more people to participate,” Johnson says.

For example, instead of employers matching worker contributions 100% to a lower max, employers could contribute half of what the employee does up to a higher max, Johnson adds. In other words, instead of matching 100% of a 3% contribution, employers could use the same amount of money to match 50% of a 6% contribution.

“That doesn’t necessarily cost the pan sponsor more, but having the level at which the match ends higher could induce workers to participate more,” he says.

Additionally, plan sponsors can assist LMI participants by considering using auto-escalation tactics, because getting participants into the plan is just the first step—ensuring participants are enrolled and contributing to accumulate a “reasonable amount of retirement savings,” is the long-term goal, Johnson adds.

Another tactic employers can use is to defer portions of an employee’s pay raise automatically into the retirement plan, rather than straight into a paycheck.

“Workers wouldn’t necessarily feel like they’re losing out on something because they’re still getting a slight bump up in their salary at the same time and getting a bump up in their retirement savings,” Johnson explains.

Warren Cormier, executive director of the Defined Contribution Institutional Investment Association (DCIIA) Retirement Research Center (RRC), says instituting a financial wellness program with an emergency savings program—that continually reaffirms the critical importance of having sufficient savings to cover emergencies—is the most powerful tool available for participants earning roughly between $20,000 and $75,000.

“The first thing they need to do before they can really focus on long-term savings or retirement is to make sure that they are getting a sense of feeling in control and security about their day-to-day experience,” he says. “Once that’s taken care of, then you can move to a higher order of experience, that is, saving for what might happen 20, 30, 40 years from now.”

LIMRA research shows that almost 30% of workers have no emergency savings fund, which can lead participants to withdraw money from retirement accounts.

Plan sponsors can turn to their retirement plan advisers for help with plan design and benefit strategies and to start financial wellness campaigns for employees that explain the information and resources in plain terms, says Greg Adams, consultant at Fiducient Advisors.

“Providing information to the plan sponsors about the auto-features, the statistics behind why they work, how they work—that information really helps plan sponsors start to make decisions and helps to alleviate some of the concerns from plan sponsors that it’s too controlling or too paternalistic,” he adds.

Compliance February 2, 2022

Duke Energy ERISA Lawsuit Clears Dismissal Motion

The district court’s order promptly concludes that the plaintiffs have sufficiently stated a claim for breach of fiduciary duty.

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The U.S. District Court for the Western District of North Carolina issued a ruling this week in an Employee Retirement Income Security Act (ERISA) fiduciary breach lawsuit filed against Duke Energy and several other related defendants.

The order, based on a recommendation prepared by a U.S. magistrate judge, denies the defendants’ motion to dismiss the lawsuit and sets the stage for discovery and trial—or a potential settlement.

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The plaintiffs claim their plan’s fiduciaries allowed the payment of “exorbitant excess fees,” making it “reasonable to infer the defendants have failed to follow these prudent practices and have thus failed to uphold their fiduciary duties.”

According to the lawsuit, from the beginning of 2014 through the end of 2018, the plan had between 33,000 and 39,000 participants, and between $6.7 billion and $8.6 billion in assets. The plaintiffs say plans of this size are often referred to as “jumbo” or “mega” plans and have “significant bargaining power to extract extraordinarily low fees for services,” including for recordkeeping and managed account services.

For its part, Duke Energy says its retirement savings plan has been carefully designed and administered as a retirement savings tool for the company’s many employees. In a prior statement to PLANADVISER, the company said Duke Energy and its fiduciaries “take seriously their responsibilities under the federal Employee Retirement Income Security Act of 1974, and work diligently to fully discharge their duties under the law.” They said the company would vigorously defend against this lawsuit, which can now proceed to discovery.

Much of the text of the recommendation and subsequent pro-plaintiff order is dedicated to discussion of the standard of pleading that applies in these cases under the Federal Rule of Civil Procedure 12(b)(6). Under this standard, a claim has facial plausibility—and thus can proceed beyond a rote motion to dismiss—when the plaintiff “pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.”

In a precedent-setting case, Ashcroft v. Iqbal, the Supreme Court articulated a two-step process for determining whether a complaint meets this plausibility standard. As the recommendation summarizes, the first issue is for the court to identify with skepticism any allegations that, because they are no more than conclusions, are not entitled to the assumption of truth. The recommendation notes that “threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice” to state an actionable claim.

Second, to the extent there are well-pleaded factual allegations, the court should assume their truth and then determine whether they plausibly give rise to an entitlement to relief. The recommendation emphasizes that the act of determining whether a complaint contains sufficient facts to state a plausible claim for relief will necessarily be “a context-specific task that requires the reviewing court to draw on its judicial experience and common sense.”

From here, the recommendation cites an important precedent applying in the 8th U.S. Circuit, summarizing it as follows: “No matter how clever or diligent, ERISA plaintiffs generally lack the inside information necessary to make out their claims in detail unless and until discovery commences. Thus, while a plaintiff must offer sufficient factual allegations to show that he or she is not merely engaged in a fishing expedition or strike suit, we must also take account of their limited access to crucial information. If plaintiffs cannot state a claim without pleading facts which tend systemically to be in the sole possession of the defendants, the remedial scheme of the statute will fail, and the crucial rights secured by ERISA will suffer. These considerations counsel careful and holistic evaluation of an ERISA complaint’s factual allegations before concluding that they do not support a plausible inference that the plaintiff is entitled to relief.”

Having spelled all this out, the recommendation and order promptly conclude that the plaintiffs have sufficiently stated a claim for breach of fiduciary duty.

“They allege that the defendants used Fidelity for recordkeeping services since 2009,” the recommendation recounts. “Plan participants paid $58 to $67 for recordkeeping services from 2014 to 2018, while similar plans paid less for comparable services. Fidelity stipulated that it would have provided comparable services to similarly sized plans for $14 to $21 since 2014. The defendants failed to renegotiate with Fidelity or solicit competitive bids until 2019, and the plan’s per-participant fees remained steady while fees across the industry dropped. Taken in the light most favorable to the plaintiffs and under the totality of the circumstances, these allegations raise a plausible inference that the defendants breached their fiduciary duty.”

This pro-plaintiff ruling comes in the wake of the filing of a much-anticipated Supreme Court order in the case known as Hughes v. Northwestern University, wherein the high court ruled that it is the employer’s obligation, not the employee’s, to make sure funds and fees in a defined contribution (DC) retirement plan are prudent and not excessively costly.

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