Opinions July 23, 2024

Encouraging Trends in 401(k) Plan Design

A review of topics plan sponsors should consider as they review their plans before the 2024 enrollment season.

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Amber L. Brestowski

In my conversations with Vanguard’s 401(k) plan sponsor clients, two questions frequently come up: 1) how are plans doing in helping participants save for retirement and 2) what’s next on the retirement plan horizon?

For many years, the singular goal of defined contribution plans was retirement savings, and the growing adoption of automatic enrollment and improvement in plan designs has helped increase employee retirement savings over the last two decades. But plan sponsors and investment providers like Vanguard are also broadening their focus to support employees’ holistic financial lives through financial wellness tools, advice, and increased personalization to improve employee wellbeing. Sponsors should consider these important trends as they review their plans before the 2024 enrollment this fall.

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Progress in Employee Retirement Savings

The 2024 edition of How America Saves, Vanguard’s annual assessment on the savings behavior of nearly five million retirement plan participants, shows how much progress has been made over the past 20-plus years in strengthening employee retirement savings.

In 2023, 59% of all plans had adopted automatic enrollment, a record high. Ten years ago, only 34% of plans used autoenrollment. Among plans with at least 1,000 participants, 77% have adopted this powerful plan design feature.

Autoenrollment plan designs continue to improve. In 2023, 60% of plans defaulted employees at a deferral rate of 4% or higher. Only 35% of plans defaulted at 4% or greater a decade earlier. Total savings rates in plans that automatically enroll are 60% higher than those that voluntarily enroll. In 2023, employees in plans with automatic enrollment saved 12.3% versus 7.4% in plans that voluntarily enroll.

Overall, retirement plan participants are also saving at higher rates. Average participant deferral rates reached 7.4% in 2023, the highest level ever. Twenty-four percent of participants are deferring 10% or more, up from 19% ten years ago.

Participant portfolio construction has become more diversified. Sixty-six percent of participants are in professionally managed allocations, including target-date funds, balanced funds, and managed accounts, up from 40% ten years ago. Professionally managed allocations have done an incredible job of reducing extreme equity allocations (0% or 100% equity). Before the growth of these options, more than one third of participants had an extreme equity allocation. In 2023, these extreme allocations represented just 8% of participant portfolios.

Improved plan designs have led to record highs in plan participation and participant savings rates. The overall average plan participation rate remained at an all-time high of 85% in 2023. When we began publishing How America Saves more than two decades ago, 1 in 3 employees did not participate in their employer plan.

Expanding What 401(k)s Can Accomplish

But as America’s workforce evolves, modern retirement plans must also evolve, and we are making great progress in three critical areas.

Financial wellness: Plan sponsors continue to focus on participant outcomes in savings for retirement. However, they also recognize that their employees often experience headwinds in the process of saving for retirement. As a result, they are increasingly focused on participants’ total financial wellness and are interested in metrics that evaluate their employees’ progress along the broader financial journey.

For example, employees might be challenged with high levels of debt, or they might have multiple goals, including saving for education or buying a house. To this end, Vanguard is continuously enhancing our retirement digital experiences. In the past year, we have added an emergency savings calculator and a debt paydown strategy tool along with enhancing retirement planning tools for participants. Enhancements like this make a difference. We have found that nearly 50% of participants are more likely to save more after engaging with our financial wellness digital experience.

Advice: Advice is a powerful tool for improving financial outcomes. But it is no longer just about portfolio management. Rather, it includes a range of financial planning solutions. Participants getting advice tend to be more engaged and demonstrate stronger savings behaviors than their peers, including higher average savings rates. While the percentage of accounts in plans offering managed account advice is at an all-time high and more than three in four participants now have access to advice, only 10% of participants with access to advice use it. So, expect continued efforts to increase adoption in this area.

Personalization: Navigating multiple financial goals alongside their retirement goals can be overwhelming for participants and can lead to confusion and inaction. But thanks to better data and technology, such as AI, we can help deliver personalized experiences for participants that help them take the next best action.

Personalized financial advice and financial wellness tools that employees can access within their plans make it easier for participants to prioritize retirement savings while managing other financial priorities. Increasingly, we can individualize recommendations, reminders, and guidance for participants based on what they have shared with us about their full financial pictures.

Plan sponsors have been instrumental in helping to prepare more participants for a secure retirement through autoenrollment and other plan design innovations. But more is being done to help workers. Financial wellness, advice, and increased personalization are expanding the possibility of what 401(k) plans can accomplish. As sponsors continue to expand the scope of support for their employees, Vanguard stands ready to support positive behaviors and improve participant outcomes.

Amber L. Brestowski is the head of institutional advice and client experience at Vanguard.

This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of ISS Stoxx or its affiliates.

Compliance July 23, 2024

What Increased Health Plan-Related Scrutiny Means for Plan Sponsors

Employers can limit their exposure with documented, prudent processes for selecting health plan providers and pharmacy benefit managers.  

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As the Federal Trade Commission is poised to file a complaint against the three largest pharmacy benefit managers, and with fiduciary litigation risk on the rise for employer-provided health plans, it is critical that plan sponsors ensure they are prudently managing their health plans. 

Jamie Greenleaf, co-founder of Fiduciary in a Box, says the FTC lawsuit and any efforts made to expose the opaque business practices of health care providers are a step in a positive direction.  

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“It’s shining a light on the health care space and how things need to become more transparent,” says Greenleaf. “People say it all the time, that sunlight is the best disinfectant, and I think that is the same when it comes to this lawsuit as well.” 

A hearing with PBM executives was held on Tuesday, and the FTC issued an interim report earlier this month, arguing that the big PBM companies are “powerful middlemen” that are squeezing Main Street pharmacies. 

Barbara Delaney, principal and founder of SS/RBA, a HUB International company, notes that over the past 10 years, the cost of mutual funds used in 401(k) plans has been cut in half as a result of increased transparency. She says if the same standards of fiduciary oversight that are applied to retirement plans were also applied to health care plans, improvements in the cost and management of health care would be very possible. 

RFP Process 

Greenleaf explains that, under the Consolidated Appropriations Act of 2021, employers are required to audit their vendors and their partners, including their PBMs, and make sure their prices are reasonable and that plan participants are paying a fair market price.  

“When you see a lawsuit like this, a plan sponsor should immediately think about, ‘Who did my RFP for the PBM?’ and, ‘Do I know what I’m paying, who I’m paying and how I’m paying for the services?’” Greenleaf says. 

When conducting a request for proposals for a PBM or any covered service providers, Greenleaf says the most important thing a plan sponsor can do is ensure that the person running the RFP is “unbiased and conflict-free.” 

“How the RFP is then designed [needs] to be in the best interest of the plan and [plan] participants, as opposed to the best interest of the person that is putting together the RFP,” Greenleaf says. 

Delaney said the best way to ensure an unbiased process is to require the individual doing the RFP to attest that they are not biased and are not being paid by any of the vendors, directly or indirectly, to place business with them.  

Litigation Risk 

In a Tuesday webinar hosted by Aon, “Fiduciary Litigation Risk is on the Rise for Employer Health Plans,” speakers warned attendees about a potential wave of claims against health plans for breaches of fiduciary duty, especially after the lawsuit Lewandowski v. Johnson and Johnson, filed in February. 

In that case, an employee claimed her employer, Johnson and Johnson, breached its fiduciary duties by mismanaging health plan costs. Specifically, the complaint alleges that Johnson and Johnson paid higher prescription drug prices than necessary, causing participants to pay more and waste plan assets.  

Another complaint was filed against the Mayo Clinic and its plan administrator, Medica, in April, alleging breach of fiduciary duty for using deceptive pricing methods in its employee health plan. 

Irene Gallagher, a vice president in the health solutions legal consulting group at Aon, said even though Johnson and Johnson had a health benefits committee, the plaintiffs alleged that this committee did not fully consider what prescription drugs would cost and that it should have chosen a different pricing structure from their PBM. 

“[Health plans] are now under more scrutiny as a result of this lawsuit,” Gallagher said. “How successful this litigation might be is not really what the concern is for us today. Right now, it comes back to procedural issues: How do you check the boxes [and] make sure that the employer is protecting itself by putting in place the proper fiduciary discretion … and understanding the scope of [its] duties in order to [achieve] the best result for plan participants?” 

Fiduciary Due Diligence 

In order to establish a better fiduciary process, Aon suggested plan sponsors should: 

  1. Establish a health and welfare plan fiduciary committee and defining its duties and powers in a charter
  2. Document committee responsibilities and decisions in the charter and in meeting minutes; 
  3. Develop committee processes for selecting medical third-party administrators and PBMs and monitor those on an ongoing basis; and 
  4. Report the compensation of consultants and brokers. 

      Speakers at the webinar also emphasized the importance of reviewing vendor contracts, explaining that contracts should have explicit and enumerated requirements for vendors, to keep the plan in accordance with applicable laws.  

      Ed Doherty, also a vice president in the health solutions legal consulting group at Aon, recommended that fiduciaries seek legal counsel’s review of all contracts before they are executed and seek review of contract terms such as indemnification provisions, performance guarantees and the right to audit a TPA or PBM. 

      “[Plan sponsors] need to take a step back, consider what [they] have in place right now, [and decide] if it is appropriate for the organization [and its] level of sophistication,” Doherty said. 

      Delaney adds that the abilities for people to be financially secure in retirement and be able to afford health care costs are very much intertwined. 

      “If people aren’t retiring or are hesitant to retire … it all ties back to the [fact that the] cost of health care has spiraled out of control, and the individual consumers don’t know what to do,” she says. “The ultimate solution is clear transparency, better ways to buy insurance and understanding the cost of it. But it’s all going to start with these lawsuits. There’s been all this funny business with the way people are collecting compensation. If we can change that, we can change the outcome.” 

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