Data and Research June 28, 2016

Many Small Businesses Adopting DC Plan Design Best Practices

One-sixth of small business plans served by Vanguard have adopted automatic enrollment, and most chose to reenroll participants in a QDIA at conversion onto the Vanguard small business plan platform.
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Vanguard’s third annual “How America Saves: Small business edition,” an extensive report detailing the plan design and participant savings trends of the small business 401(k) plans served by Vanguard Retirement Plan Access (VRPA), reveals that as of December 2015, one-sixth of VRPA plans permitting employee-elective deferrals had adopted automatic enrollment.

Six in 10 of these plans automatically enroll participants at a 3% contribution rate. More than one-third of these plans automatically increase the contribution rate annually. Nearly all of these plans use a target-date or other balanced investment strategy as the default fund, with 96% choosing a target-date fund as the default.

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In 2015, VRPA’s plan-weighted participation rate was 72%. Plans with automatic enrollment have higher participation rates than plans with voluntary enrollment. Plans with an automatic enrollment feature have an overall participation rate of 88%, compared with a participation rate of only 58% for plans with voluntary enrollment.

Plans with automatic enrollment have higher participation rates across all demographic variables. For individuals earning less than $30,000 in plans with automatic enrollment, the participation rate is more than double that of plans with voluntary enrollment.

However, the predominant use of a 3% default deferral rate means participants enrolled in plans through automatic enrollment are saving less. Participants joining a plan under an automatic enrollment feature have an average deferral rate of 5.5%, compared with 7.2% for participants joining plans under voluntary enrollment—a deferral rate that is about one-quarter lower overall. Even participants earning less than $30,000 save more than twice as much on average under voluntary enrollment designs.

Vanguard suggests that higher default deferral rates would be amenable to plan participants in automatic enrollment designs. “Our research on automatic enrollment indicates that ‘quit rates’ do not deteriorate when higher default percentages are used to enroll employees,” the report says.

NEXT: Improved participant investment diversification

Increasingly, participants are being directed into default investments selected by the plan sponsor, rather than making active investment choices on their own, Vanguard’s analysis finds. Nearly all VRPA plans have designated a default fund, and 95% had selected a target-date fund option as the default option in 2015.

Ninety-eight percent of plans had specifically designated a qualified default investment alternative (QDIA) under Department of Labor (DOL) regulations. Among all VRPA plans, 96% of designated QDIAs were target-date funds, 3% were balanced funds, and 1% selected a model portfolio.

In 2015, six in 10 VRPA participants were invested in a professionally managed allocation. A total of 57% of participants were invested in a single target-date fund in 2015. Among new plan entrants (those entering the plan for the first time), three-quarters of participants were invested in a single target-date fund.

Most VRPA plan sponsors chose to reenroll participants in a QDIA at conversion. VRPA was launched in 2011 and the majority of these plans converted between 2012 and 2015. Seven in 10 plans reenrolled participants in a QDIA at conversion, and 96% using this strategy reenrolled in a target-date fund.

From an investment perspective, an asset allocation to equities of 80% or more may appear appropriate in light of the long-term retirement objectives of most defined contribution (D)C plan participants, Vanguard says. The growing use of professionally managed allocations within DC plans, including target-date funds, is reshaping equity allocations by age and reducing extreme allocations. The fraction of participants with no allocation to equities was 3% in 2015; the fraction of participants investing exclusively in equities was 7%.

This rising use of professionally managed allocations is also improving portfolio construction. The fraction of participants holding broadly diversified portfolios was 80% in 2015. Less than 1% of VRPA participants were holding concentrated stock positions.

VRPA is a comprehensive service for retirement plans with up to $20-plus million in assets. As of year-end 2015, VRPA served 4,500 plans and 200,000 participants. For more plan design and participant savings trends among these plans, the report may be downloaded from here.
Compliance June 28, 2016

Industry Coming Together with Washington to Improve Retirement Security

PLANSPONSOR spoke with Anne Lester from J.P. Morgan to test her optimism about the potential for any new retirement-related legislation to continue the progress made post-PPA.

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Anne Lester is a portfolio manager and head of retirement solutions for J.P. Morgan Asset Management, and in that capacity she works to advance the firm’s various retirement investment product offerings—including the development of the SmartRetirement target-date funds (TDF) series, as well as the firm’s Dynamic Withdrawal strategy.

Given her experience, Lester is frequently called on to provide thought leadership both within the firm and for wider audiences working on the intersection of public policy and retirement. Just last week Lester was in Washington for an event hosted by the Aspen Institute, marking the upcoming 10-year anniversary of the debate and passage of the Pension Protection Act (PPA).

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Joining her were U.S. Representatives Joe Crowley, D-New York, and Jared Polis, D-Colorado, along with Edmund Murphy III, president of Empower Retirement, and a number of other lawmakers and retirement industry leaders. PLANSPONSOR spoke with her shortly after the event to test her optimism about the potential for any new retirement-related legislation to continue the progress made post-PPA.

 

Q: What did the event last week, held to mark the PPA anniversary, tell you about how policymakers are viewing retirement readiness issues? Do you think positive change is likely?

First I should say that it was a fantastic event, hosted right in the Capitol Rotunda by the Aspen Institute. It was an inspiring place to hold an event about our national retirement policy and it was fantastic to see the turnout.

Besides the representatives and officials from the Treasury, there were members of academia, think tanks,  as well as a diversity of business interests and advocacy organizations including TIAA, Prudential, the Urban Institute, J.P. Morgan Asset Management, the Defined Contribution Institutional Investment Association (DCIIA), the National Institute on Retirement Security (NIRS), and the Employee Benefit Research Institute (EBRI).

We were all speaking about where we have been and where we are going in terms of trying to continue to reinforce retirement security at the national level, and I think there is a collective understanding that the 10-year anniversary of the PPA would be an appropriate time to take the next big step forward. It’s a necessary and terrific conversation.

Personally, the most exciting thing I see right now is that we’re really witnessing all the right parts of the ecosystem coming together, constructively sharing real ideas with our public policymakers. They’re coming together now with a real collective sense of identity and purpose. It’s not just a conversation that plays out along the lines of, ‘Hey look, we have the best product or the best idea.’ It’s much more robust and collective than that. It’s really becoming a public conversation.

The topic of retirement is not at the top of the list of things that people are worried about right now, we all understand that. But it is pretty high up on the list for most people, and it is one of the areas where you could actually see bipartisan consensus starting to build. When I look at who really needs to be involved in this conversation—advocates for the industry service providers, for plan sponsors, and for consumers—all these parties are starting to get involved and they’re talking directly to each other and to legislative leaders, so that makes me optimistic. 

Q: Was there much agreement about the next steps that should be taken by all these parties?

I think there was, to some extent, though not as much as will be needed to galvanize new reforms on the scale of the PPA. For example, one of the things I spoke specifically about was this topic we have been honing in on recently, which is ‘re-imaging re-enrollment.’ That’s an example of low-hanging fruit in terms of things that could be accomplished quickly, without requiring major change to the regulatory or legislative structures.

Another example could be increasing the portability and reducing the leakage of small balances, and making sure everyone has the right asset allocation. These things are already being worked on under the current regulatory and legislative structure.

Thinking medium- and longer-term, there is increasing agreement that we need to make changes to improve accessibility to tax-advantaged savings. A lot of people at the forum expressed optimism about open multiple employer plans as the most likely path forward when it comes to addressing many of these issues.

 

Q: Does that imply that the state governments, in a sense, are in the driver’s seat in terms of setting retirement policy?

You know, there are a lot of people who are hoping for a federal solution to emerge to help those people who right now lack access to quality retirement planning options in the workplace. But it just doesn’t seem to be happening, so another group has become much more supportive of the state-based solutions that are slowly starting to roll out—not because it’s a great answer to have 50 different approaches to retirement planning. It’s not a good approach. But it’s better than inaction in the eyes of a lot of people.

There is a real hunger to get things going and to allow us to actually see the pros and cons of the different approaches. There are some significant differences in the approaches being taken by various states, so I think it will be very informative to see this play out.

As a portfolio manager at heart, my main concern in a lot of this is to remind people that there is a difference between a mathematically optimized portfolio and what an average investor is going to find emotionally satisfying. When we’re dealing with individual investors and developing solutions for their financial problems, we absolutely must keep this in mind. We have to come up with answers that solve the underlying financial problems while also making sense to the user.

 

Q: So, given the time you have spent recently meeting with decisionmakers in Washington, do you see building bipartisan consensus for a national-level retirement reset reminiscent of the PPA?

Sadly, I think consensus is still too strong a word. There is a … growing understanding that there are gaps to fill. There is a growing understanding that there may be lower hanging fruit, and that there are other things that are longer-term systemic fixes that are going to need to happen.

What I do find encouraging, again, is that all the stakeholders are starting to come together publicly and saying, ‘Here are some answers that we want to put into place. Let’s get to work.’ These are the pieces that have to start coming together to really drive the conversation forward for the next decade of the PPA. 

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