Data and Research March 21, 2019

Start-Up Retirement Plans Will Evolve in Plan Design and Governance

While start-up plans do offer beneficial provisions for retirement plan participants, PLANSPONSOR’s 2018 Defined Contribution Survey finds not all of them are yet using plan designs and governance practices that are recommended in the industry.

Reported by

It takes time to perfect a project, and results from PLANSPONSOR’s 2018 Defined Contribution Survey suggest this is true for start-up defined contribution (DC) plans.

While start-up plans (defined as those with less than $1 million in assets and less than three years of tenure with their provider) do offer beneficial provisions for retirement plan participants, the survey finds not all of them are yet using plan designs and governance practices that are recommended in the industry. It is likely this will change as start-up plans get larger and spend more time being educated by plan advisers and providers.

Never miss a story — sign up for PLANSPONSOR newsletters to keep up on the latest retirement plan benefits news.

According to the survey, the majority (73.9%) of start-up plans are safe harbor plans, which do not have to worry about nondiscrimination testing. This compares to 54.4% of DC plans overall in the survey. In addition, three-fourths (75.7%) of start-up plans offer participants the ability to save after-tax contributions in a Roth account. Forty-five percent of start-up plans that match participant deferrals say match amounts are immediately 100% invested, compared to 36% for DC plans overall. Start-up plans offer a similar variety of investment classes to participants for investing plan assets as DC plans overall.

One-third of start-up plans report their approximate average asset-weighted expense ratio of all investment options in their plan less than 25 bps, and 74.4% reported it is less than 75 bps. Also, more often than other plans, start-up plans do not pass fees to participants. For example, 66.1% said recordkeeping fees are paid by the company, versus 33.9% for DC plans overall. More than three-fourths (78.8%) of start-up companies report that expenses associated with employee communications and education are paid by the firm, compared to 52.1% for all DC plans.

However, only 19.5% of start-up plans use automatic enrollment, compared to 46.3% of DC plans overall. Those that do use automatic enrollment tend to stick more to smaller default contribution rates than DC plans overall. Two-thirds (66.7%) use a default deferral rate of 3% or less. In addition, only 14.7% of start-up plans use automatic deferral escalation, versus 37.8% of DC plans overall.

While average participation and deferral rates are similar between start-up plans and DC plans overall, start-up plans tend to make employee wait longer to be eligible to participate in their DC plans. Only 17.9% are eligible immediately upon hire (vs. 36.8% for DC plans overall), and 33.3% must wait until they are employed for one year (vs. 21%).

What is interesting is the information about which start-up plans are unsure. Nearly two-thirds (64%) are unsure or don’t know whether their plan includes mutual funds that pay 12b-1 and/or sub-TA fees to recordkeepers or third-party administrators (TPAs). Half are unsure whether their plan uses an “ERISA account” or “plan expense reimbursement account” to track revenue sharing credits.

In addition, no start-up plans have a policy to address fee equalization.

Fortunately, nearly two-thirds (64.5%) of start-up plans employ the services of a retirement plan adviser or institutional investment consultant. Continued interaction with retirement plan advisers, investment consultants and recordkeepers most of the time results in improved education for plan sponsors and participants and improved plan design.

For information regarding the purchase of the PLANSPONSOR 2018 Defined Contribution Survey results or industry reports, contact Brian O’Keefe at brian.okeefe@strategic-i.com.
Data and Research March 21, 2019

Nearly Half of State and Local Government Employees Approve of Auto-Enrollment

If they were automatically enrolled into a defined contribution plan, 77% say they would remain in the plan.

Reported by

Nearly half of state and local government employees (47%) approve of automatic enrollment in defined contribution plans, known in the space as supplemental retirement plans (SRPs), the Center for State and Local Government Excellence (SLGE), ICMA-RC and Greenwald & Associates learned in a survey of 400 government employees.

If they were auto-enrolled into a SRP, 77% of these employees say they would remain invested in the plan. Employees who approve of auto-enrollment say it encourages saving (24%), that people are unprepared for retirement (14%), that people would not enroll on their own (13%) and that it is done with the best interests of the employee in mind (13%).

Never miss a story — sign up for PLANSPONSOR newsletters to keep up on the latest retirement plan benefits news.

Additionally, 44% approve of the employer setting a default deferral rate. SLGE said it conducted the survey since few government agencies auto-enroll their workers into a SRP.

Approval of auto-enrollment declines from 24% when the default rate is 1% to 12% when the default rate is 7%. At the same time, 38% disapprove of auto-escalation, and 30% approve of it.

Seventy-nine percent said they are satisfied with their retirement plan. Eighty-four percent are saddled with consumer debt. Eighty-five percent have savings goals other than retirement. Sixty-seven percent said debt is preventing them from saving more for retirement.

A slim majority want more information about general financial issues and retirement planning. Thirty percent would welcome an increase in one-on-one in-person communication by their employer and financial services companies.

“The findings are critically important given that the responsibility of saving for retirement in the public sector is shifting from the employer to the employee in many jurisdictions,” says Rivka Liss-Levinnson, director of research at SLGE and author of the report. “The fact that those presented with a 7% default settled on a significantly higher rate than the group given the 1% default rate is important. This suggests that employers, retirement plan providers and policymakers should consider how small nudges—such as changing the default rate for auto enrollment in a SRP—can combat inertia and impact an employee’s ability to save for retirement.”

The report can be downloaded here. SLGE and ICMA-RC will host a webinar on May 7 to discuss the findings. Registration for the webinar is here.

«