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

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.

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.