Reader Responses January 20, 2021

SURVEY SAYS: Will PEPs Become Prominent?

PLANSPONSOR NewsDash readers weigh in on the growth of the pooled employer plan (PEP) market and whether their firms have considered joining one.

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Last week, I asked NewsDash readers, “Do you think PEPs [pooled employer plans] will grow in prominence over the years, and has your firm considered moving into a PEP?”

Nearly four in 10 responding readers (38.1%) work in a plan sponsor role, and the same percentage are advisers/consultants. The remaining respondents are recordkeepers/TPAs/investment consultants.

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Approximately 62% indicated they think PEPs will grow in prominence over the years, while 28.6% said they don’t think so and 9.5% haven’t or can’t decide.

More than half (57.1%) report their firms have not considered moving into a PEP, while nearly one-quarter (23.8%) have and 9.5% said they are already taking steps to do so.

Among respondents who left comments, some touted some benefits of PEPs: “Less work for employer and lower fees for employees and likely better financial education for both,” and “In the long run, risks of plan insolvency are reduced dramatically under pooled plans.” However, others doubted those benefits. One reader notes that the molding of PEPs will be ongoing: “Look for many plans at first, lots of mistakes, and then significant consolidation. The long-term result will be a few very large plans.” No Editor’s Choice this week. A big thank you to all who participated in our survey!

Verbatim

Tremendous benefit for smaller employers and their employees. Less work for employer and lower fees for employees and likely better financial education for both.

As an employer, we retain primary responsibility for the retirement plan for our employees, regardless of whether we sponsor our own plan or participate in a PEP. We would welcome ‘offloading’ our responsibilities onto a PEP plan administrator, but at what cost? And will a PEP truly relieve us of plan sponsor responsibilities?

In the long run, risks of plan insolvency are reduced dramatically under pooled plans.

Growth of PEPs will be driven by consultants promoting adoption, not plan sponsors pursuing them.

This is basically a multiemployer plan and we have been burned by those every time we have participated in them by other employers not paying their fair share. Don’t like having to pay other companies portion so the plan doesn’t go broke

Although PEPs will grow over the years, I believe the growth will be much slower than anticipated

Look for many plans at first, lots of mistakes, and then significant consolidation. The long-term result will be a few very large plans. Likely, the regulators will be overwhelmed and confused.

Expect mostly small plans to move to PEPs.

We will be a provider (RK + TPA) for a number of PEPs being launched. Well-designed PEPs will provide higher quality plans at a lower cost for small employers.

PEPs seem like an interesting idea for small plan sponsors who aren’t interested in running plans themselves. They will have to become significantly more economical to run than small single employer plans to really take off.

PEP’s are potential solution for small and mid-size sponsors who want to offer a retirement savings plan to their employees while relieving themselves of much of the administrative complexity. Those organizations just need to fully understand the terms and conditions of participation and they are aligned philosophically with the plan design options.

Highly unlikely!

“Prominence” is an odd way to phrase it – I think they will gain a certain notoriety, that some modest number of existing plans will migrate there (they mostly solve problems that only existing plans know), and that they will manage to attract (via vigorous sales efforts) a smattering of small plans. Not nearly enough to warrant all the “hubbub” surrounding them at present. So, is that prominence? At least one dictionary terms it as “the fact or condition of standing out from something by physically projecting or being particularly noticeable”. Based on that definition, I think probably not – and on reflection, I have gone back and changed my response accordingly. But then, we have some new winds in Washington…who knows where things are heading…

NOTE: Responses reflect the opinions of individual readers and not necessarily the stance of Institutional Shareholder Services (ISS) or its affiliates.
Data and Research January 20, 2021

Making the Savings Decision More Palatable for Participants

Research and real-life experience show that framing amounts employees need to save in smaller bits can help them increase and sustain their savings.

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Research has found that when savers perceive the amounts they need to save on more granular terms, such as $5 per day as opposed to $150 per month, they are more likely to commit to and sustain a personal savings regimen.

Hal Hershfield, an associate professor of marketing at the University of California, Los Angeles (UCLA); Stephen Shu, a research student at the University of London; and Shlomo Benartzi, a professor at UCLA, studied thousands of new users of a financial technology app and found that framing deposits in daily amounts as opposed to monthly amounts quadruples the number of consumers who enroll.

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In addition, framing deposits in more granular terms reduced the participation gap between lower and higher income consumers. Three times as many consumers in the highest rather than lowest income bracket participated in the program when it was framed as a $150 monthly deposit, but this difference in participation was eliminated when deposits were framed as $5 per day.

“One of the long-standing dilemmas for millions is not having enough money to retire, yet when you explore the primary reasons for this, you find that many simply have great difficulty finding the discipline, as well as extra space in their budget to build up a substantial retirement nest egg,” the researchers say. “As more people have become responsible for their own retirement savings through 401(k) programs and other plans, the need to change the way we think about saving for retirement has become a higher priority for society.”

Some financial advisers are having success with getting employees to save or to save more for retirement by using a similar method. George P. Fraser, financial consultant and managing director of the Fraser Group at Retirement Benefits Group (RBG) in Scottsdale, Arizona, has trademarked his “Pennies on the Dollar” education.

“If you talk about saving a percentage of salary, it can sound enormous to individuals. Reframing it to saving pennies on the dollar has resulted in almost 100% participation for our plan sponsor clients,” he told PLANSPONSOR last year.

To show what saving pennies on the dollar could mean, Fraser uses the example of a 20-year-old earning $25,000 a year. He says if the employee starts with saving just one penny out of every dollar and goes to six pennies by age 26, by 65 he will have saved $62,608.33. If that grows at just 6%, he will have $296,413.24 at 65.

Justin Goldstein, vice president, advisory services, retirement at NFP Retirement in Madison, Wisconsin, says, “I’ve learned that the better you can represent information in terms and numbers that participants can actually relate to, the more effective the message will be.” He told PLANSPONSOR that he asks employees to think about their gross pay; they likely think about just the first two numbers. Then he asks, if their next paycheck was $15 less, would they even notice?

Goldstein then explains how that $15 can translate to more income in retirement. He says the concept of increasing retirement income appeals to older participants, while the idea of small steps making a big difference speaks to younger participants.

The university researchers’ report,” Temporal Reframing and Participation in a Savings Program: A Field Experiment,” may be downloaded or purchased here. It was also published in the May 2020 edition of the INFORMS journal “Marketing Science.”

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