401(k) Plan Survey 2018 from PSCA Summary

Nicholas Zaiko, CIMA

Senior Consultant

Bridgebay Financial, Inc.

www.bridgebay.com

The Plan Sponsor Council of America’s 60^th Annual Survey of Profit Sharing and 401(k) Plans released on February 12, 2018 highlighted some interesting developments in the defined contribution market.  The survey consists of responses from 590 plan sponsors that offer defined contribution plans to their employees.    

Plan Fiduciary Advisors

The use of independent, fiduciary advisors has grown with 69.5% of plan sponsors stating that they retain independent advisors that are separate from their recordkeeper.  Nearly 36% use an ERISA 3(21) fiduciary advisor that has non-discretionary authority, providing advice to the plan sponsor with the employer making the final decision.  About 20% use an ERISA 3(38) fiduciary advisor that has full discretionary authority to select, monitor and make investment decisions.  The remaining respondents were not sure if their advisor was a co-fiduciary.

Investment Policy

Investment policy statements are in place for 87.6% of defined contribution plans.  Plan monitoring is conducted quarterly for 61.4% of plans with 19.6% of plans, mostly small plans, conducting annual reviews. 

Automatic Enrollment

Automatic enrollment is now offered by 59.7% of plan sponsors including large and small employers.  This plan feature is most common in plans with over 5,000 participants with 70% of those plans offering automatic enrollment.  Plan sponsors have been increasing the default deferral rates so that over 59.7% of plan sponsors now automatically enroll participants at over 3% of salary.  One-third of plan sponsors are defaulting participants at 3% of salary. Target date funds are used as the QDIA or default option by 63.7% of plan sponsors surveyed.

Deferral Rates

The most frequently used default deferral rate for automatic enrollment has been 3% of pay since the Pension Protection Act.  Plan sponsors are gradually transitioning to higher default deferral rates to improve savings.  More plans are now auto enrolling participants at rates more than 3% of pay with 35.2% of plans using a 6% default rate, and 40.2% using more than 6% default rate.

Auto Escalate Deferrals

Three-quarters of plans auto escalate by 1% each year, while 8.6% auto escalate by 2% and 5% auto escalate by 3%.  Plans that cap auto increases at 10% represent 41.8% of plans, while 19.4% cap it at more than 10%.

Automatic increase of default deferral rates has become widely accepted with 73.4% of plans increasing deferral rates over time.  About 33% of respondents increase the default deferral rate for all participants, 12% auto escalate deferral rates for participants that are “under contributing”. Another third of plans require the participant’s election to auto increase. 

Suggested Savings Rates

Plan sponsors that provide a suggested savings rate to participants represent 28.4% of sponsors surveyed.  The most often savings rate suggested was 6% of pay.  Some plan sponsors, 17.5% stated that they suggested savings rates higher than 10%.

Roth Contributions

The Roth contributions (after-tax) have become more readily offered as an option for participants with 63.1% of plans now offering the Roth 401(k) option in addition to the traditional 401(k) plan. 

Employer Contributions

Employer contributions have increased since the financial crisis to an average of 4.8% of participants’ pay. 

QDIA

After the Pension Protection Act most plans, nearly 70%, use a qualified default investment alternative (QDIA). The most popular QDIA is target date funds. 

The target date funds are offered by 73% of the plans surveyed of which 63.7% of plans use target dates as the QDIA or default investment option.  Plan assets in target date funds represent 22.2% of plan assets.  Of the plans using target date funds, 86.4% of the plans use off-the-shelf target date funds. Larger plans with 5,000+ participants often used customized target date funds. Actively managed target date funds represent 59.6% of the target date funds used while 40.4% use index or passively managed funds.

Investment Options and Allocations
Plans offer an average of 19 funds, a number that has remained steady since 2011. The funds most commonly offered are indexed domestic equity funds (87.3% of plans), actively managed domestic equity funds (85.3% of plans), actively managed international equity funds (83.7% of plans), and actively managed domestic bond funds (78.8% of plans). 

Managed accounts or professionally managed assets are offered by 40% of plans sponsors with the majority of plans with 5,000 participants.  In-plan annuities were offered to participants in 10% of the plans surveyed. 

The highest concentration of participants’ assets were actively managed domestic equity funds (22.9%), target date funds (22.2%), indexed domestic equity funds (13.5%), stable value funds (8.1%), and balance funds (4.3%) of plan assets.

Participant Education

The most frequent reasons given by plan sponsors for providing participant education are to:  

• Increase participation (71.4%)
• Improve appreciation for the plan (65.8%)
• Increase savings and deferrals (62.7%)

Plan sponsors use a variety of approaches to educate their participants including the following:

• Email (64.1%)
• Seminars/workshops (55.3%)
• Enrollment kits (46.4%)
• Internet/intranet (42.7%)
• Fund performance sheets (30.9%)

Participant Investment Advice

About 35% of plan sponsors offer their participants investment advice using third party advisors.  Approximately 25% of participants use the investment advice service when it is offered by plan sponsors. Of the advice providers, 30.8% are registered investment advisors (RIA), 28.8% are certified financial planners (CFP), and 20.2% are on-line or web-based providers. 

The most frequently used methods for providing advice are one-on-one counseling (68.5%), on-line advice (45.7%) and telephone representatives (48.7%).

Eligibility

Employers responded that over 90% of employees are eligible to participate in their defined contribution plans. About 65% of employers permit part-time employees to participate in the plan. Immediate eligibility is offered by 58.8% of employers surveyed. That means that employees can begin to participate in the plan as soon as they are hired.  Of employers that provide a matching contribution, 47% provide immediate eligibility to receive the match. Another 31.9% of plans that make non-matching contributions provide immediate eligibility to participants. 

The average percentage of eligible employees who have a balance in their plan is 88.7%. The average salary deferral for both 401(k) and Roth contributions for all eligible participants was 6.8%.

Loans

Most plans (88.9%) allow participants to borrow against their account balances.  Almost 25% of plan participants have loans against their balances. Plans that limit the number of loans outstanding to one loan at a time represent 55.1% of plans while two loans permitted are 36.3% of plans.  

Fees

The survey found that plan recordkeeping and investment fees are generally paid by the plan.  However, other plan expenses such as legal, audits, consulting, and education are paid by the company rather than the plan.  Asset-based fees for recordkeeping and administration are paid by 43% of plans while 34.4% of plans pay a per capita or flat fee per participant.  Over 50% of plan sponsors conduct an annual review of fees while 30.3% review fees more often.   

RFP Process for Bundled Service Provider

Nicholas Zaiko, CIMA®

Investment Consultant

Bridgebay Financial, Inc.

www.bridgebay.com

It is a good fiduciary practice to conduct a periodic review of the DC plan service provider to ensure that the participant assets are well-protected and tracked accurately.  This should include a review of financials and SSAE 16 (internal control audits) annually.  If the plan service provider has not been reviewed in a long period of time, or the plan has grown or changed dramatically in the number of participants, need for additional services and asset size, it is a good fiduciary practice to conduct a due diligence review which may best be performed through a request for proposal (RFP) for plan services. 

Define the Objectives of the RFP

The detail and customization of the RFP will be determined by the key objectives of the RFP.  Some typical reasons for sending out a RFP include:
  

1)   Benchmarking to compare the current provider's fees and services in response to ERISA 408(b)(2)

2)   Improving plan efficiency and delivery of services to the plan and its participants

3)   Streamlining the administration of the plan through improved technology and automation

4)   Expanding or enhancing the investment choices, advice, asset allocation solutions

5)   Improving participant communications, education and participation rates

6)   Seeking a change in provider's relationship team, response time and expertise

Establish Criteria

The plan sponsor should establish specific metrics to evaluate the providers to ensure that the key issues are addressed.  Any specific restrictions or contract stipulations that are non-starters should be identified at the onset.  When crafting the RFP, it is important for a plan sponsor to identify their organization's unique priorities, objectives and preferences.  Some criteria may include conversion timeline, minimum performance standards, fees, call center and on-line participant access, investment options and organizational flexibility.  A client service-oriented provider will be willing  and able to tailor its services to the plan sponsor's specific needs.

Plan Information

Make the responses specific and relevant to your plan by providing sufficient information and data about the plan features, asset mix, cash flows, employee demographics, and current investment line-up.  Include any new services desired and their importance to the overall decision.

Evaluate the RFP Responses

Quantitative criteria include sponsor and participant service measures, plan use data, fund performance, expenses and timing.  These tend to be easy to compare and understand, though they tell only a fraction of the provider’s full story.  Financial stability in the wake of the financial crisis is critical to continuously offering high quality plan services.  Financial strength ensures high quality personnel, up-to-date enhancements to systems and improvements in compliance and delivery of participant services.

The Committee should be clear on what aspects of the RFP are critical to the selection of a qualified service provider based on the criteria established prior to issuing the RFP.  Developing a scorecard is a helpful tool when evaluating RFP responses and will streamline the process.  The evaluation should be presented to the committee and finalists selected based on the results.

Education

Education should be accessible through multiple channels such as paper, webinar, in-person, on-demand information, and live representatives.  Call centers need qualified, expert representative that are responsive to participant requests.  There should be a broad menu of education media including user-friendly on-line tools, retirement calculators, retirement income education, publications, newsletters, investment information, on-demand educational tools and in-person seminars.  Beware of marketing material masquerading as investment education.

Compliance

Compliance expertise has taken a central role in this time of increased regulations. Providers should demonstrate specific cases where they provided solutions to plan sponsors to meet new regulatory requirements.  Strong providers will have updated technological tools, operational procedures and legal expertise that ensure the plan is compliant with the changing regulatory landscape.  Plan design recommendations from providers are also very useful in a rapidly evolving regulatory environment.  Plan sponsors should understand the provider's compliance resolution process and how proactive they are in ensuring the plan remains in compliance.

Finals Presentations

Once the finalists have been determined, they should be notified and sent an agenda for the presenters to follow.  The absence of a detailed agenda will allow the provider with the best showmanship, and not necessarily the best product, to win the business. The key client service and relationship personnel that will actually be handling the account on a day-to-day basis should be present at the finals presentation. The finalist in-person presentations should highlight the relationship services. Using a common agenda with each finalist will also make is easier to make truly apples-to-apples comparisons.  The way some firms answer certain questions may actually point out deficiencies in other firms.  A knowledgeable and experienced retirement plan consultant can highlight these differences and explain their implications on the plan sponsor's plan.

Evaluating Plan Service Providers

Nicholas Zaiko, CIMA®

Investment Consultant

Bridgebay Financial, Inc.

www.bridgebay.com

Selecting a service provider for a 401(k), 403(b), or 457 retirement plan is one of the most crucial decisions that an employer and plan fiduciary can make in determining the retirement outcomes for its employees.  

The Department of Labor (DOL) has indicated that a plan sponsor has a fiduciary duty to establish and follow a formal review process at reasonable intervals, generally 3-5 years, to ensure the caliber of the selected provider. A client service focused organization will tailor its services to the plan sponsor's needs and have an understanding of the key requirements of the plan sponsor.

The process starts with the Request For Proposal (RFP) which should address the provider’s services, expertise, client commitment and compliance experience at a reasonable cost.  The RFP provides a strong foundation for selection but is not the only factor.  The in-person finalist presentations should highlight the relationship services.

Provider Selection Sub-Committee

It is good practice, in order to facilitate the service provider search, for the plan sponsor to establish a Selection Committee with a range of members with different areas of expertise such as payroll, employee benefits, legal, compliance, investments/finance and technology/systems.  Each member should be responsible for evaluating the provider’s abilities in their respective key areas. 

Use of an Outside Retirement Plan Expert

Many plan sponsors engage an outside consultant to guide and advise them through a methodical process that is well-documented and clearly illustrates the reasons for the decisions made.  The consultant's role is to guide the plan sponsor in establishing goals and objectives, success metrics, and targeting performance standards. The plan consultant can screen candidates, customize the RFP to the plan sponsors needs, conduct the provider search, analyze or score the results and lead the finalists’ presentations.

The RFP consultant will pre-screen candidates based on specific plan sponsor requirements or a set of minimal capabilities.  A retirement plan consultant may expedite the selection process by searching its database of service providers to identify those candidates that offer services that best fit the particular plan's needs.  

The consultant can guide plan sponsors through a large universe of competent service providers and qualify a few candidates that are a strong match for the plan sponsor and the participants.  Service providers have different target markets, service levels and areas of expertise.  The RFP consultant can differentiate among providers and permit the plan sponsor to select the service provider that best meets their specific requirements.

Preparation of the RFP questions is critical for efficiency and thoroughness to prevent receiving vague responses.  Certain questions may serve as differentiators.  The consultant's expertise in understanding the nuances of different levels of service, identifying potential conflicts of interest and understanding the benefits or limitations of certain providers can be extremely valuable to a plan sponsor.  A key benefit in using an expert is that the consultant can provide invaluable insights from having worked directly with the numerous providers under consideration.

One of the best ways for a consultant to present the results of their evaluations is to provide side-by-side analysis and a scoring system to enable the plan sponsor to identify and understand the finalists they would want to interview.