Nicholas Zaiko, CIMA
Senior Consultant
Bridgebay Financial, Inc.
www.bridgebay.com
The Plan Sponsor Council of America’s 60th 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).
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.
