Note: Written by Nevin E. Adams. Nevin is the American Retirement Association’s Chief of Communications and serves as Editor in Chief of NAPA Net and NAPA Net the Magazine.
This is the time of year when resolutions for the cessation of bad behaviors and the beginning of better ones are in vogue. Here are three for plan fiduciaries for 2018.
Start a diet – for your fund menu.
Though it is a point often made with studies (well, one study, actually) dealing with jellies and ice cream, a long-standing behavioral finance tenet is that more choice doesn’t lead to better decisions. So what’s with those burgeoning 401(k) investment menus? Plan sponsors tend to offer more than 11 investment options in their DC plans, with 38% offering 11 to 15 options and 45% offering more than 16 options, according to the Rocaton/Pensions & Investments 2015 Survey of Defined Contribution Viewpoints study, which polled more than 400 plan sponsors and other industry professionals.
More recently – though it has been rebuffed in court – 403(b) university plans have been criticized by litigation plaintiffs for flooding their plan menus with a “dizzying” array of funds that the suit alleges serve only to intimidate participants into “decision paralysis” while at the same time imposing higher-than-reasonable fees.
Odds are that you have funds on your menu that either aren’t being used or being used widely – options that contribute little other than clutter to your investment review and to the decisions of your participants. Take a look – your retirement plan menu shouldn’t be a kitchen sink “solution.”
Get a check-up – for your target-date fund(s).
Flows to target-date funds have continued to be strong – and little wonder, what with their positioning as the qualified default investment alternative (QDIA) of choice for most 401(k)s. That said, the vast majority of those assets are still under the purview of an incredibly small number of firms, though in 2016 3 of the 10 largest target-date managers experienced outflows for the year. Indeed, there have been some seismic shifts in the space; Morningstar notes that in n 2016, passive series saw more than $40 billion in estimated inflows compared with $23 billion for active ones.
A target-date fund is, of course, a plan investment, and like any plan investment, if it fails to pass muster, a plan fiduciary would certainly want to remedy that situation, including removing the fund if necessary (don’t take my word for it – that’s coming straight from the Labor Department).
That said, TDFs are frequently, if not always, pitched (and likely bought) as a package. While each fund in the family is reviewed separately, and certainly should be, breaking up the set certainly carries with it a series of complicated consequences, not the least of which are participant communication issues and glide path compatibility. Not that those can’t be overcome – and not that those complications would be deemed sufficient to retain an inappropriate investment on the plan menu – but it doesn’t take much imagination to think about the heartburn that might cause.
The reasons cited behind TDF selection run a predictable gamut: price/fees, performance (past, of course, despite those disclaimers), platform (as in, it happens either to be their recordkeepers, or compatible with their program) – and doubtless some are doing so based on an objective evaluation of the TDF’s suitability for their plan and employee demographics. Whatever your rationale, it’s likely that things have changed – with the TDF’s designs, the markets, your plan, your workforce, or all of the above. Regardless, it’s probably time you took a fresh look.
Pump up the default rate in your auto-enrollment plan.
While a growing number of employers are auto-enrolling workers in their 401(k) plan, one is inclined to assume that, a decade and change after the passage of the Pension Protection Act, if a plan hasn’t done so by now, they likely have some very specific reasons.
But for those who have already embraced automatic enrollment, those are plans who have (apparently) overcome the range of objections: concerns about paternalism, administrative issues, cost – some may even have heard that fixing problems with automatic enrollment can be – well, problematic (though things have gotten a little easier on that front).
While there has been some movement on this front, most plans with automatic enrollment still start with a default contribution rate of 3% – and leave it there. With more than a couple of decades of experience under our belts (a third of that under the auspices of the PPA), we know a couple of things. First, 3% isn’t “enough” (ironically that is probably what accounts for its popularity – it’s small enough that it wasn’t thought to spur massive opt-outs by automatically enrolled participants). We also know (or should) that the auto-enrollment safe harbor of the PPA calls for a minimum starting deferral of 3% is a floor, not a ceiling. And finally, that – at least according to any number of industry surveys – a default contribution rate twice as high as the prevalent 3% would likely not trigger a big surge in opt-out rates. But there is a great deal of difference in the retirement outcomes between the two.