Large defined contribution plan sponsors do not appear to be buying into some plan design opportunities promoted as a means of assuring superior retirement outcomes for plan participants. At least thats one conclusion that can be drawn from the Callan Investment Institutes just-released 2015 Defined Contribution Trend report, 89% of whose respondents are private sector employers, and 21% are in the public sector.
For example, few sponsors have bought into the idea of annually automatically re-enrolling participants in a qualified default investment alternative, such as a target-date fund, as a means of assuring that their assets are allocated in a manner experts would consider appropriate for retirement investing. Less than 5% of surveyed employers said they had ever done so.
Surveys over the prior two years similarly indicated little interest in the practice.
Also, the most common reason re-mapping participants investments on those rare occasions when it did occur wasnt to play an aggressive role in influencing participant investment behavior, but as a response to significant changes in the plans investment option menu.
Why shun asset re-mapping?
Sponsors offered several reasons for not doing an asset enrollment, including the following (in order of ranked importance):
- Fear of fiduciary liability
- Expectation of participant objection
- Lack of necessity
- Challenge of explaining rationale to participants
- Administrative complexity
- Cost
- Objections from senior management
Sponsors do, however, overwhelmingly (72% among 401(k) sponsors) believe in automatically enrolling new hires. Only 12.5% automatically re-enroll existing employees.
Among sponsors that auto-enroll participants, 55% also automatically ratchet up participants deferral rates each year. The most common automatic annual deferral bump-up rate is 1%. As in prior surveys, a minority (42%) of sponsors overall employ auto-escalation.
Income solutions
The Callan survey also revealed that, so far at least, only a minority of sponsors are offering annuity-based income solutions. These are promoted as a means of guaranteeing employees maintain a minimal income from their savings throughout their retirement.
According to the survey, 59% of sponsors did not offer any form of income solution last year. Among those that did, enabling employees to incorporate their DC plan assets into the employers defined benefit plan was the most prevalent practice, offered by nearly one-fifth (19%) of surveyed sponsors.
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In addition, 14% offered an annuity as a form of distribution payment, 8.4% offered an income drawdown modeling mechanism to guide retirees towards a sustainable distribution pattern, and 6.5% offered an in-plan insured annuity arrangement.
When asked what retirement income solutions they are likely to establish in the next year, two-thirds responded that it was very likely that they would offer none. The most favored income solution among those anticipating offering one is an annuity as a form of distribution payment.
Matches holding steady
Few (10%) sponsors felt the need to change their matching contribution in 2014. However, 4.4% expect to raise their match in the next year, but none expect to reduce it.
Following are some additional survey highlights:
- The prevalence of Roth contributions in DC plans jumped to 62% in 2014 (76% among 401(k) plans), up from 49% in 2013. Another 23% are thinking about adding a Roth option.
- Most (90%) of surveyed DC plan sponsors use a QDIA as their default investment fund, and target-date funds are by far (75%) the most common form of QDIA used for that purpose.
- Growth in the use of customized TDFs is significant, with 23% usage in 2014, up from only 12% the prior year.
- Sponsors are abandoning their recordkeepers proprietary TDFs, with only 29% using them last year, down from 48% in 2013. The percentage is expected to be down to 24% this year.
The Callan survey was completed by 144 plan sponsors, 85% of which have at least $100 million in plan assets. Nearly half (46%) have more than $1 billion in plan assets. Also, 41% of the survey respondents sponsor DB plans that are still open to new hires.
Richard Stolz is a Rockville, Md.-based freelance writer.
