As a plan fiduciary, are you willing to take a clever new idea that has yet to be tested and fully implement it as part of your company defined contribution plan?  Is it right to treat your company retirement plan like a financial experiment?   Is that really what your employees deserve?

Maybe the more critical question is this: as an ERISA fiduciary acting in the best interest of your plan participants and their beneficiaries, are you willing to risk the exposure of making such a decision?

No?

I didn’t think so.

Don’t get me wrong.  I’m all for thought leadership and innovative thinking.  We truly need it.  Plan fiduciaries need to be on the lookout for better solutions for plan participants. There is unquestionably a retirement savings shortfall in America and if that problem can be fixed, then it will take innovative thinking.  However, every innovative idea doesn’t necessarily work in the real world quite the same way it does in a white paper.

A demonstrated series of successful case studies and proof of concept is much more reliable for a plan fiduciary when compared to unproven innovative thinking.  The challenge lies not in identifying the problem.  That’s the easy part.  The challenge is in finding a solution that will prove itself over time in making a measurable, positive  impact.

As one example, let’s examine how long it took, and how much the landscape changed in order to prove effective the concept of automatic enrollment with auto-escalate into target date funds (TDF).  Here is a sampling of events along that timeline:

• 1993 (November) – Barclays Global Investors (BGI) pioneers the first target date fund
• 2005 TDF AUM – $75 Billion
• 2006 Pension Protection Act Passed (PPA)
  • 32% of defined contribution plans offer TDF[1]
  • 42% of participants have access to a TDF
  • 3% of total DC plan assets invested in target date funds
• Post PPA – Auto enroll
  • Majority of plans auto enroll at 3%
  • Auto escalate uncommon feature
  • TDFs become common QDIA
• 2011 – 70% of TDF Assets in recordkeeper’s own proprietary TDF’s (See 2015 data – down to 32%)[2]
• 2014 – 27% of plans have automatic enrollment
• 2015 – 32% of TDF Assets in recordkeeer’s own proprietary TDF’s down from 70% four years prior
• 2017 – (Compare with 2006 Data when PPA passed)[3]
  • 82% of defined contribution plans offer TDF
  • 81% of participants have access to TDF
  • 24% of total DC plan assets invested in target date funds
• 2019 – TDF, AUM Approximately $2 Trillion
• 2021 – Vanguard Study presents plan data to indicate that default decisions and auto enrollment improve participation rates to 91% compared to 28% under voluntary enrollment[4]
  • 47% of plans with auto enroll and auto escalate move employees toward 10% deferral rate.
  • 79% of plans move to 10% deferral rate or higher

This timeline spans 28 years.  Even if one concedes that the Pension Protection Act of 2006 ushered in the safe harbor of using a QDIA, then its still 13 years since the advent of the first target date funds to the point of proven concept.

Also consider that auto enrollment and auto escalation into a QDIA has been designated a safe harbor approach by the Department of Labor.  That’s a noteworthy milestone in labeling this approach as widely accepted and not just an innovative idea.

Here are some of the latest trends in “innovative thinking.”  Certainly, some of these ideas show promise, but have yet to be universally accepted across all defined contribution plans of all sizes.  Some of these would be included as part of the ERISA qualified plan while others may be a supplemental benefit.  They include:

• Providing a means to enhance emergency savings in addition to defined contribution features
• Consolidated objective based fund menus
• Options for student loan debt payment
• In plan lifetime income options
• Financial wellness programs
• Promoting and utilizing Health Savings Accounts

All of the above concepts appear to work great in a vacuum.  The real question is, how will they work in the real world with employees who do not always behave rationally with their finances?  For some of the solutions listed above, there is still no standard approach.  For example, how would an employer define a “Financial Wellness Program?”  There are so many possibilities and defining a successful program is still rather nebulous. 

Before adopting an unproven, innovative idea, ask several questions:

• Has the DOL provided any guidance on the topic?
  • Note that some of the solutions listed above do not fall under ERISA and therefore this question may not apply.
• Are case studies available? What have the results been?
• How many other plans like ours have adopted a similar solution?
• Are there any conflicts of interest with current plan vendors in adopting the solution?
• Are there any potential conflicts of interest with current plan vendors in adopting the solution?

Plan fiduciaries should be open and receptive to new ideas and innovative thinking.  Plan fiduciaries also need to ask the right questions and distinguish between a good idea and a proven concept.

Blog articles are provided for general information and education and should not be considered a recommendation.  Information provided should not be considered to represent investment, legal or tax advice.

Copyright © 2021 All Rights Reserved by 90 North Consulting, LLC DBA RFP 401k Advisor

[1] The Brightscope/ICI Defined Contribution Plan Profile: A Close Look at 401(k) Plans, 2015 – Data inclusive of 401(k) plans with audit information available on 5500 filing

[2] Defined Contribution Trends Survey, Callan Investment Institute, 2010-2015 reports

[3] The Brightscope/ICI Defined Contribution Plan Profile: A Close Look at 401(k) Plans, 2017 – Data inclusive of 401(k) plans with audit information available on 5500 filing

[4] Vanguard Research – “Automatic Enrollment. The power of the default.”  Available at https://institutional.vanguard.com/iam/pdf/ISGAE_022020.pdf