PLANSPONSOR - February/March 2021 - 19

PLAN DESIGN | COVER STORY
Incorporate
automatic
rebalancing.
For investment outcomes, portfolio rebalancing
is incredibly important, Kulick
says. With the stock market's rise in the
past year, " It's very likely that your plan's
'do-it-yourself' investors are now overweight
to equity if they have not rebalanced
their portfolio. That means they
may be taking on more risk than they
intended. " He is a big advocate of having
an automatic, opt-out rebalancing feature,
or at least allowing participants to opt in to
auto-rebalancing.
" I'd like to see more do auto-rebalancing
on an opt-out basis. But when you have do-ityourself
investors, maybe sponsors don't
want to interfere with their choices. Or it
may be because of system limitations with
their plan's provider, which can't do auto-rebalancing. "
Big Ways to Strengthen Results
For sponsors thinking of making a large-scale change to improve
outcomes, here are three to consider:
Increase the default deferral and auto-escalation ceiling. Citing
behavioral finance research, Glasgow says he starts client conversations
about raising these numbers by projecting the big picture.
" Most studies we've looked at suggest that, for participants in
retirement to live on a combination of their Social Security benefit
and retirement savings-without any material change in their
lifestyle-they need to save about 10% a year over their career. In
almost every case, there's a gap between that and a plan's current
average deferral rate. It gives us something to shoot for. "
To start, a plan's default deferral rate should maximize the
match-contribution rate, Lander says. " We have plans that match
at 50% up to 6% and make a 3% safe harbor contribution, and
we auto-enroll employees at a 6% deferral rate so they get the
full match, " she says. " Then you've got the employee contributing
6% and the employer contributing a total of 6%, which
brings you to a 12% contribution initially. Because the goal is to
get employees to a 15% total [employer plus employee] contribution,
we recommend auto-escalating participants 1% a year up to
9%. This means that, in a few years, employees will have a 15%
contribution every year to their account. "
Lander says she is a proponent of utilizing behavioral
finance in plan design, but she also understands that some
employers are unable or unwilling to make a bold move. " So you
do your best, then keep picking away at it. This is why tracking
participant data for a plan is so important: We tell our clients,
'Here's the research and the thought leadership, and here's what
your people are doing-let's talk,' " she says.
The Setting Every Community Up for Retirement Enhance " Plan
design
is critical to
every aspect
of outcomes,
and it's a
conversation
that never
ends. "
ment (SECURE) Act made it possible
for safe harbor plans to move their autoenrollment
ceiling to 15%, from 10% previously.
" It's all about participant outcomes, "
Brummel says. " You want to set up the
right architecture to get employees to that
point, so we reverse-engineer it. "
Take, for example, a plan that makes
a 3% safe harbor nonelective contribution
and has a 10% auto-escalation ceiling. " That
means we're only going to get as high as a
13% total contribution, so we're falling short
of helping your employees achieve that 15%
goal, " Brummel says. " We would recommend
that employers change the plan's
auto-escalation ceiling to at least 12%. "
Shift the match formula. There is no
single best-practice match formula to maximize participant
outcomes, Lander says. It starts with the employer's budget. The
next step is, what are your people doing now with their deferrals? "
Depending on the circumstances, an employer's best choice could
be making the match more generous, or stretching it to motivate
higher employee deferrals.
With some employers currently facing budgetary
constraints, Peluse says, it may be a difficult time to suggest
making a match more generous. " But as the economy improves,
there's going to be more focus by employers on how to situate
their plan today to attract new hires and retain employees in a
competitive market. " For now, he says, it is helpful to look at
benchmarking data for the client's industry, for employers of
the same size and in the same geographic area, so the client can
get a feel for its match's competitiveness.
Do a re-enrollment sweep. Automatically enrolling nonparticipating
and low-participating employees can boost outcomes for a
plan's participants significantly. " More employers realize now that
if they're automatically enrolling only new hires, unless they hire a
ton of folks every year, it doesn't move the needle much in terms of
projected outcomes for their participant base, " Peluse says.
But the cost of giving many more employees a match can
be significant. " Everybody would love to do a sweep and enroll
every employee into its plan, but sponsors do get 'sticker shock'
when they see the projected costs, " Kulick says. " However, it's
an incredible lever that you can pull, to improve outcomes. We
have clients that have done it, and 90% or more of re-enrolled
employees typically stick with it. Inertia is a powerful force. "
Glasgow says re-enrollment is also sometimes viewed as
being too paternalistic. " Many plan fiduciaries fear an employee
backlash, " he says. " It's a misunderstanding of what the likely
perception will be among employees. In most cases, we find
that re-enrolled employees' attitude toward their employer
actually improves. " -Judy Ward
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PLANSPONSOR - February/March 2021

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