PLANSPONSOR - June/July 2018 - 20

Implementing a higher automatic default deferral rate
is simple enough: The plan sponsor needs to amend its plan
document and communicate the change to the payroll staff or
provider, according to Joleen Workman, vice president, retirement
and income solutions, at Principal Financial Group in Des
Moines, Iowa. She says, " A plan sponsor's cost may increase due
to matching a higher amount of contributions, but plan sponsors
should think about the benefits of helping participants retire
on time [as there are] the costs of lost productivity and other
increases in benefits costs if workers can't. "
According to Reed, communications to participants about
an automatic default change need to be done in a timely way.
Some plan sponsors choose to issue a summary of material
modifications (SMM), while others may just send a notice.
Plan sponsors thinking of increasing the automatic default
deferral should consider increasing or restructuring the match
at the same time. " If the plan document is updated so that the
default is raised to 10%, but the match formula isn't changed and
the plan sponsor is only matching 3%, it could be a disincentive for
employees to stay at [the higher] rate, " Reed says.
Midwest Family Mutual Insurance Co., a 2018
PLANSPONSOR Plan Sponsor of the Year finalist in the
Corporate 401(k) >$10 million to $50 million category,
raised its default deferral rate from 6% to 8%.
Kristie Van Pelt, senior vice president, chief
financial officer (CFO) and treasurer at Midwest,
in West Des Moines, Iowa, says the company's
401(k) plan had a 6% default deferral rate in 2013
and it matched 50% of that. At that time, the plan
adviser said employees needed to save 10% of their
own salary. " We really want our employees to get to
that 10%, so we decided to take it from 6% to 8%. We
decided to do baby steps because, if we jumped from 6% to 10%
right away, employees would balk, " she explains.
The plan now matches 50% of that 8%. Of the 92% of
eligible employees who participate in the plan, 72% are at the 8%
deferral rate or above.
2
Auto-Escalation
While Midwest Family Mutual uses automatic escalation to
nudge participants up to that minimum 10% suggested savings
rate, it is among only one-third of plans that do so, according to the
2017 DC Survey. Of that group, 15.3% offer it as a voluntary feature
for which participants can opt in, and 18.3% automatically default
participants into auto-escalation with the choice to opt out.
Some plan sponsors auto-escalate employees to a rate that
produces the maximum match. " Who's going to complain about
that? " Reed says. Another possible suggestion for sponsors is to
time auto-escalation with annual salary increases, to " reduce the
blow " to participants.
With an eye toward the recommended savings rate, some
plan sponsors auto-escalate above the match deferral, and
behavioral research finds that few participants reduce their
20 PLANSPONSOR.com June-July 2018
auto-escalated deferrals until they reach the double digits.
Reed says auto-escalation is another simple way to get
participants to save at the rate they will need in order to be retirement
ready. But when making decisions about either of these
steps, plan sponsors need to consider participant demographics,
he says. " Any fiduciary needs to work in the best interest of
participants, so, for example, does the average salary level of your
employees enable them to defer up to 10%? "
Workman notes that sponsors could also be incurring a
further cost in the form of additional match contributions, so
they may want to do a cost analysis. As with auto-enrollment
deferral rate changes, implementing auto-escalation requires a
plan amendment and a notice to participants.
3
A Stretched Match Formula
Stretching the plan's match formula can mean matching
a lower percentage of a higher amount of contributions such as
100 cents per dollar of a 3% deferral to 30 cents per dollar of a
10% deferral, to keep costs equal. It can also mean changing the
amount of deferrals matched to a higher amount such as 6% to
8% or 50% of 6% to 50% of 8%. Both provide an incentive
for employees to increase their deferral. According to
the latest DC Survey, only 30.3% of DC plan sponsors
use a stretch match.
As an example of the first type of stretch
match, Principal studied three groups within its
own book of business, each having the same total
match contribution but using different formulas.
In all of the groups, the participant contribution
increased as the matching formula targeted higher
contributions. In group A, plans matched 100% up to
2% of salary deferred, and the average participant contribution
was 5.3%. In group B, plans matched 50 cents per dollar up
to 4% of pay deferred-keeping the match at 2% of salary-and
the average participant contribution was 5.6%. But when plans
matched 25% up to 8% of pay deferred-still keeping the match
at 2%-the average participant contribution was 7%.
As an example of the second type of stretch match,
Southeastern Freight Lines in Lexington, South Carolina, a
2018 PLANSPONSOR Plan Sponsor of the Year finalist in the
Corporate 401(k) >$100 million to $800 million category,
increased its match but changed the formula to require participants
to save more to get the maximum match.
Alvin Shaver, director of compensation and benefits at
Southeastern, says, in 2017, the firm moved from matching 50%
of 6% of salary deferred to, instead, matching 50% of 10%. " We
had been talking for a year or two about encouraging employees
to save more to be better prepared for retirement, " he says. " We
sat down with company leaders to make sure they were on board
with the change. " The company was willing to put more money
on the table.
Shaver says the complete change, including adding the plan
amendment and sending notices to participants can be done
http://www.plansponsordigital.com/plansponsor/june-july_2018/TrackLink.action?pageName=20&exitLink=http%3A%2F%2FPLANSPONSOR.com
PLANSPONSOR - June/July 2018

Table of Contents for the Digital Edition of PLANSPONSOR - June/July 2018
