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DC Plans: Improving Their Design and Outcomes

Defined contribution plans have supplanted defined benefit plans as the most prevalent retirement plan offered through places of employment. But that certainly doesn’t mean that they are static. A recent paper argues that those that design, offer and administer them should not rest on their laurels, assuming that they assured of participants in growing numbers and stability and that the plans will serve participants as well as ever without changes and adaptations.

Enhancing DC Plan Design,” a paper by J.P. Morgan Asset Management, suggests five steps that can be taken to improve DC plans and the results they yield.

Automatic Features

J.P. Morgan says that its research begs to differ with the reticence to put automatic features in place among some that make DC plans available engendered by fears of employee opposition. On the contrary, says the report: 75% of participants at least do not oppose them if not support them, and 96% of those whose plans have such features are satisfied with them. For good measure, nearly as many support auto escalation, and almost 100% of participants whose plans have it are satisfied with it.

Tips:

  • Automatically enroll all employees.

  • Execute automatic enrollment annually for non-participants.

  • Starting the default contribution rate at 6%.

  • Set a default automatic increase rate of 2%.

Target Date Funds

The research found that both plan sponsors and participants are not confident that participants have appropriate asset allocation. Majorities of both, in fact. The paper suggests that target date funds (TDFs) are an option that could be considered as a means to address that lack of confidence and introduce a greater degree of stability.

Tips:

  • Determine plan goals and objectives.

  • Choose a TDF consistent with plan goals and objectives.

  • Periodically review the funds.

  • Document the process.

Re-enrollment

The paper notes that some plans are reluctant to conduct a plan re-enrollment, in which participants are defaulted into a qualified default investment alternative (QDIA) and participants to opt out of the QDIA if they choose. But J.P. Morgan has found that 82% of participants at least do not object to re-enrollments.

Tips:

  • Request participant-level asset allocation data from plan provider/recordkeeper.

  • Understand that ERISA safe harbor protection may be available for assets defaulted into a QDIA.

  • Keep in mind that participants who want to make their own investment options can opt out.

Core Menu

The study cites research that shows that having many investment choices can confuse participants and may result in misallocations and inertia. Further, it says, DC plans offer an average of at least 20 funds, but the average participant invests in three. The paper suggests that plans consider consolidating the options they make available.

Tips:

  • Consider consolidating the entire core menu.

  • Consolidation may results in better diversification and result in better outcomes.

Employer Match

The paper argues that there is real power in the employer match, since it can not only increase participants’ balances, but also provide employees an incentive to participate and contribute. And it cites data that shows 81% of participants share that view.

Tips:

  • Consider offering an employer match.

  • Consider “stretching” the match to increase participant savings without increasing plan costs. For example, instead of matching 100% of a participant’s savings of up to 4% of pay, consider matching 50% of savings up to 8% of pay.