Halloween is the time of year when one’s thoughts turn to trick-or-treat, ghosts and goblins, and things that go bump in the night. But what keeps—or should keep—plan fiduciaries up at night? 
Well, there are the things like…
Re-enrollment
Automatic enrollment has long been shown to transform the negative influence of inertia of participant behaviors into a positive force for retirement plan participation and, in the process, helping to make dramatic improvements in retirement security. Indeed, it may well be the single most important initiative in retirement savings in a generation, thanks to the sanction and structure provided by the Pension Protection Act of 2006.
Implementing re-enrollment typically boosts 401(k) plan participation rates from two-thirds or three-quarters of eligible workers to levels generally over 90%. The remaining 1 in 10 (and frequently fewer) take the time and effort to “opt-out” of participation for various reasons—perhaps they can’t afford to just then, or maybe they have another family member who is shouldering that responsibility.
But circumstances change—and that’s where a process called “re-enrollment” can play an influential role. It’s basically a second chance for those who may have opted out previously to participate in the plan. Let’s face it, just because circumstances weren’t right for joining the plan a year ago doesn’t mean they should be overlooked forever. Said another way, if at first you don’t “succeed” in enrolling them in the plan, this presents another opportunity to do so. The increase in participation rates proves the success of this approach. And—for those waiting for a legislative green light—legislation has recently been introduced that would permit, though not require, adoption of this innovation.
Lifetime Income Options
Speaking of apprehension, while DC plan fiduciaries aren’t exactly scared of retirement income, DC plans have long eschewed providing those options. That despite the unquestioned reality that participants need help structuring their income in retirement—and little doubt that a lifetime income option could help.
It’s ironic that programs designed to provide retirement income pay so little attention to the realization of that objective; only about half of DC plans currently provide an option for participants to establish a systematic series of periodic payments, much less an annuity or other in-plan retirement income option, and that’s despite the 2008 Safe Harbor regulation from the Labor Department regarding the selection of annuity providers under DC plans (which was designed to alleviate, though it did not eliminate, those concerns), not to mention a further attempt to close that comfort gap in 2015 (FAB 2015-02).
There are in-plan options available in the marketplace now, of course, and thus, logically, there are plan sponsors who have either derived the requisite assurances (or don’t find them necessary) or feel that the benefits and/or participant need for such options makes it worth the additional considerations. On the other hand, the occasional industry surveys notwithstanding, for the most part participants don’t seem to be asking for the option (from anyone other than industry survey takers)—and when they do have access, mostly don’t take advantage. Let’s face it, even when DB pension plan participants have a choice, they opt for the lump sum.
Proponents are hopeful that the SECURE Act’s provisions regarding lifetime income disclosures (though many recordkeepers have provided some version of this for a while now), enhanced portability (a serious logistical challenge if you ever want to move from a recordkeeper that provides the service to one that doesn’t, though solutions are emerging that claim to have made progress on this front) and, perhaps most importantly, an expanded fiduciary safe harbor for selection of lifetime income providers (thanks to SECURE), will—finally—put those “fears” to rest.
That said, the ink was barely dry on the SECURE Act when COVID struck—and it’s arguable that it really hasn’t had a chance to catch on. For now, portability appears to be the biggest concern—well, that, and there’s a certain reluctance to “go” first. That said, a couple of newly active programs are said to have had success getting plan sponsor commitments. We’ll see.
Changing Providers
It seems like every year there’s a survey out showing a hefty percentage of plan sponsors are considering making a change. Industry surveys routinely point to a certain amount of regular provider “churn”—indeed, by some counts as many as 10% of the plans change providers in any given year. That said, industry surveys (and excessive fee litigation) are replete with indications that the vast majority of plans not only don’t change recordkeepers, but may not even undertake a formal review of services, fees and capabilities.
That said, recent months may have fulfilled that “prophecy” by virtue of the consolidation wave rolling through the industry—the one that seems to emerge every 10-15 years to much acclaim. Now, any plan sponsor who has ever gone through a recordkeeping conversion knows that, however smooth the transition, and regardless how improved the experience on the new platform, moving is a lot of work. And, as with relocating your home, the longer you have been in a particular location, the harder it seems to be. Knowing that, it’s little wonder that many plan sponsors make those changes only under a duress of sorts, forced by poor service, a lack of capabilities, (relatively) high fees, or more than one of the above.
And that, of course, means that the transition, however badly needed or desired, will likely be rougher—and take longer—than desired. And who knows how many intentions to pursue a review have simply petered out on the altar of “not enough time” to do so?
But even if you don’t have the time to do so, the preparations can be instructive—and you might wind up with a better plan for you and your employees.
Offering a Plan in the First Place
It’s impossible to generalize the hesitation to offer a workplace retirement plan. Most of that gap lies with small businesses that presumably have any number of “distractions” that can prevent an “extra” like benefits, much less retirement plan benefits off their radar. And yet, one need only look to the transformation taking place in states with a state-IRA plan mandate—and more significantly the impetus it has provided to the interest in setting up a “real” retirement plan by those same small business employers to appreciate the potential.
Surveys over time have provided some insights into this hesitancy; concerns about cost or the time required, worries about potential litigation, the day-to-day challenges of running a business itself—and even the rationale that their workers aren’t asking them for the benefit.
It seems fair to say that it’s not fear—or at least not fear alone—that’s holding these employers back. But for the sake of the workers they employ—and the benefit of those who employ them—here’s hoping they put it behind them. Soon.
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