Q&A talks about the changing landscape of employee benefits with Paul Denu, New York region president of USI Consulting Group.
Q: What impact have the recent fee disclosure regulations issued by the U.S. Department of Labor had on retirement plans?
A: One trend we’ve seen recently is that fees charged to retirement plans are dropping. On reason for this is competition from economies of scale being realized by companies that have invested in technology, process improvement and distribution.
The other major reason, in our opinion, is directly related to the DOL initiative on fee disclosures. Today every plan sponsor must receive an annual disclosure from the service provider outlining the various fees and revenue sharing arrangements within their plan. This initiative has shined a bright light on how the various parties get paid and how much is coming out of the participants’ account, and how much is being paid by the employer. We would say the fee compression in the defined-contribution industry is due in large part to the DOL’s fee disclosure mandate.
Q: Have most employers reviewed the competitiveness of their fees in response to this initiative?
A: Many employers have taken the next logical step of comparing these fees to what others are paying in the marketplace. While there are public and private databases to help with fee comparisons, it should be done in light of the services offered. What may seem like a high fee, may not seem so high when compared to the services one receives for the fee. The DOL has never stated that a plan’s fees need to be the lowest available, they should simply be reasonable in light of the services provided.
Q: Through both law and regulation, the DOL and Internal Revenue Service have endorsed the use of auto-features such as auto-enrollment and auto-escalation by defined contribution plans. Have these programs been effective?
A: Auto-enrollment has certainly been successful in terms of increasing plan participation, as typically fewer than 10 percent of participants opt out. This is consistent with the rates we have seen with our client base. The adoption rate of auto-enrollment by plan sponsors is also encouraging. According to the 2012 Plan Sponsor Council of America 401(k) survey, 47.2 percent of plans have an automatic enrollment feature, while 61.5 percent of plans with 5,000+ participants report having automatic enrollment. This trend carries over for our clients as well, as typically the larger plans are more quick to adopt auto features. We have been having conversations with our clients regarding auto-enroll and auto-escalate for a number of years now, and have been seeing adoption rates beginning to accelerate.
Q: Are there any pitfalls or problems associated with auto-enrollment?
A: The are two pitfalls or problems that we have encountered with automatic enrollment. One is the plan sponsors’ perception that participants will not be able to afford automatic contributions. When they are not able to overcome this hesitancy, the plan sponsor will either not implement auto-enrollment features, or they will set the default rate too low. This is actually an industrywide issue, as the most common default deferral rate is 3 percent of pay, chosen by 51.8 percent of plans surveyed by the PSCA for the 2012 report.
Unfortunately, 3 percent is not sufficient so we strongly encourage our plan sponsors who want to start out slowly with auto-enroll to auto-escalate to at least 6 percent, if not higher. Studies have shown, and we have seen, that the opt out rates for participants at 3 percent and 6 percent are largely the same, and a 6 percent deferral rate will get far more participants to their retirement finish line than 3 percent.
The second pitfall is mistakenly forgetting to auto-enroll an employee. It should be noted that the IRS will require the employer to make a participant whole if the employer failed to enroll an employee as per their auto enrollment program
Q: Through both law and regulation, the DOL and IRS have encouraged the adoption of products that aid in the transition from accumulation to income in retirement (e.g., annuities). Have these initiatives been effective?
A: The vast majority of retirement plan participants are not prepared for retirement. Survey after survey has shown that participants not only do not save enough for retirement, but are actually delaying retirement because they haven’t saved enough. On top of this, there is uncertainty with regard to the health and longevity of the current social security system, a growing concern about the increasing healthcare costs that retirees will have to face in the future, and the well-documented drop in the number of private pension plans in this country.
This has led to both the DOL and IRS encouraging the adoption of lifetime income offerings that can create a source of income that replaces participants’ paychecks and supports their financial needs throughout retirement. Since the initiative, we have seen increased offerings of retirement income products from record keepers and insurance providers. As adoption of these products increases, we anticipate the options available to plan sponsors will also grow and become more diverse.Â
