Plan sponsors of 403(b) retirement plans have made progress in the past couple of years in benchmarking themselves against plans of similar size, but there is more work to be done.
According to the Plan Sponsor Council of America in its 403(b) Plan Survey, there are still a small percentage of 403(b) plan sponsors out there that don’t know the ERISA status of their plan, 6.8 percent. Among smaller plans, those with 1 to 49 employees, that number was 12.3 percent in 2011. The bulk of the 500 respondents to the 2012 PSCA survey were ERISA-compliant plans.
So what does this mean, particularly with fee disclosure rules going into effect July 1 and participant disclosures expected in August? It means that plan sponsors who question their status need to speak with someone about it soon, otherwise, the regulatory ramifications could be “draconian,” said Aaron Friedman, Non-Profit National Practice Leader for Principal Financial Group, the company that sponsored the PSCA survey.
In its survey, PSCA found that the percentage of eligible employees with an account balance has remained constant since 2007, sitting somewhere between 75 and 76 percent, and the percentage of eligible participants that made contributions to their 403(b) plans also stayed the same, around 64 percent.
David Wray, president of PSCA, said in a webinar that these numbers are actually an “extraordinarily good statistic” because people have believed for years that a market downturn, like that experienced in 2008, would negatively impact plan sponsors’ ability to continue offering defined contribution plans, that they wouldn’t tolerate market volatility.
“The fortunate thing is that none of that has happened. Participants in our defined contribution community have been extraordinarily resilient,” Wray said. “Of all investors, the people in our community have been the most steadfast.”
He added that the survey results also showed that a high percentage of 403(b) plan sponsors continue to change and evolve their plans as markets and regulations change.
What plan sponsors can do
The type and scope of educational initiatives offered by 403(b) plans continues to have an effect on the number of employees participating.
Silvia Frank, retirement program manager for Trinity Health and a PSCA board member, said that participation in her company’s plan nearly doubled after it instituted an extensive education and marketing initiative. Education is one “opportunity for plan sponsors... We encourage our associates to participate in our plan and our employee engagement is higher if they are participating in the employer-sponsored plan,” she said.
Friedman added that, “Employees do need to be encouraged to save. Don’t undercut education and what is necessary for participants to save for retirement.”
Plans that offer new opportunities and matching funds for their plan participants also see good results.
One survey question asked how many plans offer a Roth after-tax contribution opportunity to plan participants. The number of 403(b) plans that permit Roth after-tax contributions has steadily increased from 10.9 percent in 2007 to 21.7 percent in 2011.
Employers that made matching or non-matching contributions to their 403(b) plans increased slightly from 2010 to 2011. The only area where employer contributions decreased was in organizations that made both matching and non-matching contributions.
“Overall we do see the vast majority of plan sponsors continuing to make contributions and demonstrating their commitment to the retirement security of plan participants,” Wray said.
Many plan sponsors believe they need to offer as many investment choices as possible, but Wray and Friedman disputed that assumption.
Survey results found that 403(b) plans continue to offer more investment options than their 401(k) counterparts. There have been numerous studies on economic behavior that say that the more choices participants have the less likely they are to make a choice, Friedman said. He advised plan sponsors to keep their number of investment options below 12, so that they can manage them effectively.
Wray pointed out that some of the largest plan sponsors offer only about six options, which is much easier to manage. The panelists recommended that plan sponsors of both ERISA and non-ERISA plans have a written investment policy statement that governs how each fund should be managed, otherwise, companies open themselves up to litigation or fraud.
The PSCA survey found that only 48 percent of plans had an investment policy statement; 23.7 percent did not have one and more than 28 percent were unsure whether their company had such a statement.
Next: Positive changes
“One of the more innovative developments in the DC community was the implementation of automatic enrollment,” Wray said. Plan sponsors inform new hires and employees who haven’t previously participated in the company retirement plan that they will be automatically enrolled in the 403(b) plan unless they decide to opt out. “By doing nothing, they will begin saving for retirement in the program,” Wray said. “This has been more aggressively implemented in the 401(k) area, but clearly 403(b) plan sponsors have started down this path.”
Friedman added that there is an upward trend in the adoption of auto enrollment and that it is a “great way to get people into the plan to make sure they are saving for retirement. Most of the time it is done at a level participants’ don’t even miss.”
The average auto enrollment level is 3 percent of pay, although some plans do offer 2 percent as an option.
Friedman pointed out that most plans should start with a higher deferral rate, such as 6 percent, to help plan participants get closer to hitting the 11 to 15 percent of pay target most people will need to save for retirement.
Target-date funds within plans also are gaining in popularity because they offer plan participants diversification without having to make huge decisions. Nearly 73 percent of plan sponsors offered a TDF in 2011, compared to 69.1 percent in 2010. The PSCA survey also found that the average number of investment funds 403(b) plan sponsors offered in 2011 was 28, which is a lot of information for the average participant to digest.
Another positive change is the number of plans that offer participants access to advice. Of the 24.1 percent of plans that said they offer advice, 95.2 percent of those offered one-on-one counseling, 26.4 percent offered Internet providers, and 52 percent offered a telephone hotline. Forty-three percent of companies with 1,000 employees or more offered advice, a much higher percentage than plans with fewer employees.
Facing the regulatory issues
Not only do 403(b) plans have to deal with fee disclosures from their plan providers in the next week, but they need to figure out how to best provide that information to their plan participants. The U.S. Department of Labor also is redefining its definition of fiduciary, which also could have an impact on the 403(b) industry.
In the survey, plan sponsors were asked how they currently received fee information. Nearly 38 percent said they received a paper report periodically; 29.7 percent said they received it online where the information was updated frequently; 21 percent said they received online updates occasionally; 8.1 percent said they received a paper report upon request and 19.3 percent said they received no fee information.
“I was surprised that 20 percent were not receiving the information from their providers,” Wray said. “Certainly, if they have not received the information in short order here, they need to follow up. The Department of Labor and others are going to be following up on this. It is really critical that you know the fees your participants are paying and that they are in your file somewhere.”
Friedman added that the fee disclosure rules do not apply to non-ERISA plans, but he encouraged those plans to comply as well since it is just good practice.
More than 67 percent of all plans said they evaluated their plan fees annually. Nearly 14 percent said they evaluated them quarterly; 8.1 percent said they evaluated them semi-annually and a disturbing 6 percent said they never have evaluated their plan fees.
The good news is that more than one-quarter of 403(b) plans said they were making plan changes, including 39.3 percent that said they changed their investment lineup in 2011, 23 percent who changed or added plan design features and nearly 24 percent who changed their employer or participant contributions.
“We as plan sponsors need to remain curious about what other sponsors are doing to ensure compliance with ERISA and share each other’s challenges and provide support for each other,” Frank said. She added that if 403(b) plan sponsors continue to provide plan participants with competitively priced and adequately monitored investment options and stay focused on those goals, “we’ll be successful and get better and better as we go along.”