DC execs might be impeding auto features

Defined contribution plans can be thwarted in adopting practices such as auto enrollment and auto escalation by DC executives' uncertainty about plan design as well as by executives' misreading the interests of participants, according to J.P. Morgan Asset Management.

“We see addressable issues that may be impeding progress towards plan objectives,” according to a report by the New York-based money manager about a survey of 796 DC plan executives. DC plans need “a closer alignment” between their goals and their strategies, added the report, which is due to be published Aug. 21.

Although the survey found “a broad desire by sponsors to improve their plans,” executives “recognize they are not meeting their goals,” said Catherine Peterson, director of retirement insights at J.P. Morgan Asset Management. “There's still a lot of work to do.”

In some instances, reluctance by DC executives to adopt industry-recommended practices such as auto enrollment and auto escalation are due to concerns about antagonizing employees or to uncertainty about fiduciary protection for some plan design features.

Only 43% of plans have implemented auto enrollment, the report said. Among the top reasons for not offering this feature, 27% of executives cited a fear that employees would be upset, 19% said they “have not really considered” auto enrollment, and 19% said they are “not comfortable making the decision on behalf of my employees.“

The survey found only 21% of plans have added auto escalation. The top reasons for not offering this feature: fear of upsetting employees (30%), lack of considering this option (23%) and discomfort in making the decision on behalf of employees (20%), the report said.

“We consistently hear from plan sponsors that participants would be upset” if auto features are added, Ms. Peterson said, referring to discussions with J.P. Morgan clients. The survey, a first-time examination by her firm, wasn't restricted to J.P. Morgan clients.

Larger plans — those with assets of $250 million or more — were more likely to offer auto enrollment and auto escalation than other plans, Ms. Peterson said. For auto enrollment, 62% of larger plans offered this feature. For auto escalation, 42% of larger plans offered this feature.

Larger plans represented 16% of the survey's total sample size.

Plan executives appear more concerned than participants about auto features, Ms. Peterson said, noting that a 2012 J.P. Morgan survey of 1,009 participants showed 33% favored auto enrollment plus auto escalation, while 29% were neutral and 39% opposed it. (Due to rounding, the total is more than 100%.)

“We look at "neutral' as people saying they don't love it or they don't hate it,” she said. “People who are neutral aren't going to complain about auto enrollment or automatic contribution escalation.”

The survey found that uncertainty about fiduciary protection “may deter plan sponsors from taking a more proactive role in putting employees on a solid path to a secure retirement,” the report said.

One example is re-enrollment. When asked whether plans would receive fiduciary protection under the Employee Retirement Income Security Act for participants who were defaulted into a qualified default investment alternative during re-enrollment, 39% of plan executives said they didn't know. Another 17% said such protection probably or definitely wouldn't be available.

“We were surprised” at the response about re-enrollment, Ms. Peterson said. “Most plan sponsors understand the QDIA rules, but there's a lack of understanding of how the rules apply to re-enrollment.” The plans would have safe-harbor protection as long as they provided required notice to participants about re-enrollment and as long as participants were allowed to opt out, she added.

Among all plans, only 7% conducted a re-enrollment to a QDIA, the report said. Fourteen percent of larger plans conducted re-enrollments.

The sponsors' uncertainty was extended to target-date funds. Among plans with target-date funds, 32% of executives said they didn't understand all or some of the methodology used to construct this option within their plan. Among larger plans, the “don't know” response was 22% of executives. “One of the challenges for plan sponsors is to be well-informed of the investment strategies and glidepaths available in the marketplace,” the report said.

Ms. Peterson said the survey illustrated several examples for which sponsors should re-evaluate how they measure plan success, moving away from traditional benchmarks. For example:

• When asked about the relative importance of goals of their DC plans, 83% cited as very important or extremely important the desire to show the company cares about employees, while 82% cited the desire to retain “quality“ employees. The lowest (58%) of seven possible responses was helping employees to retire at their “normal retirement age.”


• When asked about criteria that determine a DC plan's success, 82% cited participant satisfaction with the plan as very or extremely important, 82% cited investment performance and 71% mentioned participation rates. In last place among 11 choices, cited as very important or extremely important by 44% of executives surveyed, was the “percentage of participants with account balances on track to replace at least 80% of final salary in retirement.”

These two examples show that DC plan executives should be looking at more tangible measurements of success, Ms. Peterson said. “We need to focus on things like average deferral rates and the ability of participants to replace at least 80%” of their salary for retirement, she said.

Ms. Peterson said the survey would serve as a benchmark for future surveys to be conducted every other year. Covering primarily 401(k) plans, as well as some 403(b) plans, the survey was conducted online in December and January.

See the full report