DC plan execs can learn something from Mr. Spock and Homer Simpson, keynote speaker says

For defined contribution executives wondering how behavioral economics affects their participants, Brigitte Madrian suggests they compare Mr. Spock with Homer Simpson.

They don't have to worry about Mr. Spock of "Star Trek" to act appropriately in building an adequate retirement account because he is governed by the logic of traditional economics, said Ms. Madrian, a professor of public policy and corporate management at the Harvard Kennedy School.

However, Homer Simpson of "The Simpsons" will need more encouragement to pursue best practices, said Ms. Madrian, who delivered the keynote address Sept. 25 at the annual conference of the National Association of Government Defined Contribution Administrators. The conference was held Sept. 24-27 in Milwaukee.

For Homer Simpson, the complexity of retirement planning can lead to procrastination, failing to act or making mistakes. DC plan participants can face the same problems when they are overwhelmed by too many investment choices, she said.

Ms. Madrian said sponsors can practice behavioral economics by adjusting plans to incorporate automatic enrollment, using an opt-out strategy, because "it's the best way to get people into the plan," she said.

Other strategies include reducing the number of investment options; simplifying enrollment practices; and exploiting "existing decision moments," such as conducting retirement plan education campaigns during open enrollment for medical plans.

Although Ms. Madrian and other researchers point to the success of auto enrollment, this practice hasn't caught on sufficiently among public DC plans, said Keith Overly, executive director of the $13 billion Ohio Public Employees Deferred Compensation Program, Columbus. Mr. Overly was elected president of NAGDCA by association board members on Sept. 27.

Mr. Overly, interviewed by Pensions & Investments at the NAGDCA conference, characterized as disappointing the results of a survey that showed only 20% of plans offering auto enrollment. A similar survey published last year reported that 26% of plans offered auto enrollment.

"There are some legal prohibitions at the state level," Mr. Overly said. Among the survey respondents who didn't offer auto enrollment, 36% cited legal prohibitions as a reason, according to a survey report. Some states don't allow money to be taken from a paycheck without permission by individuals.

Another 28% of this group said they feared negative reaction from employees, while 10% cited lack of management interest and another 10% cited "union issues," the report said. Respondents could choose more than one answer. Thirty-eight percent cited "other" as a reason for not providing auto enrollment.

The survey covered 52 plans with $120 billion in assets, serving 2.5 million participants. The survey was based on email responses in April and May. Among the respondents, 68% were 457(b) plans, 18% were 401(k) plans, 10% were 401(a) plans and 4% were 403(b) plans.

"We offer the opportunity to employers" to provide auto enrollment, Mr. Overly said, referring to the Ohio deferred compensation plan. "There's no negative reaction (by employees). It's a perception that's not valid."

Mr. Overly pointed out that the NAGDCA survey reported that the percentage of plans offering automatic escalation rose to 31% from 22%. NAGDCA encourages plans to consider auto features, and the plans can provide auto escalation without offering auto enrollment, he said.

Auto enrollment, auto escalation and other elements of plan design were prominent discussion topics at the annual conference — and so was plan protection.

Although lawsuits relating to fees and plan management have been the province of ERISA 401(k) plans and 403(b), several speakers said government plans aren't necessarily bulletproof even though they aren't governed by the Employee Retirement Income Security Act.

"Government plans might come under scrutiny" by the tort bar, said Jacob O'Shaughnessy, a managing director of Portland, Ore.-based SageView Advisory Group, a registered investment advisory firm, which provides services to more than 1,200 defined contribution and defined benefit plans with $70 billion in assets.

When sponsors take actions in their plans, "emphasize process," Mr. O'Shaughnessy said, emphasizing the need for showing participants and regulators what they did and why they did it.

"Document why, when and how" plan executives arrived at their decisions, said David N. Levine, a partner at the Groom Law Group, Washington.

Although plaintiffs' lawyers have focused on 401(k) and 403(b) plans, "anyone can bring a lawsuit," even one that is poorly written, Mr. Levine said.

He said it's acceptable for government DC executives to look at ERISA for guidance in plan management, but he warned that "sometimes, it's not practical" for government plans. Pay close attention to the state laws that govern respective government DC plans, Mr. Levine added, because they offer the most important guidance for these plans.