Equity gains propel 457 plans, but future growth is hampered

Deferred compensation plans grew by 9.3% during the 12 months ended Sept. 30, as sponsors and other DC plan members cheered the stock market's comeback and praised the resilience of participants but also lamented a lack of legislation that could further propel participation and account balances.

"The markets are doing great" in rebounding from the pandemic-induced plunge during the first quarter of 2020, said James Potvin, executive director of the Employees Retirement Systems of Georgia, Atlanta, who administers a deferred compensation plan with $646 million in assets and a 401(k) plan with $1.3 billion in assets as of Sept. 30.

"Overall, plan participation was pretty stable," he added. "Member contribution rates remained pretty level throughout the summer. When the stock market dropped in February and March, I was afraid that we would get some panic selling out of some equity funds, but it bounced back so quickly that the response was muted, as well."

The assets of deferred compensation plans among the 200 largest U.S. retirement plans rose to $146.4 billion as of Sept. 30 from $133.9 billion the year earlier, according to Pensions & Investments' annual survey. The 457 plans' assets rose 56.4% from $93.6 billion five years prior.

"Assets seemed to increase, thanks to the stock market," said Matt Petersen, executive director of the National Association of Government Defined Contribution Administrators Inc.

Based on anecdotal accounts, "participant engagement is up as peoples' comfort increases with virtual meetings and online use," said Mr. Petersen, referring to 457 plans adjusting their communication efforts because one-on-one and group meetings have been eliminated due to health concerns.

Despite the overall asset gains, improvement has been muted due to state laws that in effect prevent or discourage the use of auto enrollment by 457 plans.

Unlike 401(k) plans and other ERISA-covered plans, the non-ERISA 457 plans are governed by state laws that can prohibit, restrict or discourage auto enrollment due to state anti-garnishment laws. These laws were designed many years ago and weren't aimed at retirement plans, but the impact on the plans has been an unintended consequence.

"Auto enrollment is the primary driver of participation," said Mr. Petersen, commenting on the DC industry in general. "We have not seen a lot of movement on the state level (for pro-457 laws). It's a heavy lift."

An interactive report created by NAGDCA shows nine states allow auto enrollment for deferred compensation plans; 25 prevent it; and 16 allow partial auto enrollment. The nine states that allow it are Georgia, Utah, Colorado, Nebraska, West Virginia, Tennessee, Virginia, Michigan and Rhode Island.

Even if a state allows auto enrollment under any or some circumstance, there's no guarantee plans will offer it. In some states, auto enrollment may be generally banned, but exceptions can be made if this option is collectively bargained.

"Auto features have been proven to work," said Robert Boehmer, vice president of NAGDCA. "It drives better participation. It drives better wellness."

Mr. Boehmer also is executive director of the State of Nevada Public Employees' Deferred Compensation Program, Carson City. The NAGDCA interactive report describes Nevada as allowing some auto enrollment.

"Wage deductions are permitted under the Nevada Administrative Code without expressly requiring employee authorization when for the purpose of making employee contributions to a benefit program, such as a retirement plan," NAGDCA says. "No plans in the state currently offer automatic enrollment."

Mr. Boehmer said neither legislators nor governors — in both major political parties — have provided enough support for specific authorizing legislation for auto enrollment in 457 plans.

Still, his plan's assets have climbed to $1.1 billion from $524 million in 2014 when Mr. Boehmer became the executive officer. He attributed the gains, in part, to revamping and consolidating the investment lineup — now at 17 options vs. 33 — and replacing revenue sharing with a per-participant fee.

"We looked at utilization and pricing," said Mr. Boehmer, adding that the plan conducted focus groups with employees and retirees to assess their interests. Since 2014, he noted that participation has increased to 38% from 18%.

The plan also switched to one record keeper from two in 2015. "We cut administrative costs in half," Mr. Boehmer said.

Because Georgia allows auto enrollment for public plans, the state's 401(k) plan offers it but the 457 plan does not, said Mr. Potvin of the Employees Retirement Systems of Georgia.

Since 2014, the 401(k) plan has had a 5% deferral of salary for auto enrollment. Participants can opt out, but 92% of new hires stay in the plan, Mr. Potvin said. If participants defer the full 5%, they can receive a 3% match. The 457 plan "is just another way to save," said Mr. Potvin, describing it as a legacy plan.

The 457 and 401(k) plans have the same investment options: a target-date series, four fixed-income choices, nine equity options and a self-directed brokerage. The target-date series is the qualified default investment alternative in the 401(k) plan for new hires. "A huge percentage of new hires do this," he said.

Over the years, the plans "have moved to more indexed equity, which has had a significant impact on costs," Mr. Potvin said. Only two of the nine equity options are actively managed.

"State employment, and therefore our eligible membership population, has declined somewhat over the past year," Mr. Potvin added. "But this is more due to attrition (or) failure to replace departing employees than to any significant job actions by the state. In fact, when agencies proposed furloughs as part of their budget reduction efforts, both the governor's office and leadership in the General Assembly resisted those proposals that had the greatest impact on the state's workforce."

Auto enrollment would improve participation, Shelly Schueller, director of the $6.5 billion Wisconsin Deferred Compensation Program, Madison, wrote in an email. The deferred compensation program is offered to state employees, and the current participation rate is approximately 42%.

The program is an optional benefit for local government entities, such as counties, cities, villages and school districts, she explained.

More than 900 local governments participate. "Adding more employers would increase participation," she wrote. "I suspect that if it was available, an employer match would also improve participation."

Although her program hasn't made major design changes recently, it "has worked to target specific participants and categories of participants with additional outreach, education and information," she wrote.

One example was a "free look" trial period for a managed account service last year. "The average deferral rate of those trying the managed account service increased from 6.28% to 7.33% and the average number of investment options used increased from 2.64 to 8.52," she wrote.

The Wisconsin plan's assets grew by 20.2% for the year ended Sept. 30, tied with Virginia Retirement System's $3.7 billion deferred compensation plan, for the highest growth rate among the 25 largest deferred compensation plans tracked by P&I.

To cope with the pandemic, the plan offered all meetings with participants virtually and continues to do so, said Ms. Schueller, adding that plan officials provided additional communication about market volatility and the CARES Act.

Although she hasn't reviewed all 2020 data yet, the results so far indicate that the plan "did not see an appreciable decline in contributions during 2020," Ms. Schueller said. "There was a larger amount of transaction activity during 2020, but overall participation and contribution amounts remained steady."