HOW RE-ENROLLMENT BOOSTS POSITIVE INVESTMENT BEHAVIORS AND PARTICIPANT OUTCOMES — AUTOMATICALLY.
The advent of automatic features in DC plans has had a positive impact driving retirement readiness by boosting participation and savings rates, especially among workers newer to the job. 73 percent of large and mega plans use auto-features, such as auto-enrollment and/or auto-escalation, to encourage greater savings in the DC plan.1
Through automatically enrolling new hires to the plan, and directing them to the qualified default investment alternative (QDIA) option, preferably with at least a 6 percent deferral rate to start, employees are not only able to save for retirement but can also do so within an appropriately allocated investment vehicle that matches their specific retirement needs or time horizon.
While most auto-default to the QDIA — whether an off-the-shelf or custom target date fund (TDF), balanced fund or managed account — employees who prefer to allocate and manage their own investments are able to choose from a selection of investment offerings from the plan’s core menu, or opt out of the plan altogether. For plans that implement auto-features, less than one-third of participants currently not enrolled opt out, making it a powerful lever for the plan sponsor to effect change in the plan — and for participant outcomes.2
According to the 2014 DCIIA Plan Sponsor Survey3 of 471 plan sponsors across various DC plan types, industries and plan sizes (ranging from mega to small plans) auto-enrollment’s impact on participation is significant.
Separately, in the same study, plans that offer both auto-enrollment and auto-escalation have over twice as many participants with retirement savings rates over 15 percent as plans that do not offer both (14% vs. 6%, respectively).4
The combination of auto-features and other savings incentives (e.g., a matching contribution) chosen by the plan sponsor creates a “choice architecture” for employees’ retirement savings decisions, with increasing behavioral economics literature documenting that these plan design choices can have large effects on savings behavior.5 This in turn leads to an increase in a participant’s probability of success in reaching their optimal income replacement levels in retirement.
While this is promising, it’s becoming clear that two employee segments have been left out of the impact of auto-features, affecting their chance for retirement savings success:
- Active plan participants hired before auto-enrollment and increased auto-deferral rates, resulting in a potentially misallocated investment strategy that may not meet their future needs, a low plan account balance and/or no ongoing contributions.
- Non-participating eligible employees hired prior to auto-enrollment, who chose not to participate in the plan, and are missing out on an impactful retirement savings tool (and potential match) altogether.
A positive nudge from plan sponsors via a plan re-enrollment could make all the difference.
1,2 The Cerulli Report, Retirement Markets 2014, “Sizing Opportunities in Private and Public Retirement Plans.”
3,4 2014 DCIIA Plan Sponsor Survey, “Focus on Automatic Plan Features.”
5 Source: Jeffrey R. Brown et al., Individual Account Investment Options and Portfolio Choice: Behavioral Lessons from 401(K) Plans 7 (Nat’l Bureau of Econ. Research, Working Paper No. 13169, 2007) per NYU School of Law, “A Behavioral Contract Theory Perspective on Retirement Savings,” Ryan Bubb, Patrick Corrigan and Patrick L. Warren, July 2015
This is an excerpt of BNY Mellon’s article in Planet DC Magazine, “Reversing Inertia.”
The target date is the approximate date when investors plan to start withdrawing their money. The principal value of a target fund is not guaranteed at any time, including at the target date.
THE HIGH PRICE OF YIELD AND PERCEIVED SAFETY
Since the inception of markets there have been particular investments that garnered the attention of investors above all others. In the 1600s it was the tulip mania and at the turn of this century, tech stocks had investors’ focus. Although not to the extent of these examples, currently low-volatility dividend paying stocks are the rage du jour in this low-yielding uncertain market environment.
The lack of yield available on bonds has driven yield-thirsty investors to bond proxies for income, such as dividend-paying stocks. Global economic uncertainty, as well as academic studies that touted the merits of low-volatility stocks, has exacerbated the flow of money into this type of investment. In 2015, over $11 billion flowed into low-volatility exchange-traded funds and in the first two months of 2016, another $5 billion.¹
Utilities and consumer staples lie at the epicenter of this low-volatility, bond proxy trade due to their lack of economic cyclicality and higher than average dividend yields. This has led to stretched valuations in these sectors. Between 1995 and the financial crisis, the average price-earnings ratio of the utilities sector traded at a 25 percent discount to the broad market.² In contrast, utilities currently trade at a premium to the S&P 500 despite the sector’s lower growth and profitability characteristics. Additionally, the forward price-earnings ratio on the consumer staples sector is over 20 times on average compared to the S&P 500 at about 17 times.³ This represents one of the largest premiums for staples in the last 20 years.
Valuation is a poor timing tool because valuations can remain extended for long periods of time. If bond yields remain depressed and the global economy continues to slow or deteriorate, this trade could continue to outperform for the time being. However, when investors are looking for perceived “safety” in low-volatility dividend paying stocks, buyer beware. When any investment trade becomes too crowded a reversion to the mean is likely to follow. This type of investment will be particularly vulnerable when interest rates eventually rise and their relative yield advantage dissipates. Certain investments will go in and out of favor over time which is why it is important to maintain a diversified portfolio with exposure to different asset classes, styles and sectors.
Average price-earnings ratio: The average of the ratio of a company’s stock price to the company’s earnings per share. Forward price-earnings ratio: A current stock’s price over its “predicted” earnings per share.
Mutual funds are sold by prospectus only. Before investing, investors should carefully consider the investment objectives, risks, charges and expenses of a mutual fund. The fund prospectus provides this and other important information. Please contact your representative or the Company to obtain a prospectus. Please read the prospectus carefully before investing or sending money.
Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions. Rebalancing assets can have tax consequences. If you sell assets in a taxable account, you may have to pay tax on any gain resulting from the sale. Please consult your tax advisor. S&P 500 Index is an unmanaged group of securities considered to be representative of the stock market in general. You cannot directly invest in the index. Common stocks do not assure dividend payments. Dividends are paid only when declared by an issuer’s board of directors and the amount of any dividend may vary over time.
Please note that all investments are subject to market and other risk factors, which could result in loss of principal. Fixed income securities carry interest rate risk. As interest rates rise, bond prices usually fall, and vice versa.
WHEN “FLOAT” IS A BAD THING
What is “float”? Float refers to the earnings or “compensation” accruing to a service provider while a plan’s contribution remittance (or other assets held in suspense) is awaiting deposit or distribution.
With many service providers, a contribution received after 2 p.m. EST will not be deposited until the next day.
Any return on these remittances that are held overnight (i.e. if placed in an interest bearing account) is considered by the DOL to be “compensation” and therefore treated as such and should be disclosed as required by ERISA Section 408(b)(2). The plan sponsor, as per 408(b)(2), has a responsibility to determine whether total compensation inclusive of float is reasonable. Failure to do so may result in a prohibited transaction.
This may be a good time to inquire to your service provider as to this issue of float in order for this not to become a compliance issue down the road. The question to pose is as simple as “are there any opportunities for you, the service provider, to obtain what ERISA considers compensation for plan assets held in abeyance either for contributions pending allocation, which may be held in an interest bearing account, a forfeiture account, or a distribution check issued but not yet cashed?”
This ounce of prevention may be worth pounds of cure.
FREQUENTLY ASKED QUESTION:
In an increasingly connected world, employees are bombarded with communications from various sources every day. How do we make sure they don’t miss out on the all-important message about retirement planning?
||The key words here are “don’t miss out.” The average worker receives more than 100 emails every day, not to mention text messages, social media, news and the entire internet at his or her fingertips 24/7. Your ability to rise above the din may lie in a centuries-old concept with a new name: FOMO, or fear of missing out, according to a recent Deloitte study. Using FOMO in retirement plan communications enables you to deliver information to workers in the way they want to receive it. As such, your messages will garner closer attention and spur workers to take action.
Use four simple FOMO techniques to deliver retirement plan communications to workers in the right way, at the right time:
- Send fewer messages: Limiting the number of messages increases their perceived value. For example, send enrollment emails quarterly instead of monthly. If workers believe they might miss the opportunity rather than being constantly reminded of it, they are more likely to pay attention and take action.
- Mix things up: Try unconventional techniques such as video or written communications rather than defaulting to email to ignite attention, engagement and FOMO.
- Select senders strategically: A message from someone with a personal connection to the recipient will likely be more high-impact. Again, targeted messages distributed to peer or social groups also naturally arouse FOMO because they are more personal, interesting and valuable than a generic, company-wide communication.
- Create a feeling of exclusivity; choose your words carefully: Exclusivity creates heightened interest, along with increased engagement and reaction. Words like “elite” and “limited” grab attention and spark interest. Tailor the communication to be highly specific and relevant, then make it available to a select audience. The message becomes more attractive because the audience feels it is part of a “privileged” group.
Find out more at http://tinyurl.com/DeloitteFOMOstudy.
PLAN SPONSOR CALENDAR
- Begin preparing for the distribution of the plan’s Summary Annual Report to participants and beneficiaries by September 30, unless a Form 5500 extension of time to file applies (calendar-year plans).
- Submit employee census and payroll data to the plan’s recordkeeper for mid-year compliance testing (calendar-year plans).
- Confirm that participants who terminated employment between January 1 and June 30 elected a distribution option for their plan account balance and returned their election form. Contact those whose forms were not received.
No strategy assures a profit or protect against loss.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.
For Plan Sponsor use only – Not for use with Participants or the General Public.This information was developed as a general guide to educate plan sponsors, but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.
Montgomery Retirement Plan Advisors does not warrant and is not responsible for errors or omissions in the content of this newsletter.