|DC PLAN “EASE OF USE” DRIVES HIGHER SAVINGS RATES, EMPLOYEE ENGAGEMENT
Today’s workforce relies primarily on defined contribution plans to help them save for retirement. However, industry consensus is that there’s no panacea for plan engagement. That’s why it’s vital that workplace retirement plans are accessible and their features as easy to use as possible.
Plan sponsors are taking notice, and this emphasis on “ease of use” is paying off, according to Deloitte’s 15th “Annual Defined Contribution Benchmarking Survey.” Employee contribution rates and account balances are up thanks to features like auto-enrollment, step-up contributions and smartphone/tablet apps, as well as less-stringent service requirements for plan entry and immediate matching contributions. Combined with a stable, growing economy and steady job market, these enhancements have fueled positive developments in DC plan engagement.
Effective plans, engaged employees
Conducted with the International Foundation of Employee Benefit Plans (IFEBP) and the International Society of Certified Employee Benefit Specialists (ISCEBS), Deloitte’s 2015 survey found that average employee participation rates remained high at 75%, in line with the 77% reported in 2013-14. A majority of plan sponsors, 60%, ranked “high level of participation” as the top indicator of plan effectiveness, compared to 51% in 2013–14.
Participants’ saving habits reflected improved plan engagement, too. The average account balance grew nearly 4% to $99,011 in 2015 from $95,227 in 2013-14. Contribution rates rose, with the median actual deferral percentage for non-highly compensated employees increasing to 5.9% from 5.2%.
Employer match still powerful
Employees gave varied reasons for plan participation, and the survey sought to identify the most prevalent. In 2015, the personal desire to save for retirement was No. 1 at 40% (up slightly from 39%), beating last year’s leader—receiving the maximum company match—at 35% (down from 43%).
Nonetheless, sponsors recognize the match is still powerful. According to the survey, 94% of plan sponsors offer a matching or profit-sharing contribution, with 6% increasing the match. This is consistent with the last three years’ findings. Notably, for the first time since 2009, 100% of plan sponsors with discretionary matching reported making matching contributions.
Employers use a variety of strategies
However, the results show there’s no universal solution to foster plan engagement. In response, plan sponsors are implementing strategies focused on plan mechanics and offerings:
- Seventy percent responded that auto-enrollment had a positive impact on deferrals (up from 56% in 2013-14), participation (88% vs. 79%), and participant awareness (64% vs. 57%).
- Sixty-two percent of plans offered step-up contributions, a significant increase from 46% in 2013-14.
- Sixty-six percent indicated no service requirements for plan entry compared to 62% in the last survey.
- Seventy-one percent offered an immediate match (up from 62% in 2013-14), and 43% offered full vesting in the match (up from 32%).
Deloitte’s 2015 Benchmarking Survey is available online at http://tinyurl.com/DeloitteDCBenchmarking2015.
© 2016 Kmotion, Inc.
RATE HIKE EXPECTATIONS
In addition to the presidential election, the Fed meeting in December will likely be a main driver of fixed income markets in the fourth quarter. During the third quarter, fixed income markets increasingly priced in a rate hike in December [Figure 1]. The difference between fed funds futures contract rates and the current fed funds rate can indicate how much Fed action markets are expecting.
Currently, the implied rate differential between the December 2016 contract and the current fed funds rate suggests markets are pricing in a 0.23% increase in the next three months. At this same time last year, markets were pricing in a 0.20% increase in the subsequent three months. Additionally, the trend in 2015 had been downward, indicating that investors had been incrementally discounting a December rate hike during the third quarter. In the third quarter of 2016, by contrast, investors have been gradually increasing their expectations of a December hike.
Because a market on guard for a rate hike is much less likely to be shocked by one, we believe this adds to the case that although rates may rise in response to a December rate hike, they may not rise violently, as witnessed in the taper tantrum of 2013.
Election-related volatility, further weakness in European banks, or other unforeseen events may throw a wrench in the Fed’s presumed plan to hike rates this year. Although our base case remains that the Fed will hike rates in December 2016, it is important to remember that this is not set in stone, and the Fed has held off previously in response to market-destabilizing factors. The Fed did so in response to equity market weakness following China’s currency devaluation in its September 2015 meeting and Brexit-related concerns in its September 2016 meeting.
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. All performance reference is historical and is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly.
The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
This research material has been prepared by LPL Financial LLC.
THE IMPORTANCE OF QUALITATIVE REVIEW
he qualitative review of the investment options helps support the quantitative analysis within the Scorecard System™ by providing color and insight into the portfolio and the investment performance. The qualitative review process is structured in its approach and designed to identify the factors that will ultimately drive future investment performance. The three primary factors include: People, Process and Philosophy. The baseline criteria are set for each:
Is there an experienced team with the ability to manage both philosophy and process? You must weigh factors such as changes within the firm’s leadership and organization as well as the experience and ability of a portfolio manager.
Is the process clearly defined and consistently applied? Is the process sound and established? The implementation of a strategy may be just as, if not more important than, the ideas and research supporting it.
The research and ideas must be coherent and persuasive with a strong rationale supporting past results and future performance expectations.
NEWS FROM MRPA
Michael Montgomery, Managing Principal of MRPA, was recently named to the 2016 Financial Times Top 401 Retirement Plan Advisors list.* This recognition is awarded to financial advisors advising at least $50 million in defined contribution (DC) plan assets where DC plans represent at least 20% of total AUM. Graded on several criteria, including growth in DC plans and assets, plan participation rates, experience and industry certifications, and compliance record.
*The Financial Times Top 401 Retirement Plan Advisors is an independent listing produced by the Financial Times (September, 2016). The FT 401 is based on data gathered from financial advisors, firms, regulatory disclosures, and the FT’s research. The listing reflects each advisor’s performance in eight primary areas, including: DC plan assets under management; DC plan assets as a percentage of overall Assets Under Management; growth in DC plan Assets Under Management; growth in DC plans advised; DC plan employee participation; professional designations; experience; and compliance record. Neither the brokerages nor the advisors pay a fee to The Financial Times in exchange for inclusion in the FT 401.
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.