Plan design optimization — the creation of retirement plans that aim for the best in participant outcomes — are swiftly becoming a staple of the adviser-sold-401(k) market.
Indeed, as employers become aware of participants' lack of preparedness in saving for retirement, they're zeroing in on ways to increase what workers walk away with when they retire. Toward that, more employers are demanding 401(k)s that make it easier to for them to automatically enroll workers and provide matching contributions.
“In the 403(b) space, plan sponsors have been slower to adapt these mechanisms, but there's a faster uptake in the 401(k) space, and that's for all plan sizes,” said Earle W. Allen, vice president of retirement at Cammack LaRhette, a consulting firm.
“Advisers are speaking more to those entities to get them to move along [with plan optimization] and get them educated,” he added.
The adviser-sold market, which largely includes plans with $50 million in assets and less, has faced its own unique hurdles when it's come to incorporating plan optimization methods.
Cost is a major factor. Small plans don't have the benefit of economies of scale, so they tend to have higher overall expenses than their large-plan counterparts. This also makes them more sensitive to adding services that could ratchet up expenses, such as auto-enrollment and matching contributions.
“Employers want to get more people in the plan, but they're concerned that if they do auto-enrollment, then the cost from the match will go up considerably,” said George Fraser, managing director at Retirement Benefits Group LLC.
Financial advisers working in those markets have softened the blow by meeting plan sponsors in the middle. One example: advising employers to require workers to contribute at a higher rate for them to qualify for the match.
Typically, plans match 50% of workers' deferrals, up to 6% of pay. But advisers can encourage employers to require deferrals of 10% or 12% in order to qualify for the match, Mr. Allen observed.
Harry Dalessio, leader of Prudential Retirement's strategic-relationships group, says that for smaller plans, the default contribution rates for auto-enrollment tend to hover around the standard rate of 3%. “I think if we were to start from scratch all over again,” he noted, “you would want people saving 10% or greater, given the importance of deferring early.”
Prudential, a major player in the 401(k) market, has been pushing to get advisers who already have adopted that 3% rate to consider raising their default rate or embrace automatic escalation.
Mr. Fraser noted that it's sometimes easier with clients who are put off by the costs of auto-enrollment to get them to add clients at an automatic deferral rate of 1% and then ratchet up the contribution by a percentage point each year. Matches can then be set once workers are contributing 4% to 7% of salary.
Also, at a starting rate of 1%, workers view their own contribution as manageable — “a rounding error,” as Mr. Fraser puts it. At the same time, they qualify for the retirement saver's contributions tax credit of up to $1,000 for single filers who earn up to $29,500 in 2013 and $2,000 for joint filers earning $59,000.
“Most people stick once they get into the plan,” Mr. Fraser said. “You can still get to that [matching-contribution level] over time, and you'll start seeing more people save.”
Retirement income is also becoming a major part of advisers' discussions with retirement plan clients, particularly as legislators and regulators draft proposals that would give participants a view of how their savings would translate into a stream of income.
The Lifetime Income Disclosure Act was introduced this month in the Senate and the House, securing bipartisan support. Meanwhile, the Labor Department is seeking comments on a draft proposal that would also call for the depiction of workers' savings as monthly income.
That discussion is heating up in the adviser-sold-401(k) market.
“For the last 20 to 25 years, the [defined-contribution] industry focused on accumulation, but now there's more discussion on how to take that savings and convert it to lifetime income,” Mr. Dalessio said. “How do you ensure they have the income they need to live?”
On the ground, that conversation is requiring more education from advisers. Mr. Fraser noted that his firm has on-site education at the workplace focusing solely on receiving income in retirement, as well as webinars on the subject. Social Security and the role it will play when workers take stock of their income stream is also becoming a focal point.
“The other piece around plan design is that it's part of our job to talk to people about when they should take Social Security,” Mr. Fraser said. “The difference between starting at age 62 and age 70 is huge.”
