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Plan Design-ing the Perfect Participant

March 03, 2020

When I first started working with company retirement plans a little over 15 years ago the prevailing approach from most business owners/committee members was a very hands off one. The thinking was that it was their job to put together strong investment options for an employee to choose from but everything after that was up to each and every employee.

Are you going to participate? Your call. How much will you contribute? You tell us. Which investments are you going to choose? Here's a stack of prospectuses, have at it!

If the plan had an engaged and proactive adviser working with it then there was someone to step in and help answer those questions, and many others, but it still required an action step from each employee individually to call, email or set up a meeting with that adviser.

A couple of years into my career the Pension Protection Act (PPA) came along and introduced the idea that maybe the hands off approach traditionally taken by most companies might not be the best possible course of action (or inaction). Among the many things that the PPA did was to introduce the idea of the "Automated" retirement plan, and therefore the notion of the automated plan participant as well.

Want to participate? Well you will, unless you tell us otherwise. How much will you contribute? However much you want but you'll start at __% if we don't hear back from you. Which investments are you going to use? Any one(s) that you want, but we're going to default you into the XYZ fund until you change that

Fast forward almost a decade and a half and what was the impact of this change of course from hands off to automation? The employees who are in the age ranges most directly affected by the change in philosophy (20's and 30's) were more "retirement ready" than their older counterparts (State of the Participant 2020: Readiness Within Reach). More than sixty percent of employees in those age brackets were on track to be able to replace at least 70% of their pre-retirement earnings.  That percentage fell to 53% for employees in their 40's, only 34% for those in the 50's and fell again all the way down to 20% for participants in their 60's.   

In addition to those stats many people assumed that there had to be a tipping point where the plan design could get too aggressive and eventually push participants away. The stats say otherwise. In the beginning the most common default contribution amount most companies adopted was 3% and with that about 12% of employees still chose to opt out. Contradictory to what everyone assumed, plan's that had a default starting point of 7% only saw a 4.6% opt out rate.

TL;DR:  The generation of employees who have come into retirement plans in the age of the "automated revolution" are, whether they know it or not, on track to be in a better position than their older colleagues. If a company wants to they can use the plan design options to create the "perfect participant".

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of the author and not necessarily those of Raymond James.