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The Critical Role of Advisors in Promulgating the 'Ideal' 401(k) Plan

The Critical Role of Advisors in Promulgating the 'Ideal' 401(k) Plan

And why plan sponsors are still resisting.

There is no questioning the efficacy of the 'ideal plan' to accelerate accumulation of assets in defined contribution plans.

As detailed in a previous column, the 'ideal plan' includes:

  • Autoenrollment and re-enrollment;
  • Deferral at 5-7%;
  • Auto escalation of 1-2% annually up to 10-12% at the time when workers get a raise;
  • Stretching the match from, for example, 50% of 6% to 25% of 12%; and
  • Target date or managed accounts as the QDIA.

Though it does not affect current plans, SECURE 2.0 will mandate new plans use auto enrollment. And though it can create issues with engagement needed for the decumulation phase, it does, at least, solve half the problem.

Some pundits suggest that, in combination with target funds, the auto plan features actually diminish the role of advisors. However, with a vast majority of RPA-sold DC plans still not incorporating all the features, some for good reason, I believe the advisor's role is more critical than ever.

It’s worth revisiting these objections so we can better understand and overcome them.

  • Without 360° payroll integration, not only can work increase, it can lead to costly errors like forgetting to enroll an employee – most record keepers will work with the payroll provider to help;
  • If there is high turnover, like in retail, auto enrolling immediately can create lots of low account balances and more work. The solution might be to wait six months or more;
  • If there is a match, the cost can rise with autoenrollment. Best to put cost in numbers, not percentage which most do not understand. If the cost is still too high, lower the match slightly depending on whether including more workers in the plan is a priority; and
  • Stretching the match can result in less for some participants if they do not increase contributions. Participants can increase their deferrals, assuming it is within legal limits, to get the full match.

DC plans have moved from being a tactical benefit where costs are paramount to a strategic benefit deployed to improve recruiting and retention. Plus, DC plan sponsors have a herd mentality – they do not want to be so far ahead of the pack, like offering cryptocurrency or hedge funds, but neither do they want to be laggards. Industry averages are interesting but not entirely relevant. It’s best to look at the five-to-ten employers that the plan sponsor either loses employees to or takes workers from.

Advisors play a critical role in helping their front-line administrators to sell the 'ideal plan' features, usually one at a time, to senior management putting together a presentation that highlights how the plan compares to competitors understanding the needs and potential objections of decision makers.

We are all in sales. Some of us, like RPAs, recognize this reality more clearly. Helping HR and financial professionals sell the 'ideal plan' to senior management not only helps the organization, their workers and administrators, it elevates the status of the advisor and eviscerates the argument that their role is diminished by auto features.

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