Saturday, April 17, 2010

“Different” Strokes

Having been born in the Midwest, lived a quarter of my life in the South, and now another sixth in the Northeast, I can tell you—people are different. However, having worked for huge firms and considerably smaller ones, I can also tell you that, when people come together in groups, they are not as different as you might think (or hope, as the case may be).

There is a “common wisdom” in our business that suggests that all plan sponsors are, more or less, alike; that large plans are the inevitable early adopters of trends that, sooner or later, trickle down to plans of all sizes. Consequently, those who make their living trying to discern trends and patterns frequently focus on the behaviors in evidence at larger programs—figuring that, in three years or so, those same characteristics will emerge across the spectrum.

There’s some logic to that perspective, IMHO. Plan fiduciaries frequently draw comfort and solace from the experience of others, and smaller programs can hardly be faulted for adopting plan designs and approaches that have been “vetted” by programs with more copious resources. Moreover, providers frequently introduce innovations with price tags that initially discourage smaller-program adoption (at least until later iterations are included as part of the “package”).

That said, I have always found it dangerously simplistic to assume that small plans will, inevitably, follow along eventually in the footsteps of their larger cousins.

"Less" Likely

Consider that smaller programs—let’s use $5 million in assets and less (though some would carve even that in half)—are significantly less likely to have adopted automatic enrollment than those with more than $200 million; in PLANSPONSOR’s DC survey, only about one in five small plans had done so, compared with more than half of larger plans. Now, a goodly number of those smaller plans already had safe harbor designs in place, so had no “need” of automatic enrollment. In fact, one could argue that the safe harbor design is a kind of automatic enrollment. Smaller programs were also much less likely to have a contribution acceleration design in place (just 8.7% compared with about a third of larger programs).

PLANSPONSOR’s Annual DC Survey, which captures the perspectives of some 6,000 plans, found that smaller programs were more likely to make participants wait to vest in employer contributions, and only half as likely to have embraced immediate vesting—differences that admittedly might be predicated on economic considerations.

Only about half of smaller programs had an investment policy statement (IPS) in place, compared with nearly nine of 10 among larger programs. Perhaps not surprisingly, smaller plans reviewed their plan investments much less frequently (49% said annually, the most common response, while more than half of larger plans did so quarterly). They were also less likely to review fees regularly—and much more likely to “never” review them (one in 10).

Consider also that smaller programs were less likely to have adopted a target-date (TDF) solution as a default (28.6% versus roughly two-thirds among larger plans); though, even among smaller programs, target-dates were the predominant default fund choice. They were, however, more likely to be unsure that TDFs were the “best” QDIA option (44%), and more likely to doubt that their recordkeeper was offering the “most appropriate” TDF option.

"More" So

Investment performance was significantly more important to smaller plans, and fee transparency was also noticeably, if modestly, so. Things like financial strength, market image/reputation, and recognizable “brand name” funds stood out in their ranking of preferred provider attributes. However, when it came to things like participant service, reasonable fees, and provider Web site, there was no apparent difference at all.

Smaller programs were more likely to offer advice, and MUCH more likely to offer advice via an adviser outside the plan. Smaller plan sponsors were significantly more focused on the quality of advice to plan participants than larger programs, more worried about the reasonableness of fees, and placed less emphasis on adviser independence but greater emphasis on the ability to negotiate on behalf of the plan than did larger programs.

Of course, the service criteria are expressed in relative, not absolute, terms. That certain aspects were more important to smaller plans does not mean that others were unimportant. However, for those who work with and/or focus on smaller programs, those differences can be significant.

After all, we may all be alike—but that doesn’t mean we’re all the same.

—Nevin E. Adams, JD

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