(Not-So) ‘Common’ — Wisdom

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—and at least anecdotal evidence to support it. Human beings—including 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.

Sure enough, there are areas in which larger programs once dominated—but over time those variances have disappeared. For example, according to the Plan Sponsor Council of America’s 66^th Annual Survey of Profit-Sharing and 401(k) plans, there is now essentially no difference in the availability of Roth options (more than 90% across the board do), and no longer any difference in permitting catch-up contributions (also about 90% for both the largest and smallest plans)—and just about the same percentage of workers took advantage of this feature. Nearly all plans of all sizes accept rollovers from other plans—while just under half of plans of all sizes encourage roll-ins. And while it’s hardly common, in-plan annuity options are to be found at about 1 in 10 plans, regardless of size.

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

On the other hand, consider that—and this has long been the case—that the smallest employers (those with less than 50 employees) were significantly less likely to offer automatic enrollment than the largest programs—those with 5,000 or more workers (28.9% versus 71.8%), according to the Plan Sponsor Council of America’s 66^th Annual Survey of Profit-Sharing and 401(k) plans.[i] 

There’s also a big gap in opening the door to participation; more than three-quarters (77.9%) of those larger employers now offer immediate eligibility, versus just 30.4% of smaller employers, and 37% of those with 50-199 workers. Indeed, the most common for smaller employers remains a year. Similarly, to receive matching contributions, two-thirds (62.2%) of the largest plans allow them immediately, while just 28% of smaller employers do—and 45.7% overall. Therein lies some of the danger in relying solely on the aggregate responses in discerning trends—like averages in any assessment, they can obscure considerable variances in the underlying responses.

Note that the largest plans were also significantly more likely (93.1%) to report having an investment policy statement (IPS) than were the smallest plans (though more than two-thirds of those did). There’s some irony to be found in the reality that while just over a third of the smallest employers have 26 or more fund options available on the menu, only half as many (17.1%) of the largest have that many (roughly a third have 11-15). Smaller plans were also notably less likely to review those options; only half did so on a quarterly basis, compared to 81% of the largest programs.

Advisor Attributes

There were also differences in advisor compensation; the vast majority (81.1%) of the largest programs are using a fixed fee, while only about a quarter of the smallest are (60% of those are using a percentage of assets basis). Robo-advisors were much more typical (28%) at the largest plans than the smaller programs (7.8%). The smallest plans were notably more reliant on advisors[ii] for retirement committee plan education (75.9%), while the largest plans were more likely to lean on an ERISA attorney (68%) than an advisor (37%). 

The largest plans were notably more likely (6.4%) to be considering a change to provider or advisor in 2024 than the smallest (2.7%). On the other hand, 6% seemed to be a pretty solid response across the board.

Having worked for huge firms—and considerably smaller ones—I can 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). That said, resources and priorities differ and often diverge. Those who target specific niches—be they industry, geographic or plan size—are well advised to be alert to the potential divergence from the “common wisdom” of industry trends.

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

- Nevin E. Adams, JD 

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[i] Though that’s likely at least partially attributable to the preponderance of safe-harbor plan designs—73.5% of smaller employers were safe harbor plans, compared with 36.7% of larger employers.

[ii] This actually was the case for all plan sizes other than 5.000+, with somewhere between three-quarters and two-thirds of responding employers noting that the advisor provided that education.

[iii] Of course, to see those plan size breakdowns, you need the full report—details on how to obtain it can be found at https://www.psca.org/research/401k/66thAR