The Situation

In addition, the Plan Sponsor’s existing advisor would not act as a fiduciary to the plan or its participants. Participation rates hovered in the mid-50% range with average savings rates below 4%. The 401(k) plan incumbent was a bundled provider (service provider with proprietary investments) responsible for driving participant outcomes through communication and education.

The Approach

In every instance, the goal of participant level communication should be squarely focused on driving an on-going behavior (e.g. participating, saving enough, diversifying, rebalancing, etc.). To this point, evidence from academic studies and our own personal experience show that traditional investment “education” is ineffective (i.e. “What is a stock?” “What is a bond?”). A more effective approach to driving desired outcomes includes changing plan design and personalized investment advice. 

We recommended the Plan Sponsor add auto enrollment, auto escalation with a change to the matching formula. Auto Enrollment uses inertia in a positive manner by automatically enrolling participants in the plan at a predetermined percentage of their pay. In this case we automatically enrolled participants at 6%. In addition to auto enrollment, we added auto escalation where their deferral percentage increased 1% per year from 6% to a predetermined ceiling of 10%. Lastly, we changed the matching formula by extending the match formula to a higher percentage (from 6% to 9%). Moving the match formula to a higher percentage forces participants to contribute more to receive the employer match.

Lastly, we conducted a Request for Proposal, held final meetings, and selected a new service provider. We included an open investment architecture with risk based model portfolios and held one-on-one participant level consultations.

The Result

Participation rates jumped from mid-50% range to over 90%. Savings rates increased from below 4% to over 5% and will continue to climb as auto escalation continues to drive savings rates upward. The total retirement plan fee dropped by 43% with the investment and service provider change.