Tuesday, June 5, 2012

401(k) 3.0?

Mark Iwry (pronounced eevry) gave a speech at the 2012 PLANSPONSOR National Conference in Chicago. I wasn't there, so I am taking PLANSPONSOR's reporting on it as the gospel. Mr. Iwry apparently spoke on the topic of version 3.0 of 401(k) plans.

Before discussing Mr. Iwry's recommendations, I think it's appropriate to provide a little of his impressive resume for those who don't know. Currently, he is senior adviser to the secretary and deputy assistant secretary (retirement and health policy), U.S. Department of Treasury. If you were unable to work it out from the title, that means he is a policy adviser for the federal government. Previous to that, he has been a Principal with the Retirement Security Project, a Senior Fellow with the Brookings Institution, and Counsel with the Department of Treasury. The two roles previous to his current one were related as the Retirement Security Project appears to be a part of the Brookings Institution.

This c.v. would seem to establish that Mr. Iwry is an intelligent man. He has spent a career working in positions in the government and in think tanks that require significant intellect. But, note something that is missing in Mr. Iwry's resume -- he appears to have never been employed by a traditional corporate entity. None of his employers have been focused on profits.

According to the PLANSPONSOR summary, Mr. Iwry laid out five ideas as part of 401(k) version 3.0:

  1. Increase the use of automatic enrollment and do it at higher levels than 3% [presumably through automatic escalation]. Use automatic enrollment for existing employees as well as new ones.
  2. Stretch the match by doing something like providing a 33 cents on the dollar match on the first 10% of pay deferred instead of a more traditional 50 cents on the first 6%.
  3. Give lower-paid employees a higher rate of match.
  4. Decrease the eligibility waiting period, or at least decrease it for employee deferrals.
  5. Accept rollovers from other plans.
You see, there is a reason that I laid out Mr. Iwry's resume. While any of these ideas might improve the ability of our workforce, taken as a whole to retire, most have another side of the proverbial coin.

Automatic enrollment works really well in some cases. However, I have looked at a lot of 401(k) data. Two things have jumped out to my eyes with plans that use automatic enrollment:
  • New employees tend to defer at the automatic rate.
  • When automatic enrollment is forced on existing employees, a large number wind up decreasing their deferrals, because they simply do not read their communications from HR and they get-auto-enrolled at levels lower than those at which they were deferring.
Mr. Iwry's second idea may have a lot of merit. In fact, I blogged about it more than 18 months ago. In that post, I discussed a Principal survey based on their client base. It suggested that changing from a match of dollar for dollar on the first 2% deferred to a match of 25 cents on the dollar for the first 8% deferred tended to cost the employer less, but left employees better prepared for retirement. I would love to see similar data prepared by other 401(k) recordkeepers to see if it holds true across a broader universe. 

The third idea is nice. Theoretically, it's nice. Many companies would tell you, however, that it does not make business sense to do this. In fact, I called a corporate Vice President of Human Resources while I was working on this post. He told me, under promise of anonymity, that this is a nice idea, but makes no practical sense. He went on that that there are two ways to accomplish this -- either increase the match for lower-paid employees which cost more money, or cut the match for high-paid employees which hurts morale among the producers.

In my experience, many companies that have a waiting period for a particular benefit do it for one of three reasons:
  • It's expensive to set up a record for someone who may not be around for long.
  • It's a waste of money to provide a benefit to someone who may not be around for long (yes, I know that they can put a vesting schedule on a match).
  • They have so many new employees who don't last long that the increased level of paperwork would overburden HR.
Accepting rollover contributions seems to be a no-brainer. For plans of any meaningful size, the only reason not to do it is the additional fees that a plan might be paying on the additional asset base. But, there is an answer to this. Negotiate up front that this won't cost extra money. If you can't negotiate it out, decide if you can live with the extra cost.

However, 401(k) 3.0? These are not a bunch of revolutionary ideas. There is nothing in here about investments. There is nothing in here about lifetime income options. It just doesn't seem that new.

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