Breaking Bad Enrollment Behavior
“There’s a saying that software will eat the world. Well, private equity is eating business,” Aaron Pottichen says by way of a precursor to a great participant outcome anecdote.
“We engaged a client in 2015, and they’d just been bought by a private equity firm,” the senior vice president with Alliant Retirement Consulting explains. “They therefore had a little bit of pressure to hit certain EBITDA targets.”
A legacy 401k plan in place for many years proved a challenge. It was partially paid for through a revenue sharing agreement, which was unequally distributed with some participants paying a heavier share than others (which today would be a dream for many a tort lawyer).
“It was $25 million in plan assets at the time, with only around a 45 percent participation rate and 4.5 percent average deferral rate. Additionally, the employer had about $100,000-plus that they were paying per year in billed record keeping expenses as well.”
His first directive was to move the plan (obviously) off the costly and legally-treacherous legacy platform to one with a better user experience, as well as access to data and metrics the previous vendor could not provide.
“We are able to keep the participant expenses very closely aligned with what they were already paying, which was under 50 basis points, and eliminate the $100,000 per yeas direct bill to the employer.”
Here’s the ‘wow’ factor; it included Pottichen’s fee as a fiduciary advisor. Yes, they were able to add a fiduciary component—a service the previous plan did not provide—while lowering the overall plan expense.
“We were able to do it by showing the record keeper the existing asset level and annual flows, but then adding automatic enrollment and illustrating what the estimated flow going forward would be (which was double the flow at the time). We re-enrolled all of the employees in target-date funds, but not into the record keepers proprietary target date funds; we did not game the system that way. They were passive funds to keep the costs level, but they were all well-performing institutional shares.
“The previous match was 10 cents on the dollar, which “obviously cast a few people out. You had to defer $18,000 at a time in order to get the most amount of money from the employer,” he adds.
They performed an analysis and converted the match to 25 percent up to 6 percent, and it was raised again in the time since to 40 percent up to 6 percent.
“Looking back a year after the conversion, we were a little bit higher than a 90 percent participation rate. We started it at a 3 percent automatic deferral with an automatic escalation feature. The average referral rate now is closer to 5.6 percent. The employer also dropped their vesting schedule down to 100 percent immediately.”
The plan currently has $44 million in assets, and it goes to show that retirement plan participation (or lack thereof) isn’t necessarily about whether a worker can afford to enroll, since the firm’s average salary is between $75,000 and $80,000. In a nod to Thaler, Benartzi, et al., it’s squarely behavioral driven.
“I think education is great, but plan design trumps all.”
Aaron Pottichen is Senior Vice President with Alliant Retirement Consulting.