The Participation and Deferral Rate ‘Gold Standards’
Funds, fees and fiduciary—the three “fs” might be cliché, but they’re also a key to successful participant outcomes in any 401k plan. Yet Barbara Delaney points to one other ingredient too often overlooked.
“What we look for, as far as the health of a plan, is not only good funds, but the right allocations,” Delaney, the high-profile principal with New York-based StoneStreet Renaissance, explains. “If people are not properly allocated and enrolled in the right amounts over time, having good funds is not going to rescue you.”
Employing blunt, no-nonsense language for which she is known, Delaney adds that, “It almost becomes academic. The outcome over time is dependent upon the asset allocation you stick with, and not what fund [products] you pick.”
For this reason, Delaney and her StoneStreet Renaissance team are “really tuned in” to ensuring a) participants are correctly allocated, and b) they participate at a rate that will provide replacement income of at least 80 percent.
“As a whole, we have participation rates near 100 percent, and that is our goal.”
Which, when one thinks about it, should be the goal of every 401k advisor, but the difficulty of getting plan sponsors and participants to engage in behavior that meaningfully moves the needle too often means many settle for far less.
But not Delaney.
“If we do it right with automatic enrollment, [participants] should not be opting out unless it’s for a specific reason,” she argues. “We have one client, in particular, who re-enrolls every year, even if they opt out, which is interesting.”
While auto-enrollment has of course been a boon for getting American workers to save (and in part responsible for Richard Thaler’s recent Nobel win), the controversy surrounding the 3 percent automatic deferral rate continues, something Delaney is dealing with directly.
“We’re focused on increasing the plans we work with to a 6 percent automatic deferral, rather than the standard 3 percent. As 401ks are maturing, we see people too often taking a step back. Sometimes they’ve increased their deferral rate above the default, only to then leave for another company where it goes back to 3 percent. So, the more companies that we can get to 6 percent, the better.”
We can’t help but wonder if it’s met with resistance from participants.
“No, the resistance we get is from sponsors who know that it’s now a budgetary item,” she counters. “We had to recently perform a cost analysis for a client on the increase from 3 percent to 6 percent because the increase could be as much as $300,000 or $400,000 annually on a 50 percent match up to six percent.”
So how, specifically, does she benchmark participant success to ensure positive outcomes? Through constantly analyzing the data.
“I can take the plan demographic reports from the recordkeepers and look at participation by age band, and asset level by age band, and replacement income ratios by age band.”
The results pretty much speak for themselves, and are an indication of Delaney’s (extremely) high standards. She points to one plan with 95 percent participation and an average contribution rate of 7.6 percent, before deadpanning, “Our goal is to get that up.”
“I’ll give you another example of a plan that allowed us to go back and re-enroll each year at a 6 percent default. Their stats are off the chart. I’m able to say that 67.47 percent of the employees who are eligible to participate are on track to replace 80 percent of their income. And that’s without taking any outside assets into account. The average deferral rate as of our last quarterly data (and it might be skewed a little bit down because they might have maxed out toward year-end) is 9.48 percent.”
Barbara Delaney is principal with Pearl River, New York-based StoneStreet Renaissance.