The concept of the “ideal plan” for accelerating asset accumulation in defined contribution (DC) plans has been a topic of much discussion, and for good reason. The ideal plan encompasses several vital features, including auto-enrollment and re-enrollment, initial deferral rates of 5-7%, automatic escalation of 1-2% annually up to 10-12%, stretching the match (for example, from 50% of 6% to 25% of 12%), and utilizing target date or managed accounts as the Qualified Default Investment Alternative (QDIA).
The effectiveness of such a plan, offering a structured path toward financial security for employees, is undeniable. With the introduction of SECURE 2.0, new plans will be required to use auto-enrollment, ensuring that at least part of the ideal plan’s strategy is implemented across the board. It is a significant step towards solving the accumulation phase of retirement planning, though it presents new challenges in engagement for the decumulation phase.
However, some industry experts argue that the auto features of these plans might reduce the necessity for financial advisors. Yet, considering that many Retirement Plan Advisors (RPAs)-sold DC plans have yet to incorporate all these features, often for valid reasons, the role of advisors remains more crucial than ever.
To understand the full scope of the ideal plan and how it can be effectively implemented, let’s delve into some common objections and their solutions:
- Integration with Payroll Systems: Without 360° payroll integration, the administrative workload can increase, leading to costly errors such as forgetting to enroll an employee. Collaboration between record keepers and payroll providers is essential to mitigate these issues.
- High Employee Turnover: Industries with high turnover rates may find immediate auto-enrollment leads to numerous low account balances and additional administrative work. A potential solution is to delay enrollment for a period, such as six months, to ensure that only committed employees are enrolled.
- Cost of Autoenrollment: Implementing autoenrollment can increase costs due to matching contributions. It’s vital to communicate the cost implications in absolute numbers rather than percentages, which can be confusing. Adjusting the match slightly can help manage costs while still promoting employee participation.
- Stretching the Match: This strategy can lead to some participants receiving less if they do not increase their contributions. Encouraging participants to adjust their deferrals within legal limits can ensure they receive the entire match.
The evolution of DC plans from a tactical to a strategic employee benefit highlights their importance in recruitment and retention strategies. However, plan sponsors follow industry trends closely, avoiding being too innovative or conservative. Understanding the competitive landscape, particularly the benefits offered by direct competitors, is crucial in positioning a DC plan effectively.
Advisors play a pivotal role in navigating these complexities. They assist HR and financial professionals in advocating to senior management for the ideal plan’s features. By crafting presentations that compare the plan’s features with those of competitors and addressing potential objections, advisors can demonstrate the value of adopting these strategies.
Selling the ideal plan requires understanding the needs and concerns of decision-makers and presenting compelling arguments for why these features benefit the organization, its employees, and its overall competitive position. Recognizing the sales aspect of this process is crucial, especially for RPAs, who are often more attuned to the realities of the marketplace.
In conclusion, while introducing auto features in DC plans presents challenges, it also offers a significant opportunity to improve employees’ financial well-being. Advisors are central to this process, providing the expertise and guidance necessary to implement these features effectively. By addressing common objections and demonstrating the competitive advantage of the ideal plan, advisors can ensure that organizations not only meet the needs of their employees but also enhance their market position.
