403(b) plan designs incorporating more best practices
More organizations that offer 403(b)s are working with advisors, a Plan Sponsor Council of America survey finds.
Organizations that provide 403(b) plans for their workers are adjusting plan designs to rely more on automatic features to help improve participant outcomes.
That’s according to the PSCA 403(b) Retirement Plan Survey from the Plan Sponsor Council of America, sponsored by Principal Financial Group. The survey finds that more organizations are working with advisors, too, and that could be responsible for some of the changes.
“The PSCA survey suggests a correlation between an increased presence of advisors among 403(b) plans, and higher adoption rates of positive plan design features such as auto enrollment,” Aaron Friedman, nonprofit national practice leader, Principal, says in a statement. “The progress is very encouraging, but more work needs to be done.”
The nonprofit sector accounts for at least 1 of every 10 jobs in more than half of states, so these changes, according to the survey, can spur significant improvement to retirement security in the U.S.
Over the last four years here’s what’s happened with 403(b)s:
1. The number of sponsors relying on advisors who act as plan fiduciaries has risen by 40 percent.
2. Participation levels are either consistent with or up from, 2016 levels, with 79.2 percent of eligible employees having an account balance.
3. 71.9 percent of employees are contributing at an average deferral rate of 6.3 percent of pay.
4. Average account balances rose to $76,331.
When it comes to auto features, the survey shows that automatic enrollment increased by 45 percent from 2008, and is now used by nearly a quarter of plans (23.9 percent).
More than a third are using a default contribution rate higher than 3 percent—up 76 percent in only two years—and 56.6 percent of organizations offering auto-enrollment provide auto-escalation as well. That’s up from 43 percent in 2015.
Sponsors are also adding investment policy statements, with nearly 60 percent of plans having one; that’s up from 46 percent in 2008.
And on the flip side, they’re cutting back on investment choices, offering an average of 25 investments—down from a high of 31 in 2013.
And they’re also offering Roth contributions. In fact, the number of employers overall making Roth contributions available to employees is up 169 percent from 2010, when it was a scant 13.9 percent; in 2018 it stands at 37.4 percent.
Of plans with more than 200 participants, 47 percent now offer Roth, and participants taking advantage also rose, with 12.5 percent making Roth deferrals in 2017.
Other changes include the addition of managed accounts, with 30.2 percent of respondents now offering one. More than a third of participants use them when they’re offered.
While that’s progress, the study points out that there’s still plenty of work to do in improving plans so that employees do better at preparing for retirement. Three quarters of 403(b) plans, it says, still have no auto-enrollment features, and nearly 44 percent of nonprofits are still going it alone without an advisor and dealing with complex issues.
According to the study, this year’s findings indicate three trends to monitor:
- the fluctuation of investment options available to employees
- increasing access to Roth plans
- reevaluation of employer contribution formulas
“To keep improving participant outcomes, plan sponsors need to continue the improvements that are reported in the survey,” Friedman says in a statement, adding, “Setting up the plan for success is imperative—as it encourages participants to start saving early and to increase their deferral percentage as their salary grows over time.”
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