Been There, Done That. Now What?

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Plan design is a very important component to allowing you plan to attract and retain top talent. This talent will be crucial in small to mid sized companies to remain competitive.

Paying Now or Paying LaterWhat we said: As with self-directed brokerage accounts, the Roth conversion window (and its affiliated tax acceleration) seems most likely to appeal to the highly compensated minority. The impetus for the conversion itself is not only the timing window, but also the (still) looming sunset of the Bush Administration’s tax cuts. Of course, the real issue may be a shift in assumptions about taxes; what if they won’t be dependably lower in retirement?

Where we are: Perhaps the most surprising trend to emerge from this year’s PLANSPONSOR Defined Contribution Survey was a huge increase in the offering of Roth 401(k)s, an option that “plan sponsors have long been reluctant to push since their pay-it-now concept on taxes seems at odds with the traditional tax-deferral mantra, and their benefits are often seen as skewed toward more highly compensated workers.” This year’s survey found that 38.2% of all plans now offer the option, compared with just 20.2% a year ago, and that increase was broad-based across market segments. Of course, just try finding someone today (who is not running for political office) who is expecting taxes to be lower in the future.

What’s ahead: As with self-directed brokerage accounts, the Roth conversion window (and its affiliated tax acceleration) seems most likely to appeal to the highly compensated minority. Many more plans are now offering the choice, but it remains to be seen if participants will respond in kind. I would guess not that many in the short term—but that, of course, could change.

Plan design is critical to many small businesses to realize a true employee benefit. One which will attract and retain talented employees.

Please comment or call to discuss how this could affect you and your company.

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Points of plan design differentiation emerge in PLANSPONOR’s Annual DC Survey

Regulatory changes due in 2012 will help plan participants see how much their 401(k) is costing them. This new clarity of fees will force plan sponsors to take an overall examine of their company plan.

Market segmentation
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In this, the year before a new series of fee disclosure regulations take hold, plan sponsors’ sense of fees paid by their plans was all over the board. About a quarter of mega plans (those with more than $1 billion in plan assets) said that the “approximate average expense ratio” of all the investment options in their plan was less than 25 basis points (0.25%), a sentiment expressed by nearly one in eight overall. Nearly half of those mega plans said the overall fee was between 25 and 50 basis points, but 8.2% in this market segment said they “didn’t know.” Indeed, the “don’t know” group was a significant group across market segments; one in 10 in the mid-size (plans with between $50 million and $200 million in plan assets) and large (between $200 million and $1 billion) categories admitted that, as did more than 18% in the small-plan (between $5 million and $50 million in plan assets) category, and a full third of those in the micro-plan segment (plans with less than $5 million in plan assets).

That said, more than two-thirds (70.4%) of plan sponsor respondents said they review plan fees annually, and the larger the plan, the more likely they were to do so. However, 6%—mostly among those in the micro-plan segment—admitted they “never” formally review actual administrative costs/fees. In a new question in this year’s survey, we asked who was paying those administrative/recordkeeping costs—and, perhaps somewhat surprisingly, a clear plurality (34.6%) said the employer did, and did so exclusively, a finding that included nearly half of micro plans, 29% of small plans, and 15% of plans in the larger segments. On the other hand, larger plans were significantly more likely to say that participants were carrying the costs through revenue-sharing arrangements. In fact, more than a third of mid-size and large plans did so, as did more than a quarter of those in the mega market.

Regulatory changes coming in 2012 will change the landscape for 401(k)s.

Please comment or call to learn how this will affect you.

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