When I am meeting with plan sponsors to review the specifics of their defined contribution retirement plans, I am routinely asked about how they compare to other plans.
Notwithstanding the variety of sizes of plans, its not necessarily a bad question to ask. Section 404 of ERISA generally defines prudence as acting in accordance with how a reasonable person in like circumstances would act. However, decisions on how to structure a plan are settlor functions, not necessarily fiduciary functions so what is reasonable in the fiduciary sense may not apply in the framework of a settlor function. But since settlors should still act reasonably in discharging their roles, it does not hurt to consider what others might be doing.
I was surprised by the amount of data and surveys available from a variety of sources on the issue of defined contribution plans. I was also surprised by the variety of results of these surveys, which certainly suggests that sample size and respondent selection has a lot to do with formulating conclusions.
The statistics I cite are a good faith effort to aggregate the various responses I considered and should by no means be taken as absolute fact, only an effort to summarize my complied data relating to plans generally.
That said, it seems that somewhere around 94% of private employers report that they offer some form of a defined contribution plan. Of those private employers, offering plans, the average eligibility appears to be about 88% of their full-time employee population with about 65% active participation of eligible employees.
Of the companies that sponsor defined contribution plans, about 90% offer more than 10 investment options to employees, and 56% offer more than 15 choices. For their part, employees selected target date (or life cycle fund) most frequently (almost 70% of the time), with domestic equities a close second (67%). Around 56% of employers offer automatic enrollment of some form and around 92% of employers with plans had employer matching of some kind.
When deciding on investment options to provide, sponsors report that their top three considerations are fees (74%), historical and expected returns (63%) and diversification of plan options (52%). Fifty-six percent of companies provide some form of investment advice to employees and of those that do, 65% report that they provide this counseling through someone independent of the plans investment manager.
Seventy-nine percent reported that they have concerns about the lack of employee participation and the three most common ways they try to improve participation is through simplifying the enrollment process, including life cycle funds into the plan as an investment option and providing participant education.
So there may not really be an average defined contribution plan, but there are certain consistencies that seem to make up a typical defined contribution plan, and certain typical considerations that plan sponsors consider when forming and administering their plans.
There is not one right answer to what a plan should look like, but when considering how to administer your plan, there is no harm in asking around to see what others might consider reasonable.
Keith R. McMurdy is a partner with Fox Rothschild focusing on labor and employment issues; he can be reached at email@example.com or (212) 878-7919.
The information in this legal alert is for educational purposes only and should not be taken as specific legal advice.
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