DC plan execs warned of unintended consequences of design changes


Defined Contribution

To avoid unintended consequences of design changes, defined contribution plan executives must review plan objectives, test plan changes, and conduct plan and participant analyses.

That’s the conclusion of a report by BlackRock (BLK) posted Nov. 12 on the company website.

“The most well-intentioned and carefully considered plan design decisions may have unexpected results and even successful implementations occasionally reveal the limits of some baseline assumptions,” said the report, written by Dagmar Nikles, managing director and head of defined contribution plan strategy and Mike Arak, vice president of plan strategy.

One unintended consequences is setting auto-enrollment and auto-escalation features too low, which can “undermine the power of these plan design features and ironically prevent some participants from saving more,” the report said.

BlackRock recommends raising the default rate to 6% or 8% of a participant’s annual salary and raising the cap on auto-escalation so the total auto features’ component rises to at least 10% or, better yet, 15%.

For participants contributing below the default savings rate, BlackRock recommends re-enrolling them — a process called back sweeping — at the higher rate while allowing the to opt out. The firm also recommends back sweeping participants into auto-escalation, allowing them to opt out.

The BlackRock report also counseled plans that offer company stock in their DC plans to pay closer attention to which participants hold the stock and how much.

Plan executives should “conduct a communications campaign on the risk of a large single stock allocation targeted at participants with company stock allocations over a certain threshold,” the report said.

Sponsors could offer “an auto-diversification service” that would help participants “systematically reduce the company stock allocation to a set level over time,” the report said.

Other suggestions included establishing a cap of 20% to 25% per participant account for holding company stock, with larger legacy holdings grandfathered in, or freezing additional company stock purchases within the plan.

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