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STRATEGIC PLAN DESIGN

Better plan decisions, driven by better analysis

BlackRock’s plan design analysis provides detailed, data-driven insights to help plan sponsors enhance retirement readiness across different participant cohorts.
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Choosing plan design analysis with BlackRock

At BlackRock, we use plan and participant-level data, as well as risk analytics, to help identify the most impactful changes a plan can make. The following real-world plan design case studies illustrate the type of actionable insights we can help you uncover.

Case study #1: Do auto-features create unintended ceilings?

The scenario: 10 years ago, a large 401(k) plan with over 100,000 participants and $5 billion in assets started to auto-enroll all new participants into the plan at a 4% default rate. Five years ago, in an effort to increase savings, the plan added auto-escalation as an opt-out for all new participants, in increments of 1% annually up to 6%.

The assumptions: The plan was concerned that if the auto-escalation cap was too high, significant numbers of participants would opt out.

What we found: Analysis suggested that the modest cap may be limiting participants’ savings in the plan.

We were able to divide the participant population into “active” participants that had made proactive changes to savings amounts and/or asset allocations beyond the plan defaults, and “passive” participants that accepted the default choices made by their employer. 43% of active participants demonstrate an appetite for saving well beyond the auto-escalation cap of 4-6%, whereas the majority of passive participants (60%) simply remained within the 6% default/auto-escalation range.

As seen in Figure 1, active participants had average deferral rates of 6.8% vs. 4.9% for those considered passive—a difference of nearly 2%.

Figure 1: Active participants save substantially more:

Analysis design

For illustrative purposes only.

Passive participants typically remain at the plan sponsor’s default. This tendency can be used to their advantage by setting defaults higher and increasing auto-escalation caps considerably, or even allowing them to reach IRS contribution limits. The example of the active group with their increased appetite for savings may also be considered an argument in favor of higher caps.

Resetting assumptions:

The unintended effect that setting defaults and auto-escalation too low may have is to undermine the power of these plan design features and ironically prevent some participants from saving more. With that in mind, plan sponsors may want to consider a number of actions to increase savings, including:

  • Increasing the auto-enrollment default rate.
  • Increasing the cap on auto-escalation.
  • Back sweeping all participants below the default savings rate into the higher rate on an opt-out basis.
  • Back sweeping all participants into auto-escalation on an opt-out basis, including those who had previously opted out.

Case study #2: Were the most loyal employees left behind?

The scenario: Over a decade ago, a U.S. technology company updated its qualified default investment alternative for new hires from a stable value fund to a target date fund. Legacy employees were not reenrolled. Two years ago, the company added 10,000 employees through an acquisition, all of whom were reenrolled into the target date fund. The combined plan now has over 30,000 participants and $6 billion in plan assets – and two very different participant populations with very different return profiles.

The assumptions: The introduction of the target date fund and the merging of the acquired employees into the plan may have been natural opportunities to re-enroll legacy participants out of the stable value fund. The plan sponsor chose not to conduct a re-enrollment, preferring to avoid disrupting their longstanding employees.

What we found: The post-acquisition plan unintentionally created two distinct populations with significantly different long-term retirement outcomes. As shown in Figure 2, the acquiring Company A had over the course of 10 years seen participation in the target date fund gradually rise to 42%. However, 25% of participants remained in stable value. By contrast, following the opt-out reenrollment implementation, 61% of the newly acquired employees (shown as Company B) were invested in the target date fund.

Figure 2: Two distinct populations post-merger

distinct populations post-merger

For illustrative purposes only.

The opportunity cost for Company A’s longest tenured employees may be significant. Stable value is a relatively conservative vehicle with lower expected returns. As Figure 3 illustrates, higher returns from a target date fund (in green) compared to a stable value fund (represented in yellow) compounded over a career can result in a nest egg that’s 95% larger or would potentially require a participant to save 11.4% more annually to make up the difference.

Figure 3: Opportunity cost of investing too conservatively*

Opportunity cost of investing too conservatively

* Based on BlackRock methodology. Assumptions: starting contribution age = 25, salary at age 25 = $50,0001, default portfolio Mix = 50% US bonds / 50% money market vs 100% target date strategy2, default total contribution amount (employer + employee) = 12% (6% + 6%)..

Resetting assumptions:

The majority of participants in Company B accepted the reenrollment, which is evidence the Company A participants would have likely done the same. Reenrolling the original legacy population – in effect, offering them the same benefits offered to those more recently hired or newly acquired - is a reasonable and easily justifiable option.


 

Case study #3: Who really holds company stock?

The scenario: Previously, the company match for a large U.S. healthcare company was made in company stock. The plan, with over 10,000 participants and over $10 billion in assets, also offered company stock as an investment option along with a balanced fund QDIA and a core menu of six equity and fixed income funds. Thanks in part to the legacy match, the plan has a sizable overall allocation to company stock. The company decided to update the plan’s QDIA by replacing it with a target date fund.

The assumptions: The plan sponsor assumed that senior managers and executives, who were required to hold a percentage of their assets in company stock, were particularly exposed.

What we found: Surprisingly, BlackRock’s assessment found that lower income participants allocated 33% of their portfolio to company stock (Figure 4), which is more than twice that of employees in the highest compensation percentiles (15%).

Figure 4: Company stock more popular amongst the lower salaried

stock more popular amongst the lower salaried

For illustrative purposes only.

Less-investment savvy participants may tend to equate risk with the unknown and may, therefore, think that shares in the company they know first-hand are safer compared to investing in, for example, an S&P 500 index fund filled with many companies they know little or nothing about.

Furthermore, research into company stock in 401(k) plans suggests that participants underestimate the risk of owning company stock. Additionally, they may not recognize that they are already “invested” in the company’s continued financial health in that they depend on it for future wages and continued employment. Lastly, being concentrated in any single stock increases investment risk for these lower salary workers due to its inherent reduction in diversification.

Illustrating this risk, Figure 5 uses the S&P Health Care Index as a proxy for the company stock in this case study. In a global shock scenario, the proxy index would drop -23.5% compared to -12.8% for a diversified risk-aware target date fund. The company stock could, of course, be more volatile than its index, creating the potential for even more significant losses.

Figure 5: Risk of low diversification*

Risk of low diversification

* This chart shows the sensitivity of the above portfolios to a 2 standard deviation change in the MSCI World Net TR Total Return factor. Risk Factor Sensitivities are a function of (1) the correlation between the portfolio and the market factor and (2) volatility (riskiness) between the portfolio and the market factor. A sensitivity less (greater) than zero indicates that the portfolio generally moves in the opposite (same) direction as compared to the market factor. The portfolio and market factor are negatively (positively) correlated. ** The Target Date Strategy Retirement Vintage is proxied by an approximately 40% stock and 60% bond portfolio and comprised of allocations to the following asset class indices: BlackRock proxy for U.S. Money Market, Bloomberg Barclays U.S. Aggregate Bond Index, MSCI USA Index, MSCI USA Small Cap Return Index, MSCI World ex-USA Index, FTSE EPRA/NAREIT Global REITs Index, BlackRock Proprietary Commodity Proxy, and the Bloomberg Barclays U.S. Treasury Inflation Protected Securities (TIPS) Index.

Resetting assumptions:

Plan sponsors with company stock allocations should confirm which participant cohorts hold company stock and their allocation percentages. Even if they choose to reduce company stock allocations, a sizable exposure may exist for some time. To help mitigate the exposure, any or all of these steps may be considered:

  • Conduct a communications campaign on the risk of a large single stock allocation targeted at participants with company stock allocations over a certain threshold.
  • Offer an auto-diversification service to participants to systematically reduce the company stock allocation to a set level over time.
  • Establish a cap for company stock allocations, with certain legacy holdings "grandfathered" in.
  • Freeze the purchase of additional company stock purchases within the plan.

 

Harnessing data for better outcomes

The three cases we have explored here are not cautionary tales; they are an argument for better data and deeper analysis. BlackRock’s strategic plan design team can not only analyze existing plan data to reveal potential obstacles, but also has advanced tools for projecting the potential impact of dozens of plan changes, from the investment menu to deferral rates, fees and alpha generation. BlackRock works with plan sponsors to help:

  • Review plan objectives: How are desired participant outcomes defined and how should they be measured?
  • Conduct plan and participant analysis: Where on the path of retirement readiness are your participants given your current plan design?
  • Test plan changes: Identify the most effective “levers” to close gaps between current and desired participant outcomes.

At BlackRock, we share your continued focus on retirement readiness and the desire to bring the best of your plan to your participants.

Contact BlackRock’s strategic plan design team
Would you like a custom evaluation or a reenrollment consultation? Get in touch with our BlackRock team who can offer a data-driven analysis to support your plan design conversations.
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