Plan sponsor white paper 0906

Investments

Inside the Minds of Plan Sponsors:What They Care About and Want

SignificantResearchConclusions

> Sponsors of smaller, traditionally advisor-serviced U.S. defined contribution (DC) retirement plans feel that their plans should be better aligned with the needs of their plan participants.

> Many sponsors of smaller DC plans find it challenging and burdensome to manage their plans.

> DC sponsors need more from their service providers, particularly increased human interaction.

> The number of investment options offered in DC plans is out of synch with sponsors’ preference for a streamlined menu of choices.

> DC sponsors should keep two concepts uppermost in their minds as they strive to come up with solutions for participants who ask, “What should I do?” These concepts are “Make it simple!” and “Just do it for me!”

AUGUST 2006

Foreword

In August 2006, long after AllianceBernstein Investments had conducted the research studies

underlying this report, Congress passed the Pension Protection Act of 2006. This law is the

most important legislation affecting U.S. defined contribution (DC) plans since the passage of

the landmark Employee Retirement Income Security Act of 1974.

We believe that the Pension Protection Act’s significance and impact will be far-reaching and

felt by generations to come. Though the Act doesn’t completely resolve all the issues facing

the U.S.’s current and future retirees, their plan sponsors and service providers, it signals a new

direction that should greatly improve the odds that Americans will enjoy a more comfortable

and financially secure retirement.

In reviewing the Act’s provisions, we were struck by how closely certain of them—notably

those concerning investment advice, automatic enrollment and default investment options—

seemed to echo what defined contribution plan sponsors and plan-eligible employees had told

us they wanted and needed in their plans. Sponsors wanted their service providers to “Make

it simple!” and employees wanted their sponsors to “Just do it for me!” (see page 32). It

appears that the Act incentivizes DC plans to do precisely these things.

As you read the report and find out what sponsors and employees have been thinking, we

think it’ll become increasingly clear that the Act should help to greatly reduce the wide gap

between what they want and what they’ve been getting. So we invite you to read with the

Act in mind.

We hope you enjoy the report, and welcome any feedback you may have. Thanks for your time

and attention.

Warmest regards,

Daniel P. Gangemi Matthew P. Mintzer

AllianceBernsteinInvestments,Inc. is an affiliate of AllianceBernstein L.P., the manager of the funds, and is a member of the NASD.

AbouttheAuthors

DanielP.GangemiManaging Director of Market Research

Mr. Gangemi is responsible for all customer, competitor and

industry research in support of AllianceBernstein’s businesses

in retirement services, mutual funds, college savings,

separate accounts and variable accounts. Prior to joining

AllianceBernstein in 2004, he was Director of Market Research

at OppenheimerFunds, Manager of Market Research at

Prudential Investments, and an analyst at Donaldson, Lufkin &

Jenrette. Mr. Gangemi holds B.A. and M.A. degrees in English

from The City University of New York’s College of Staten Island.

MatthewP.MintzerManaging Director, National Sales Manager–Retirement

Mr. Mintzer is responsible for AllianceBernstein Investments’s

retail retirement business. He has spent nearly his entire

career in the field of retirement planning. Mr. Mintzer joined

AllianceBernstein in 2005 from Putnam Investments, where

he was the Director of Retirement Products. Previously, he

was Alliance Capital Management’s National Sales Manager–

Retirement, a Vice President and client service officer at Delaware

Investments, and a Vice President at DALBAR. Mr. Mintzer holds a

B.S. in finance from Pennsylvania State University.

AboutthisResearch

Ourresearchstudyhighlightssponsorsofsmaller,traditionallyadvisor-serviceddefinedcontribution(DC)plans.These are plans whose total assets range from

less than $2 million to as high as $400 million. We studied this

portion of the DC market because of its high growth potential

and historically low access to the resources available to the

biggest plans.

Our study didn’t include the “mega plans” offered by the

largest U.S. companies.

We categorized the four asset-based plan segments in our

study as follows:

> Micro plans: less than $2 million in plan assets

> Small plans: $2–4.9 million in plan assets

> Mid-size plans: $5–19.9 million in plan assets

> Large plans: $20–400 million in plan assets

(Note: 73% were in the $20–100 million range)

Executive Summary 1

Introduction: Where Are We and How Did We Get Here? 5

The Story in a Nutshell: Sponsors Want More— and Less—from Their Plans 5

But First, Let’s Put This into Perspective 6

The Big Picture I: DC Plans Are Dominant 6

The Big Picture II: Participants Get Lost in the Shuffle 6

Simplicity: A Recurring Theme 7

Absolute Participation Rates Are Low 8

Employees Need Help 9

Employees See Themselves as “Active” or “Accidental” Investors 9

Employees Aren’t Confident About Retirement 10

The Conclusion Is Clear: Employees Need Help Now 11

Plan Management Is a Challenge and a Burden 12

Most Sponsors Don’t Consider Themselves Fiduciaries 12

Sponsors Are Behind on Some of the Basics 13

More Time Is Needed for Plan Design and Maintenance 15

Fees Aren’t Fully Understood 16

Sponsors Are Unfamiliar with Section 404(c) 17

The Conclusion Is Clear: Managing a DC Plan Is Challenging and Burdensome 18

Sponsors Want a Renewed Emphasis on Service—and People 19

Sponsors Need More from Their Service Providers 19

The Service Process Needs More of a Human Touch 21

Sponsors Could Have More Trust in Their Providers 22

Even So, Sponsors Don’t Often Change Plan Providers 23

The Conclusion Is Clear: Sponsors Want a Renewed Emphasis on Service—and People 24

Too Many Investment Choices, Not Enough Advice 25

How Many Investment Options Are Enough? 25

Adding Options: Lower Participation, Higher Loss Aversion 26

Sponsors Want to Make Their Plans Much Simpler 27

Target-Date Retirement Funds: Win-Win for Participants and Sponsors 27

Investment Advice: Mostly Unavailable, but Wanted and On the Way 29

Advice Should Be Specific and Come from People 30

The Conclusion Is Clear: Sponsors and Participants Want Streamlined Options, More Advice 31

Table of Contents

Suggestions for Improving the Status Quo 32

Using an Old Playbook for a New Game Plan 32

Automatic Enrollment 33

Automatic Increases in Salary Deferral Rates 34

Better Default Investment Options 34

Simple, Yet Effective, Communication Plan 35

Investment Advice 36

Mandatory Plan Reviews 36

Investment and Fiduciary Education 36

New Goals for Service Providers 36

In Conclusion 38

Research Methodology 39

AllianceBernstein | 1

Sponsorsofdefinedcontribution(DC)retirementplansfeelthatthere’smuchroomforimprovementintheirplans. The core desire of the sponsors who took part in our research study was that their plans focus more on participants’ needs. To reach this goal, they wanted their plans to become simpler, more user-friendly and more people-oriented, and their service providers to upgrade the quality of their services.

Ourresearchstudyhighlightssponsorsofsmaller,traditionallyadvisor-servicedDCplans. Page 39 These are plans whose total assets range from less than $2 million to as high as $400 million. We studied this portion of the DC market because of its high growth potential and historically low access to the resources available to the biggest plans. Our study didn’t include the “mega plans” offered by the largest U.S. companies.

We categorized the four asset-based plan segments in our study as follows:

> Micro plans: less than $2 million in plan assets



> Large plans: $20–400 million in plan assets (Note: 73% were in the $20–100 million range)

Sponsors’needforimprovementinDCplanscloselyalignswiththefeelingsofDCplan-eligibleemployees,whoaren’tconfidentaboutretirementandthusneedhelpwiththeirplans. Pages 10–11 Although nearly all of the plan-eligible employees we surveyed in 2005 and early 2006 felt that a comfortable retirement was a “birthright” to which they were entitled, they also expressed a low level of confidence in their ability to retire comfortably. In fact, only 25% of our total employee respondents felt confident about a comfortable retirement (see display at upper right).

Overthepasttwodecades,theemphasisofDCplanfeaturesandserviceshasevolvedawayfrommeetingtheneedsofplanparticipants. Pages 6–7 This process unofficially started with the introduction of daily valuation of plan assets—a major technological advance at the time—in the early 1980s. Since daily valuation was (and remains) highly beneficial to participants and sponsors, its widespread popularity set off a virtual arms race of technological innovations. The DC industry began to mistakenly view many of the new tech-based features as actual participant benefits (see display below).

Executive Summary

InvestorConfidenceAboutRetirementIsLow(Display 8, page 10)

Active Investors*

Accidental Investors*

AllInvestors

49%

10%

25%

Percentage of Investors Confident/Very ConfidentAbout a Comfortable Retirement

*We define “Active” investors as those taking an active interest in investing, and “Accidental” investors as those lacking confidence in their ability to make good investment decisions. See page 9.Source: AllianceBernstein Research 2006

TheDCArmsRaceAddsFeatures,butHasMigratedAwayfromParticipantBenefits(Display 3, page 7)

00s90s80s

401(k) Features Added Over Time

First 401(k)Daily valuation

LoansVoice response units

Multi-manager

Self-directed brokerageWeb access

Advice toolsMultiple share classes

Co-fiduciary

Source: AllianceBernstein Research 2005

2 | Inside the Minds of Plan Sponsors: What They Care About and Want

Asapracticalmatter,manysponsorsofsmallerDCplansfinditchallengingandburdensometomanagetheirplans. Pages 12–18 Most of our sponsor survey respondents, particularly those who were company owners, found themselves struggling to keep up with the many responsibilities of plan management as they tried to run their businesses.

Several of our findings clearly underscored this point. For example, a majority of sponsors:

> Didn’t spend sufficient time on plan design (see display below);

> Didn’t fully understand the fees associated with their plans;

> Weren’t familiar with ERISA’s section 404(c), which spells out several key requirements that sponsors must meet if they want to avoid liability for participants’ investment decisions; and

> Didn’t consider themselves fiduciaries of their plans.

IncreasedhumaninteractionwiththeirserviceproviderscouldhelpDCplansponsorsclosesomeimportantgaps. Pages 21–23 Sponsors viewed people as a critical part of the service process that they weren’t getting enough of. Greater human interaction with providers could help sponsors feel more trust toward providers, and could also improve sponsors’ perceptions about providers’ level of plan knowledge (see display at upper right).

ThenumberofinvestmentoptionsofferedinDCplansisoutofsynchwithsponsors’preferenceforastreamlinedmenuofchoices. Pages 25–26 Although the average DC plan had 19 options and two-thirds of respondents said that a “diverse” plan (which ERISA requires) should contain at least 16 options, sponsors complained that their plans offered far too many options.

A recent study found that as plan diversification increased, fewer employees chose to participate (see display at upper left of next page). Among those who did, there was a pronounced gain in loss aversion, as ref lected in both higher allocations to money market and bond funds and a higher probability that participants would not invest in equity funds.

Target-dateretirementfundshavesignificantappealforDCplansponsorsandparticipantsalike. Pages 27–29 Key benefits to sponsors include encouragement of plan participation; potential to help reduce possible fiduciary liability; and characteristics that are particularly appropriate for a default investment option.

Key benefits to participants include ease of use; minimization of decision-making; and built-in asset allocation and rebalancing as participants approach their targeted year of retirement.

Two-ThirdsofDCSponsorsSpendaDayorLessonPlanDesignEachYear (Display 16, page 16)

More than1 week

At least1 full week

Severaldays

A full day1–5hours

Less than1 hour

10%12%11%

27%34%

68%

7%

Time Spent on Plan Design by All Sponsors*(Percentage of Respondents)

*Columns add to 100% by rounding.Source: AllianceBernstein Research 2005

DCSponsorsGivePlanSpecialistsConflictingGradesforImportanceandKnowledge (Display 23, page 20)

Percentage of sponsors considering this specialistknowledgeable/very knowledgeable

Percentage of sponsors considering this specialistimportant/very important

Financialadvisor

ERISAspecialist

Enrollmentspecialist

Senior relationship

manager

Client servicerepresentative

18%13%

78%

22%

95%

9%5%

33%

16%

77%



We expect target-date retirement funds to eventually become the standard default investment option in most DC plans.

ManyDCplansponsorswouldliketheirplanstoofferinvestmentadvicetoparticipants.It’llbeavailablesoon. Page 29 Until recently, ERISA rules prevented or discouraged many sponsors and service providers from offering advice. The Pension Protection Act of 2006, however, includes several measures that collectively serve to make prudent and objective advice far more widely accessible than previously, beginning in 2007.

DuetothepassageofthePensionProtectionActof2006,weexpecttoseemuchmoreadvice-relatedactivityamongsponsorsandfinancialadvisors(see display at upper right). Page 30 We also expect financial advisors to devote more of their efforts to educating plan participants about basic investment concepts and retirement-oriented financial issues.

ConclusionandSuggestedActionStepsDCplanparticipantscontinuetoask,“WhatshouldIdo?”tomakeeffectiveplanchoices,astheyhaveforyears.WebelievethatDCplansponsorsshouldkeeptwoconcepts—“Makeitsimple!”and“Justdoitforme!”—uppermostintheirmindsastheystrivetocomeupwithsolutions. Page 32 “Make it simple!” refers to sponsors’ strong desire that their plans be simpler and more user-friendly. It enables sponsors, in turn, to help participants who are saying “Just do it for me!,” which is a catch-all phrase for seeing to it that all aspects of the plan involve as little work for participants as possible.

“Make it simple!” and “Just do it for me!” are the fundamental drivers of our own specific suggestions for how DC sponsors should go about improving their plans.

DCPlanParticipationFallsastheNumberofInvestmentOptionsRises (Display 32, page 27)

50

60

70

80

594939291992Number of options offered

Participation Rate per Number of Options Offered

(%)

The graph above plots the relationship between participation rate (all explanatory variables except the number of funds offered are set at their respective mean values) and the number of funds offered using the Robinson two-stage semiparametric estimation method. Source: Iyengar and Jiang, 2003

MostDCParticipantsUseInvestmentAdviceIfTheyGetIt (Display 34, page 29)

no

don't know

yes

All

Some

None

53%Yes

30%None of the recommendations

57%Some of therecommendations

13%All of therecommendations

45%No

2%Don’t know

“Did You Request and Receive Investment Advice?”

“If Yes, Did You Implement Any of the Advice?”

Source: EBRI 2006 Retirement Confidence Survey


Takentogether,ourresearchobservationsaboutimprovingDCplansleadustoconcludethattheoverallDCindustryispoisedataninflectionpointofhistoricalchange. This change will be for DC plans to take on some of the essential characteristics of the traditional defined benefit plan.

Wesuggestthatsponsorsconsiderthefollowingmeasureswhenrefreshingexistingplansorestablishingnewones:

> Automaticenrollment (Page 33) Employees should automatically be enrolled in a DC plan unless they indicate otherwise. Instead of making an active choice to participate in their plans, employees should make an active choice to “opt out,” or not participate. We believe this has the potential to revolutionize DC plans, much as daily valuation did in the early 1980s.

Congress gave its blessing to automatic enrollment in the Pension Protection Act of 2006, which removes a legal obstacle and offers DC sponsors a compelling inducement to include it in their plans.

In addition, we advocate automatically increased salary deferral rates for plan contributions, which the Pension Protection Act also encourages (Page 34).

> Betterdefaultinvestmentoptions(Page 34) We believe that sponsors can serve their participants more effec-tively by placing greater importance on the selection of “smart” default options that make the investment process easier by doing most of the work.

Target-date retirement funds are an excellent example of what a smart default option should be (see display below). They’re easy to conceptually understand, typically have built-in diversification and rebalancing, and help sponsors meet their fiduciary obligations.

Congress recognized this in the Pension Protection Act of 2006. The Act encourages the use of “investments that include a mix of asset classes consistent with capital preservation or long-term capital appreciation or a blend of both” as DC default options.

> Simple,yeteffective,communicationplan (Page 35) Sponsors must communicate plan-related information to employees clearly and consistently in order to get key messages across and help participants feel good about the investment decisions they make.

> Investmentadviceasastandardfeature(Page 36) We think DC sponsors should give plan participants access to professional investment advice as a standard feature of their plans. The passage of the Pension Protection Act of 2006 has given sponsors a green light to make advice more readily available.

Additional action steps include:

> Mandatoryreviewsofplansatfixedintervals(Page 36)

> Increasededucationforsponsorsaboutbasicinvestmentconceptsandfiduciaryresponsibilities(Page 36)

> Newgoalsforserviceproviders(Pages 36–37)

Target-DateRetirementFunds:A“Smart”DefaultOptionforDCParticipants(Display 39, page 34)

“Active”Investors “Accidental”Investors39% 61%

Confident 31%Aggressive 8%

Unprepared 37%Reluctant 24%

Employees See Themselves as “Active” or “Accidental” Investors


Why All Kinds of Investors Like Target-Date Retirement Funds

ActiveInvestors

Clear investment benefit

Helps investors reach retirement

Appropriate investment mix during retirement

Appealing methodology and design

AccidentalInvestors

One-stop investment option

Simplicity

Ease of use

Minimal decision-making

Investment manager determines asset allocation

Automatic rebalancing


For millions of baby boomers and other retirement savers—whether their retirement comes soon or much further down the road—the process of getting to the golden years may be anything but golden. Among those for whom defined contribution (DC) plans, particularly the 401(k), are the primary retirement savings vehicle, plenty lack confidence in their ability to invest. As a result, they may not get the most out of the opportunities available to them in their DC plans.

It’s the job of plan sponsors to make sure that their plan-eligible employees have those opportunities and understand how to best use them to meet their own retirement goals. And when it comes to DC plans, what do sponsors themselves care about and want? Many of them believe there is much more that their plans could do to meet the needs of employees.

As a company that serves plan sponsors as well as plan participants, we’ve observed this environment up close. As a research-driven investment firm, we’ve also realized that we needed to gain a fuller understanding of the factors that are driving sponsors’ and participants’ attitudes and behavior with respect to their plans.

So we dug deeper. The result is this report, which highlights sponsors of smaller DC plans traditionally serviced by financial advisors. Our research on sponsors, in turn, builds on studies of plan-eligible employees that we did in 2005 and early 2006. (A brief discussion of our participant research comprises the next chapter.)

Here’s our ultimate conclusion: Many DC sponsors see significant room for improvement within their plans, and they’re eager for improvement to happen.

TheStoryInaNutshell:DCSponsorsWantMore—andLess—fromTheirPlansThe response to one of the many survey questions we asked neatly summarizes the way DC sponsors are feeling about their plans these days.

The question asked sponsors simply to rate their overall plan experience and several characteristics of that experience. Judging from the responses, sponsors really want to see their plans improve, which clearly indicates the need for considerable positive change.

Here are the detailed results. The percentage ratings refer to the proportion of all respondents who rated each item as “excellent” or “very good”:

> Overall plan experience: 63%

> Plan investment options: 36%

> Performance of plan investment options: 47%

Introduction: Where Are We and How Did We Get Here?

It’s 2006, a milestone year in the evolution of the pension plan business. The time has finally arrived for the first of the

77 million baby boomers to say goodbye to the daily grind of the workplace and hello to the golden years of retirement.

“In Their Own Words”

As part of our methodology for this report, we followed up on the statistical results of our survey of DC plan sponsors by directly contacting many of them to discuss their responses in greater depth. In numerous instances, we found that how the sponsors verbalized their thoughts was strikingly revealing and went far beyond the data in illuminating how they felt about their plans.

We’ve therefore chosen to include some of the most compel-ling quotations from these discussions throughout the report. The quotations appear under the recurring title of “In Their Own Words.”


> Overall experience with plan provider: 60%

> Getting questions answered by plan provider: 51%

Although some of these percentages appear respectably high, our key takeaway from this is that all of the percentages ought to be higher.

ButFirst,Let’sPutThisintoPerspectiveWe’ve got a lot to talk about in this report. But for it all to make sense, we need to put it into a clearer context by describing the defined contribution plan industry and how it has evolved to its present state.

In other words, where are we and how did we get here?

TheBigPictureI:DCPlansAreDominantDC plans are the dominant employer-based retirement program, having overtaken defined benefit plans in size long ago, in 1992. Assets in employer-based DC plans were $4.1 trillion in 2005, of which $3.6 trillion (or 87% of total assets) was held in private-sector plans and the remaining $531 billion (13%) in public-sector plans (Display 1).

The most common DC program, by far, is the 401(k) plan, named for the section of the Internal Revenue Code that established it. Assets in 401(k) plans totaled $2.2 trillion in 20051 (Display 2). This was equivalent to 53% of all employer-based DC plan assets and 61% of all private-sector employer-based plan assets.2

TheBigPictureII:ParticipantsGetLostintheShuffleWhile the DC market has enjoyed rapid growth, that growth has had a human cost.

Somewhere along the way to growing into a $4.1 trillion market over the last two decades, DC plans took a wrong turn: They veered off the main road of focusing on the welfare of their participants, and took an exit that led to technological innovations with limited benefits to participants.

This process unofficially started in the early 1980s with the introduction of daily valuation of plan assets, which revolutionized DC plans. Previously, if participants wanted to know the value of their account, they had to wait until around four weeks after the end of a quarter to get the information. This could be unsettling, especially during times of market volatility.

Display 1

BreakdownoftheEmployer-BasedDCPlanMarketin2005

Private sector$3.6 trillion

Public sector$531 billion

Total Assets = $4.1 trillion

13% 87%

Source: SPARK Marketplace Update 2006

Display 2

401(k)PlansAccountedfortheBiggestShareoftheEmployer-BasedDCPlanMarketin2005

Total Assets = $4.1 trillion

401(k)$2.2 trillionPublic sector

$531 billion

Other private sector$1.4 trillion

34%

13%

53%

Source: SPARK Marketplace Update 2006

1 SPARK Marketplace Update 2006, RG Wuelfing & Associates, Inc., 2006, p.3.2 Ibid.


Suddenly, with daily valuation, participants could know their account value on any day. It was thus a major advance at the time not only in terms of technology, but also for its enabling of a much higher level of customer support. It additionally helped to spur the mass movement of plan assets into mutual funds, which first embraced it, and out of banks and insurance companies, which didn’t.

Since daily valuation was (and remains) highly beneficial to participants and sponsors, its widespread popularity set off a virtual arms race of technological innovations. Firms supplying all kinds of specialized products and services (such as self-directed brokerage, Internet development, online investment advice, etc.) pursued the potential for endlessly rising revenues that they hoped to generate from plan sponsors.

As suppliers sought to build their market presence and developed hot new bells and whistles to differentiate themselves, they began to mistakenly believe that many of these bells and whistles provided significant benefits to participants. The emphasis gradually shifted from doing the right thing for participants to just doing more. The very people whose future welfare was the reason for retirement plans in the first place, got lost in the shuff le.

And so the industry reached its current state, in which plans have many features that look great on paper but don’t offer enough of what participants need and want (Display 3). Much of today’s plan sponsor behavior can be characterized as reactive activity—doing things in response to what service providers are doing—rather than as proactive achievement—giving participants what they need and want, and generating good investment results.

Simplicity:ARecurringThemeDespite the arms race’s massive effort and resources directed at making plans presumably better, our research finds plan sponsors feeling that their plans have a long way to go before being truly “better” becomes the norm. And, as we will indicate throughout this report, simplicity has replaced complexity as a prominent part of what “better” means.

Underscoring this last point are sponsors’ answers to two questions:

> Do their plans offer 18 specific services, and how do they feel about them?; and

> Do they need, or would they be willing to pay extra for, the 18 services specified?

Display 3

TheDCArmsRaceAddsFeatures,butHasMigratedAwayfromParticipantBenefits

00s90s80s

401(k) Features Added Over Time

First 401(k)Daily valuation

LoansVoice response units

Multi-manager

Self-directed brokerageWeb access

Advice toolsMultiple share classes

Co-fiduciary


In Their Own Words: Simplicity

“I want to make the plan simple for me and for my employees. This means that I have to get rid of a lot of the junk that we put in the plan.”

“…the problem going forward is that there is just too much offered in our plan, and no one is actually using any of it. Too many funds, too much technology, too little common sense.”

“Keep the plan features at the basic level. Great enrollment, great communication, great live service support, smart investment options.”

“What we need is common sense and line of sight to a goal that focuses on the need of the employee.”


In responding to the first question, sponsors were most positive about seven services that we’ve dubbed the “Lucky 7” (Display 4). Five of the Lucky 7 are strong, tangible benefits that directly enhance a plan’s effectiveness, while two embody the kind of human interaction that sponsors especially want. (For a discussion of sponsors’ desire for more human interaction with their service providers, see page 21 in our fourth chapter, “Sponsors Want a Renewed Emphasis on Service—and People.”)

As for the second question, a solid majority of sponsors said they didn’t need nine of the 18 services, and none was willing to pay extra for any of the 11 services that weren’t among the Lucky 7. Hence our designation of these latter services as the “Unlucky 11.” The Unlucky 11 are primarily non-essential services that providers came up with as the arms race got into full swing.

The idea of practical simplicity is what differentiates the Lucky 7 from the Unlucky 11: Sponsors feel that their plans contain many services that they neither want nor value. Streamlined, simpler plans are far more desirable.

AbsoluteParticipationRatesAreLowPlan participation rates are near historical highs in relative terms. But given the big picture we’ve described, it’s not surprising that plan participation rates are low on an absolute basis. Our respondents reported that only about one-third of their plans had participation rates in the coveted 90-100% range, while half of plans had participation rates below 80% (Display 5).

We then asked sponsors to select the top among several possible reasons why so many of their employees didn’t participate in their plans. Two of the most-selected of these reasons speak to sponsors’ desire for their plans to improve:

> “Employees don’t know which investment options to choose” (selected by 29% of respondents); and

> “Employees feel there are too many investment choices” (26%).

We’ll have more to say about the issues touched on by these responses as we continue.

Display 4

TheNeedforSimplicity

Services Plan Sponsors Especially Want and Don’t Want

TheLucky7(What They Want)

Signature-ready Form 5500

Enrollment services: group meetings

Quarterly hardcopy participant statements

Live customer service reps for participants

Enrollment kits

In-person pre-retirement counseling

Phone-based pre-retirement counseling

TheUnlucky11(What They Don’t Want)

Integrated trustee services

Integrated admin. of non-qualified plans

Integrated admin. of DB plans

Sponsor reporting via Internet

Calculation of profit-sharing

Paperless distributions

Online participant help

Online pre-retirement counseling

Self-directed brokerage

Handling of company stock

Foreign-language services


Display 5

HalfofDCPlansHaveParticipationRatesBelow80%

90–100%80–89%70–79%60–69%50–59%Below 50%

31%

19%14%12%

5%

19%

50%

Sponsors’ Self-Described DC Plan Participation Rates(Percentage of Respondents)

Participation rate



EmployeesSeeThemselvesas“Active”or“Accidental”InvestorsIn 2005 and early 2006, we conducted extensive sur-veys of employees eligible to participate in defined contribution plans. (See page 39 for a summary of our research methodology.) Respondents described themselves as being in one of four categories of inves-tors: “Confident,” “Aggressive,” “Unprepared” and “Reluctant” (Display 6).

We combined Confident and Aggressive investors into a broader heading of “Active” investors. As a group, Actives tend to display the following characteristics:

> They take an interest in investing early in their careers.

> They truly enjoy investing.

> They’re comfortable with their current financial situation.

> They pay a lot of attention to their investments.

> They actively manage their investments.

> They generally have a positive view of their prospects for a comfortable retirement.

We combined the other two categories, Unprepared and Reluctant investors, into a broader heading of “Accidental” investors. In contrast to Actives, Accidentals typically have these characteristics:

> The only reason they invest is because they participate in their company’s DC plan. [Note: this is why we call them “Accidental.”]

> They lack confidence in their ability to make good investment decisions.

> They invest inconsistently.

> They don’t pay much attention to their investments.

> They don’t actively participate in the investment process.

> They generally have a negative view of their prospects for a comfortable retirement.

Accidentals accounted for the biggest proportion of total respondents—61%—with 37% of employees considering themselves Unprepared and 24% considering themselves Reluctant. Of the 39% that were Active investors, 31% considered themselves Confident and 8% considered themselves Aggressive (Display 7, next page).

Employees Need Help

In order to best understand what plan sponsors are thinking, it’s crucial to understand what plan-eligible employees are

thinking. As we’ll demonstrate in this and subsequent chapters, what employees are thinking ultimately boils down to,

“What should I do? I need help.”

Display 6

EmployeesSeeThemselvesinFourInvestorCategories

AggressiveReluctantConfidentUnprepared

8%

24%

31%37%



EmployeesAren’tConfidentAboutRetirementWithin our employee research, nearly all respondents agreed with the idea that a comfortable retirement is a “birthright” to which they’re entitled. Yet, at the same time, they expressed a low level of confidence in their ability to retire comfortably.

This lack of confidence especially applied to Accidentals, but was also meaningful among Actives (Display 8). In aggregate, only 25% of respondents felt confident about a comfortable retirement. In other words, 75% didn’t feel confident about a comfortable retirement. These numbers are in line with the recent historical trend compiled by the Employee Benefit Research Institute (Display 9).

Consequences of low investor confidence may include low participation rates in DC plans and ineffective asset allocation decisions. The latter, in turn, could lead to weak investment returns.

Additional data underscore the fragility of employees’ feelings of security about retirement. For example, 55% of U.S. workers say that they’re behind schedule in saving for retirement, and only 37% say that they’re on track. We find it distressing that these numbers are worse than they were in 2000, when fewer workers felt they were behind schedule and more felt they were on track (Display 10, next page).

Among workers who consider themselves “very confident” about retirement, furthermore, certain facts suggest that they may actually be overconfident.3

> Twenty-two percent of them aren’t currently saving for retirement.

> Thirty-seven percent haven’t calculated their retirement needs.

> Thirty-nine percent have less than $50,000 in savings.

> Thirty-two percent don’t have an IRA opened with money saved outside of their employer’s retirement plan.

Display 7

MostEmployeesSeeThemselvesas“Accidental”Investors

“Active”Investors “Accidental”Investors



39% 61%


Display 8

InvestorConfidenceAboutRetirementIsLow…

ActiveInvestors

AccidentalInvestors

AllInvestors

49%

10%

25%

Percentage of Investors Confident/Very ConfidentAbout a Comfortable Retirement


Display 9

…andinLinewiththeRecentHistoricalTrend

06050403020100

25%24% 24%21%23%22%

25%

Percentage of Workers Very Confident in Their Ability to Live Comfortably in Retirement


3 “2006 Retirement Confidence Survey,” EBRI Issue Brief, April 2006.


TheConclusionIsClear:EmployeesNeedHelpNow1. We’ve uncovered two important characteristics of

DC plan-eligible employees: “Accidental” investors account for the majority of employees, and most employees lack confidence about their prospects for a comfortable retirement.

2. The combination of these characteristics sends a powerful message. Essentially, millions of Americans are saying, “We’re not good at investing and not really interested in it, either. Who knows whether we’ll have enough to retire on?”

3. Employees need significant help in order for this situation to improve. And with their post-employment financial well-being at stake, they need help sooner rather than later.

4. Much of the burden for providing help falls on plan sponsors. More than any other party, it is the sponsors who face this difficult task: Bridging the huge gap between the near-universal expectation of a comfortable retirement as a birthright, and the harsh reality that most employees don’t believe they’ll actually be able to get there.

As we’ll discuss in the following chapters, sponsors face a variety of obstacles to bridging this gap.

Display 10

MoreThanHalfofWorkersFeelBehindScheduleinPlanningandSavingforRetirement

55%Behindschedule

32%A lot behind schedule

27%A lot behind schedule52%

Behindschedule

23%A little behind schedule

25%A little behind schedule

37%On track

40%On track

4%A little ahead of schedule

3%A lot ahead of schedule

4%A little ahead of schedule

3%A lot ahead of schedule

2000*

Percentage of Opinions Expressed by Workers 2000 vs. 2005

2005*

*Pie charts add to 100% by rounding.Source: EBRI 2005 Retirement Confidence Survey


Our research reveals that DC sponsors are finding it tougher to keep up with the responsibilities of plan management. We see this as both a ref lection of the practical difficulties they face in trying to fulfill their dual roles as sponsor and high-level employee, and a byproduct of the arms race waged by plan service providers. It’s also in line with our earlier characterization of their behavior as activity rather than achievement.

MostSponsorsDon’tConsiderThemselvesFiduciariesA key contributor to the challenging nature of plan management for smaller-plan sponsors is the fact that most of them don’t consider themselves plan fiducia-ries. This strongly suggests that they aren’t sufficiently aware of the important responsibilities that fiduciaries have (see “What Is a Fiduciary?” text box on next page).

We know this because we asked sponsors the direct question, “Do you consider yourself a plan fiduciary?” Even though a plan sponsor is typically a fiduciary, 60% of all respondents replied “No.” This number was even

higher for sponsors of our two smallest plan sizes: 79% for micro plans and 62% for small plans (Display 11).

When asked to choose from among several reasons that would explain why they don’t consider themselves fiduciaries, 65% of respondents (including 85% of micro-plan sponsors and 67% of small-plan sponsors) chose “My role is not that of a plan fiduciary.” Thirty-one percent of respondents, a level that was fairly consistent across plan sizes, additionally chose “We have hired an independent fiduciary service” as a reason.

One more survey result really sums up sponsors’ dis-comfort with the fiduciary role: Seventy-eight percent of respondents agreed with the statement, “Issues related to fiduciary responsibility keep me up at night.” Even though most sponsors didn’t consider themselves fiduciaries, they somehow sensed that they should be worried about fiduciary-related issues.

Plan Management Is a Challenge and a Burden

In a variety of ways, DC plan sponsors have indicated to us that they find it challenging and burdensome

to manage their plans.

In Their Own Words: Fiduciaries

“I don’t know the details of this fiduciary stuff. We have lawyers and accountants to figure that out. I just don’t think I should be an expert in every area of my plan. If this were the case in every aspect of my business and personal life, I would probably just fall over and die.”

“We have to act within the law, but what do I know? I make and sell shoes for a living, I am not a lawyer. I want my employees to be treated the right way, but that’s why we have experts and lawyers; they keep the plan honest.”

Display 11

MostDCSponsorsDon’tConsiderThemselvesFiduciaries

$20–400 mil.

$5–19.9 mil.

$2–4.9 mil.

<$2 mil.All plans

57%

45%38%

21%

40% 43%

55%62%

79%

60%

Yes No

“Do You Consider Yourself a Fiduciary?”(Percentage of Respondents, by Plan Size)



SponsorsAreBehindonSomeoftheBasicsIf sponsors don’t think of themselves as fiduciaries, it stands to reason that they’re probably not as up to speed on some plan basics as they could be. Our research results support this deduction.

Assetallocation. Awareness of the concept of asset allocation has risen among the general investor population in recent years. Yet most sponsors, for whom a solid familiarity with asset allocation is critical, aren’t comfortable with it.

We asked respondents to grade themselves on their degree of understanding asset allocation, and 66% gave themselves a C, D, or even an F (Display 12, next page). For sponsors of micro and small plans, the corresponding figures were 78% and 75%. Only 14% of total respondents gave themselves an A.

Sponsors Beware: Co-Fiduciaries Aren’t Co-Equals

It’s not unusual for DC plan sponsors and other fiduciaries to turn to outside service providers for help in managing their plans. On occasion, these outside providers will agree to become “co-fiduciaries” that have fiduciary responsibility for some aspects of the plan.

What many sponsors don’t realize, though, is that co-fiduciaries aren’t co-equals. Regardless of how much work the co-fiduciary does or the proportion of fiduciary functions he/she performs, the original fiduciary—in all likelihood, the plan sponsor—retains ultimate legal liability for the co-fiduciary’s acts. Original fiduciaries need to know and remember that the buck stops with them.

What Is a Fiduciary?

In the pension world, “fiduciary” is a very specific legal term that is defined in the Employee Retirement Income Security Act of 1974, the landmark pension law best known by its acronym, ERISA. It’s a serious job that should be taken very seriously by those who have it.

ERISA defines a fiduciary as someone who has discretionary authority or control over a pension plan, whether with regard to the plan’s administration or assets. While ERISA requires each plan to designate a specific fiduciary (often the company’s CEO or a committee appointed to manage the plan), others can be considered fiduciaries as well.

Non-specified fiduciaries are people whose job includes the discretionary authority we’ve described. Non-fiduciaries (such as human resources professionals) may also be closely involved in the making of plan-related decisions. Common examples of fiduciaries include a plan’s trustee, sponsor or administrator. [Note: the administrator is usually also the sponsor.]

Perhaps the most important fiduciary responsibility is the selection and oversight of plan investment options. Other key responsibilities include the interpretation of a plan’s provisions as stated in the official plan documents, and the selection of service providers such as recordkeepers, third-party administrators, investment managers, participant advice providers and participant educators.

ERISA’s fiduciary provisions are intended to protect plans from misuse of assets. Under the law, retirement plans aren’t extensions of a corporation; instead, they’re entirely separate entities, holding assets in trust. Fiduciaries must manage them solely in the interests of their participants and beneficiaries. Additionally, fiduciaries are required to avoid conflicts of interest; see to it that the plan pays only reasonable fees; and diversify the plan’s investments in order to minimize the risk of large losses.

Fiduciaries are held to a high legal standard widely known as the “prudent expert” rule. ERISA states that a fiduciary must perform his/her plan duties “with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.”

Translation: Fiduciaries must conduct themselves in the same way as prudent experts would conduct themselves. It’s not enough for fiduciaries to be simply well-intentioned, but uninformed; they must behave as an expert would.

Failure to perform their duties under ERISA exposes fiduciaries to potentially heavy personal legal liability. Fiduciaries that don’t meet the law’s standards can lose their cars, savings and any other assets. Legal vulnerability is especially wide in the area of plan investments, where the law is imprecise and thus open to broader interpretation.


Sponsors didn’t think their participants knew much about asset allocation, either. Only 9% of respondents, a level that was representative across plan sizes, thought that their participants could create a proper allocation in their 401(k) plans. This suggests to us that sponsors aren’t providing enough plan education; their education efforts aren’t successful; or both.

Finally, we asked respondents to choose among state-ments that best described how they thought partici-pants could achieve their financial goals. The good news here is that 71% selected “By establishing an appropriate asset allocation plan and rebalancing when necessary.”

But the bad news is that 28% selected “By choosing the right investments at the right time.” In other words, 28% of sponsors felt that a market-timing approach was the right way for participants to achieve their financial goals.

Investmentpolicystatements.An investment policy statement is a written document that provides guide-lines for fiduciaries to make investment decisions. It helps fiduciaries decide which investment options to make available in their plans, and how those options should be regularly monitored.

ERISA doesn’t require DC plans to have an invest-ment policy statement. But it would seem logical to have one for guidance and reference, especially since investment managers need to be evaluated for performance and style consistency.

Nonetheless, 25% of our respondents didn’t have an investment policy statement. What’s more, 88% within that 25% slice of sponsors without policy statements said that they didn’t intend to have one (Display 13).

Another survey result accentuates sponsors’ attitudes about policy statements. About half of respondents (a total of 48%) reviewed their plan’s investment options only semiannually (38%), annually (8%), or even less than annually (2%). Totals among micro- and small-plan sponsors were 60% and 53%, respectively.

Selectionofdefaultinvestmentoption.The idea of having a default investment option, in which participants’ assets are automatically invested if they don’t designate a specific option on their own, is fairly basic. Without a default option, participants’ assets would likely sit around uninvested, which isn’t good for participants or sponsors.

Display 12

MostDCSponsorsDon’tThinkTheyUnderstandAssetAllocationWell

FDCBA

2%

19%

45%

20%14%

“What Grade Would You Give Yourself forUnderstanding Asset Allocation?”

(Percentage of Respondents)

66%


Display 13

ManyDCSponsorsDon’tIntendtoHaveanInvestmentPolicyStatement

88%No, do not intend to get an investment policy statement

5%Yes, eventually

7%Yes, very soon

75%Yes

25%No

“Does Your Plan Currently Have an Investment Policy Statement?”

“Does Your Plan Intend to Get/Create an Investment

Policy Statement?”



But 58% of the sponsors we surveyed told us that their plan did not have a default option. Since all plans must have a default option, this means that 58% of the sponsors we surveyed didn’t know that their plan had one. Although this shortcoming was most prevalent among micro and small plans, it’s significant that 35% of large-plan sponsors thought there was no default option in their plans.

The most popular default option, by far, was what we have generically called “stable value”—money market funds and guaranteed accounts (Display 14). This option, named by 55% of respondents, was undoubtedly chosen for its ostensibly low risk exposure. [Note: There is considerable opportunity risk in maintaining a long-term allocation to cash, as we explain in the text box at upper right.4]

We asked respondents to choose any of several factors that inf luenced their selection of a default option. Only 48% replied that their plan’s investment policy committee had reviewed default options and chosen one. A total of 62% said that their default option was recommended by an external party (i.e., third-party administrator, recordkeeper, plan provider, investment consultant, lawyer or financial advisor).

MoreTimeIsNeededforPlanDesignandMaintenanceA majority of DC sponsors don’t devote adequate time to designing and maintaining their plans, a task that is a crucial element of a plan’s success.

This is out of synch both with sponsors’ view that, as one put it, “Increasing participation is the Holy Grail of plan issues”; and with the fact that nearly all respondents said that they felt they spent enough time reviewing their plans’ design features and benefits (Display 15).

Display 14

MostDCDefaultInvestmentOptionsAren’ttheBestChoiceforParticipants

Lifecyclefund

Otherspecialty

funds

Equityfund

Balancedfund

Stablevalue

3%6%13%

27%

55%

Percentage of DC Plans Offering This Default Investment Option


4 Thomas J. Fontaine, Target-Date Retirement Funds: A Blueprint for Effective Portfolio Construction, AllianceBernstein Investments, Inc., New York, October 2005, pp. 26–27.

Display 15

AlmostAllDCSponsorsFeelTheySpendEnoughTimeonPlanDesign

LargeMidSmallMicroAll

91%87%90%93%90%

Response by Plan Size(Percentage of Respondents)


Cash: A Risky Default Option

Cash vehicles such as money market funds are the most popular default investment option in DC plans, largely due to their ostensibly low risk exposure.

But investors are vulnerable to significant risks if they hold a meaningful portion of total assets in cash in a long-term portfolio like a DC plan:

> Inflation. The probability of a spike in inflation increases as an investor’s holding period lengthens. When the inflation rate exceeds the return on cash, which is a reasonable possibility over any long period, cash’s purchasing power—its value as measured by how much it can buy—declines.

> Opportunitycost. Using cash to dampen portfolio volatility reduces the magnitude of both negative and positive returns. In other words, holding cash instead of a return-oriented asset class such as stocks can actually cost investors in the form of lost opportunity over the long term.


Sixty-eight percent of our respondents told us that they spent one day or less each year on plan design matters, including 34% that spent between one and five hours (Display 16). We weren’t surprised to learn that most micro-, small- and mid-size plans fell into the one-day-or-less category. We were very surprised, though, that 25% of large plans did (Display 17).

FeesAren’tFullyUnderstoodOur research indicates that many plan sponsors don’t fully understand the fees associated with their plans. [Note: This is particularly noteworthy in light of recent efforts by the Department of Labor—which administers ERISA—to emphasize fiduciaries’ duty to see to it that their plans’ fees are reasonable.]

The answers to four survey questions make this clear:

> Only 32% of respondents considered themselves confident or very confident that they understood all of the fees they pay for their plans. This figure was substantially higher for large-plan sponsors (56%), but still much lower than should have been the case (Display 18).

> Twenty-three percent said that they didn’t pay explicit fees for plan services, and 45% weren’t sure (Display 19, left).

> The 23% cited in the preceding question gave three reasons why they didn’t think they paid explicit fees. Forty-four percent said that fees had been waived; 34% said that participants paid the fees; and only 22% correctly said that plan investments covered the fees (Display 19, right).

Display 18

MostDCSponsorsFeelTheyDon’tUnderstandPlanFees…

LargeMidSmallMicroAll

56%

34%

18%21%32%

Sponsors Confident/Very Confident AboutUnderstanding Plan Fees, by Plan Size

(Percentage of Respondents)


Display 19

…andThey’reRight

33%Yes

45%Not Sure

23%No

44%The fees havebeen waived

22%The investments cover the fees

34%The participants pay the fees

“Are You PayingExplicit Fees forPlan Services?”

“If Not, Why?”


Display 16

Two-ThirdsofDCSponsorsSpendaDayorLessonPlanDesignEachYear

More than1 week

At least1 full week

Severaldays

A full day1–5hours

Less than1 hour

10%12%11%

27%34%

68%

7%

Time Spent on Plan Design by All Sponsors*(Percentage of Respondents)

*Columns add to 100% by rounding.Source: AllianceBernstein Research 2005

Display 17

One-QuarterofLarge-PlanDCSponsorsSpendaDayorLessonPlanDesignEachYear

25%

65%

88%92%

LargeMidSmallMicro

Percentage of Plans Spending One Day or Less on Plan Design, by Plan Size



> Approximately 25% said that they didn’t pay fees at all for each of a number of essential plan services that included recordkeeping, plan administration and investment management (Display 20).

Most sponsors reviewed their plan costs infrequently, which could be both a cause and effect of their low understanding of fees. Seventy-six percent of respon-dents told us that they evaluated their plan costs for reasonableness and appropriateness either semiannually (26%) or annually (50%). Only 18% evaluated plan costs quarterly.

Interestingly, sponsors of micro plans reviewed their plan costs more frequently than did all sponsors as a group. Twenty percent of micro plan sponsors did so quarterly, and 35% did so semiannually.

SponsorsAreUnfamiliarwithSection404(c)A notably important part of ERISA for plan sponsors is section 404(c), which spells out several key require-ments that sponsors must meet if they want to avoid responsibility for participants’ investment decisions:

> Offering participants a “broad range” of investment alternatives;

> Providing participants with “sufficient information” to make informed decisions; and

> Enabling participants to change investment options at least once each quarter.

But 404(c) won’t exempt fiduciaries from legal responsibility for investment choices made by plan participants unless two more conditions are met. These are that the fiduciary chooses the investment options in compliance with ERISA’s prudent expert rule, and that the fiduciary monitors the options for appropriateness on an ongoing basis.

Clearly, sponsors must familiarize themselves with 404(c) in order to be fully aware of their potential legal liability. But many sponsors don’t appear to know this.

Among our respondents, only 31% said that they knew what 404(c) was, and only 20% said that their plan was 404(c)-compliant. Thirty-seven percent did not know what it was—this includes 62% of micro-plan sponsors—and 24% said that their plan was not compliant (Display 21).

And in an eerie echo of our discussion of fiduciary issues, 61% of respondents (a level that was consistent across plan sizes) agreed with the statement that “404(c)-related issues keep me up at night because I am not sure we comply.”

Display 20

AroundOne-QuarterofDCSponsorsThinkTheyDon’tPayFeesforKeyPlanServices

Otherfees

Wrap feeson outside

funds

Record-keeping

fees

Planadmin.

fees

Investmentmgmt.fees

Insurancewrap fees

21%21%23%25%25%27%

Percentage of Sponsors SayingThey Don’t Pay These Fees

Source: AllianceBernstein Research 2005 Display 21

ManyDCSponsorsNeedtoDevelopFamiliaritywithERISASection404(c)

404(c)-relatedissues keep

me up at night

Plan is 404(c)-compliant

Don’t knowwhat section

404(c) is

Know whatsection

404(c) is

61%

20%

37%31%

Percentage of Sponsors Response Describes Well/Very Well



TheConclusionIsClear:ManagingaDCPlanIsChallengingandBurdensomeThis chapter has described how DC sponsors, notably those of smaller plans, find it challenging and burden-some to manage their plans. It’s useful to recap the various ways in which this is the case:

1. A majority of survey respondents didn’t consider themselves fiduciaries.

2. A majority acknowledged that they didn’t know enough about asset allocation.

3. A sizable minority of plans didn’t have an investment policy statement, and nearly half of sponsors reviewed their plan investment options relatively infrequently.

4. A majority of sponsors didn’t know that their plan had a default investment option, and the most common default option wasn’t the most effective from an investment perspective.

5. Most respondents spent little time each year on plan design and maintenance, yet nearly all felt they spent enough time reviewing their plans’ design features and benefits.

6. By several measures, respondents didn’t fully under-stand the fees associated with their plans. Most reviewed fees infrequently.

7. There was considerable unfamiliarity among respondents with ERISA section 404(c) and its relevance to sponsors.


Many service providers aren’t living up to sponsors’ expectations. And concern about services and service quality is something that isn’t unique to our own survey respondents, but is felt throughout the DC sponsor universe.

In PLANSPONSOR magazine’s 2005 annual survey of DC sponsors, respondents were asked to rate each of 11 factors for their importance in helping sponsors select or evaluate DC plan providers. For the second consecutive year, sponsors replied that the two factors they valued most highly were the quality of service to plan participants, and the quality of service to plan sponsors.5

SponsorsNeedMorefromTheirServiceProvidersIt’s tempting to think that statements like those cited in the text box on this page aren’t the norm but, instead, are exceptions that can be written off as the complaints of a few disgruntled ex-customers.

Unfortunately for the plan provider community, they’re not. Our research indicates that there’s a gap between what sponsors say they need from their providers and what they’re actually getting.

Eighty-three percent of our respondents, for instance, told us that they needed in-person pre-retirement counseling services, but weren’t getting them. Seventy-three percent said the same about phone-based pre-retirement counseling and 59% about ongoing group enrollment meetings. [Note: All three of the services cited here were among the Lucky 7 services

described in our first chapter that sponsors said they especially liked.]

The f lip side of this relationship is services that sponsors were getting but didn’t necessarily need. These notably included online participant help (37% of sponsors received it but didn’t need it), self-directed brokerage accounts (19%) and paperless processing of plan distributions (18%). Not coincidentally, all of these were among the Unlucky 11 services described in our first chapter for which sponsors said they wouldn’t pay extra.

Sponsors Want a Renewed Emphasis on Service—and People

The previous chapter focused on how DC plan sponsors have partially contributed to their own belief that the condition

of their plans must improve. But service providers have also contributed to this belief.

In Their Own Words: Service

“Service is critical in my business. Why other people don’t see it that simply is remarkable to me. We changed plans because service at every level was terrible.”

“Without great service, I want nothing to do with any firm that we work with. In the case of the plan, we were like an island that they could never get messages or reports to. I thought we lived in the twentieth century. Pick up the phone and say hello once in a while! It goes a long way.”

“When a provider promises things, they should feel compelled to follow through. In our case, we were promised live phone reps, but our employees could rarely get anyone on the phone. The provider later told us that the account sizes were too small and they had changed our service offering based on account size. This was news to us. Other things fell apart. Our monthly reports stopped showing up until we called and asked for them. A lot of things like that just made it frustrating to deal with this firm.”

5 “2005 PLANSPONSOR DC Survey,” PLANSPONSOR, November 2005, p. 62.


We see the service gap manifested not only in terms of individual services, but also in how sponsors view their service providers.

Respondents were asked whether they were given certain support specialists as part of the packages offered by their plan provider. All respondents were given client service representatives (e.g., telephone service reps). Eighteen percent were given a senior relationship manager (though this number fell to 4% for micro plans and 6% for small plans). Eighteen percent were given an enrollment specialist (2% for micro plans and 12% for small plans). Just 4% were given an ERISA specialist (including 0% for micro plans) (Display 22).

We then asked respondents to say whether each of these specialists was especially important in supporting plan needs, and whether the specialists were particularly knowledgeable about the respondents’ plans.

Nearly all respondents ranked client service reps very highly in terms of their importance to plan support. In the cases of the other three specialists, though, sponsors thought they were far more important than their low presence in plan packages would suggest. The most attention-getting example of this was enrollment specialists: While 18% of sponsors reported having one, 78% told us that enrollment specialists were very important (Display 22).

Sponsors gave each of the five specialists6 much lower grades for knowledge than for importance (Display 23). These results highlight a discrepancy in how plan sponsors are thinking about some of their service pro-viders: Sponsors consider the providers important, but they perceive providers’ level of knowledge about the sponsors’ plans as much lower.

In our view, the more meaningful data are the num-bers about knowledge. Regardless of what sponsors might say about their specialists’ importance, their assignment of low marks for knowledge should be a cause for concern among their service providers.

Display 22

ThePerceivedImportanceofSomeDCPlanSpecialistsExceedsTheirAvailability

Percentage of sponsors considering this specialist important/very important

Percentage of sponsors receiving this specialist

ERISAspecialist


Seniorrelationship

manager


4%18%18%

100%

13%

78%

22%

95%


Display 23

DCSponsorsGivePlanSpecialistsConflictingGradesforImportanceandKnowledge

Percentage of sponsors considering this specialistknowledgeable/very knowledgeable

Percentage of sponsors considering this specialistimportant/very important

Financialadvisor

ERISAspecialist


Senior relationship

manager


18%13%

78%

22%

95%

9%5%

33%

16%

77%


6 We added financial advisors to the mix of service specialists for the questions about importance and knowledge.


TheServiceProcessNeedsMoreofaHumanTouchOne consequence of the plan provider arms race is that the involvement of people in the provision of services has declined. Sponsors wish this wasn’t the case.

To some extent, a decline in human interaction is very understandable: The quickening pace of automation and other technological innovations enabled the introduction of tech-based services and processes that were cheaper and more efficient. Most of the plan enhancements we showed in Display 3 back on page 7 fit this description—things like daily valuation, loans, expanding menus of investment options, and Internet applications.

A message that comes through clearly in sponsors’ discussions of service, though, is that they want more human interaction with their providers. They’re not pleased that providers have emphasized features over people. People, they told us, are a vital part of the service process.

A few survey results notably f lesh this point out:

> Asked to rate the importance of six specific services, sponsors rated two people-based services highest, by far. Ninety-two percent of respondents felt that employee education and enrollment were important

or very important. Eighty-four percent felt the same way about “periodic checks to make sure I’m satisfied” (Display 24).

> High percentages of respondents said that they “don’t ever work with” most of the seven service providers we listed. Prominent among these percentages were 71% each for financial advisors and senior product/relationship managers (Display 25).

> Ninety-five percent of respondents preferred that their financial advisor communicate with them via personal visits.

In Their Own Words: Interaction

“How much time does it take to call once in a while? How hard is it to show up and help me with my employees? I guess most of the experts have better things to do or have no time to get to know me. It’s what they promised and it’s not even close to what they delivered.”

“If I could do it all over again, I would do it very differently. I would require quarterly in-person meetings at a minimum.”

“I would love to meet an advisor or a service rep or an enrollment specialist that really knew the details of my plan and understood what I need to make a better plan. Just show me that you spent the time and show me that you are willing to come and help me.”

Display 24

DCSponsorsConsiderPeople-BasedServicesMostImportant,ByFar

Periodic due diligenceresponsibilities

Plan design or complianceupdates/issues

Retirement program review

Investment research,monitoring or updates

Periodic checks to makesure I’m satisfied

Employee education/enrollment

0 25 50 75 100

Percentage of Sponsors Considering This Service Important/Very Important

92%

84%

46%

37%

30%

24%


Display 25

DCSponsors’InteractionwithManyServiceProvidersIsLow

Client service rep.

Third-party admin.

Sr. product/relationship mgr.

Financial advisor

Accountant

Consultant

Employee benefits specialist 91%

82%

73%

71%

71%

61%

21%

Percentage of Sponsors Saying “I Don’t Ever Work with This Person”



SponsorsCouldHaveMoreTrustinTheirProvidersOur research reveals a parallel theme of trust running alongside sponsors’ desire for more of a personal element in their plan services. Sponsors want people to be more involved in their service process, yet they don’t have enough trust in the people they’re dealing with.

We gave respondents a list of types of service providers and asked them whether they trusted each of the providers “without question” (Display 26). Given sponsors’ near-universal belief that client service representatives were important to their plans, it wasn’t surprising that these providers earned the highest grade for trust. But that highest grade was only 45% of respondents, a level consistent across plan sizes. A mere 29% of respondents said that they trusted plan providers/recordkeepers without question.

Sponsors’ low degree of trust in their service providers additionally came out in two other related questions that we posed. In both cases, we felt that the percentage responses should have been significantly higher.

The first question asked sponsors to indicate whether they viewed each of the eight service providers we listed as “one of my trusted partners in matters related to running my firm’s retirement plan.”

The strongest responses were for client service reps (70% of respondents considered them trusted partners) and plan providers/recordkeepers (54%). Two service providers that we would have expected to rank well in this context—senior product/relationship managers and financial advisors—got a thumbs-up from only 18% and 15% of respondents, respectively (Display 27).

In Their Own Words: Trust

“How do I say this any clearer? I need to hear from a person once in a while if I am going to trust them. They have to show me that they understand me and the issues that I face. I don’t know why that would be such a surprise to most people, but it seems to be an orphaned idea.”

Display 26

DCSponsorsDon’tHaveEnoughTrustinTheirServiceProviders

Employee benefits specialist

Financial advisor

Consultant


Third-party admin.

Accountant

Plan provider/recordkeeper

Client service rep.

Percentage of Sponsors Saying “I Trust This Person Without Question”

2%

6%

18%

6%

9%

17%

45%

29%


Display 27

DCSponsorsDon’tViewTheirServiceProvidersasTrustedPartners


Consultant

Financial advisor


Accountant

Third-party admin.


Client service rep.

0 25 50 75 100

Percentage of Sponsors Viewing This Provideras “Trusted Partner”

4%

10%

20%

15%

18%

25%

70%

54%



It’s worth pointing out here that the degree to which sponsors considered their providers trusted partners was much higher when sponsors were in touch with those providers more regularly (Display 28). For example, 52% of sponsors who regularly used a financial advisor felt that their advisor was a trusted partner, compared to the 15% of all respondents cited in the preceding paragraph. This not only underscores sponsors’ desire for greater human interaction in the service process, but also indicates a positive correlation between interaction and trust.

In the second question, we asked sponsors to indicate whether they viewed each of the eight service providers as “an expert in the retirement plans market and retirement issues.”

Again, client service reps (67%) and plan providers/recordkeepers (56%) got the most positive votes. And again, sponsors expressed a low level of confidence in other professionals who we’d expect to fare much better (Display 29).

Interestingly, the percentage responses to these last two questions were nearly identical. This suggests a strong linkage between expertise and trust in sponsors’ minds: Expertise about plans may be a vital measure of whether a service provider should be considered a trusted partner.

EvenSo,SponsorsDon’tOftenChangePlanProvidersDC plans don’t change providers as frequently as they seem to think they should, despite the concerns that sponsors have about many of their services. Only 14% of our respondents said that they had changed providers in the past few years.

Why haven’t more plans switched providers? The primary reason is that it’s a daunting task that takes an extraordinary amount of work. The frustration and logistical difficulties associated with changing providers can be severe.

Those of our respondents who actually changed providers were very articulate when discussing the topic. Their comments touched on both the hardship and necessity of changing providers when they felt that the providers’ interests weren’t appropriately aligned with their own or those of their participants (see text box on next page).

Display 28

RegularInteractionwithServiceProvidersBuildsTrust

Percentage of Sponsors that Use Financial Advisors or Third-Party Administrators Regularly

and View Them as “Trusted Partner”

25%

Third-party admin.Financial advisor

64%

15%

52%

All sponsors Sponsors who regularly interacted with this provider


Display 29

DCSponsorsDon’tViewTheirServiceProvidersasExpertsinRetirementPlans


Consultant

Financial advisor


Accountant

Third-party admin.


Client service rep.

Percentage of Sponsors Viewing This Provider as “Expert in the Retirement Plans Market

and Retirement Issues”

5%

10%

14%

20%

20%

26%

67%

56%



TheConclusionIsClear:SponsorsWantaRenewedEmphasisonService—andPeopleAs a group, DC plan sponsors would like to be more satisfied with the types and quality of services in their plans.

Here’s a brief summary of our main observations:

1. A solid majority of sponsors aren’t getting services that they strongly need. In addition, there are services they’re receiving that they don’t necessarily need.

2. Sponsors consider a number of service specialists important in supporting their plans, yet give those same specialists low ratings for their plan knowledge.

3. Sponsors don’t have enough direct human interaction with their service providers.

4. Sponsors don’t consider many of their service providers to be trusted partners.

5. The relatively few sponsors who have undertaken the daunting task of changing plan providers say that they’ve been compelled to do so because of especially ineffective service.

In Their Own Words: Changing Providers

“Our decision to change providers was tough because it takes a lot of energy. We worked hard identifying a firm that would do the heavy lifting for us...At the end of the day, the previous plan provider was just sloppy and lazy. They had terrible people working the phones and never resolved any issues for us. We had to constantly hound them to get back to us. It was a big mess.”

“We changed plan providers after three months of literally not getting a call back unless we called 20 times per day. It was frustrating and we were getting crushed by our employees asking questions.”

“My issues in the decision to change were centered on service, actually poor service. The 800 number for employees was always busy or people were transferred to a machine. When you are dealing with people’s life savings, they [the providers] have to provide access to real people who know the ins and outs of the plan. There is nothing more frustrating to a participant than not getting a good explanation or answer when their money is involved. That’s why we changed.”


Diversification is part of the bedrock underlying a sound approach to investing for long-term goals like retirement. Remember, too, that ERISA requires fiduciaries to diversify their plans’ investments in order to minimize the risk of large losses.

One could reasonably conclude that when it comes to investment options, it’s thus better for DC plans to offer their participants more than less. But is it possible for plans to offer too many options?

According to our research, the answer is a resounding “Yes!” Plan sponsors feel that the number of investment options offered in their plans is out of synch with their preference for a streamlined menu of choices. This is so much the case that it’s very difficult for most participants to decide which options to choose.

We described earlier how only 9% of our survey respondents thought that their participants could create a proper asset allocation in their 401(k) plans. It’s more than likely, as we see it, that the high number of investment options in most plans is a contributing factor to this perception.

HowManyInvestmentOptionsAreEnough?How many investment options are enough in a DC plan? This is what we were getting at when we asked sponsors to tell us how many options it would take for them to meet ERISA’s requirement that they offer participants a “diverse” set of options.

Sixty-seven percent of respondents said that a diverse plan should contain at least 16 options (Display 30). This figure included 25% who felt that a diverse plan should contain at least 20 options.

These sponsors have apparently practiced what they’ve preached: The actual degree of diversification within their plans was consistent with what they felt was theo-retically appropriate. Viewed in aggregate, their plans included anywhere from 18 to 28 investment options (Display 31, next page). This ranged from 15–23 options in micro-size plans to 22–29 options in large plans.

As a further reality check, the actual degree of diversification within our respondents’ plans also matched up with the results of PLANSPONSOR’s 2005 annual survey of DC sponsors. According to the survey, the average DC plan had 18.8 investment options.7

But when we spoke to sponsors directly, they complained that their plans had too many options, a fact that was causing them and their participants considerable anguish (see text box, next page).

Too Many Investment Choices, Not Enough Advice

DC sponsors would like their plans to have fewer investment options and offer investment advice to participants.

Display 30

Two-ThirdsofDCSponsorsFeelaDiversePlanShouldOfferatLeast16InvestmentOptions

5 or fewer5–1015–1116–20Morethan 20

0%

12%

21%

42%

25%

67%

Percentage of All Sponsors Viewing This Number as Required Number of

Investment Options for “Diverse” Plan




AddingOptions:LowerParticipation,HigherLossAversionIt makes sense that the availability of a wide array of investment options could have an adverse effect on plan participation. The plan’s obligation to educate participants about each option could easily create an information overload for them. And, in turn, partici-pants could find it increasingly difficult to translate so many options into an appropriate asset allocation.

A recent study found a direct link between a plan’s number of investment options and participant behavior.

Sheena Iyengar and Wei Jiang of Columbia University’s Graduate School of Business reviewed participation data for 800,000 participants in 401(k) plans. They compared participation rates to the number of available investment options.8 Among their main observations were that, for every 10 investment options added to a plan:

> Overall participation rates dropped about two percentage points (Display 32, next page);

> There was an increase of 5.4 percentage points in the allocation of assets to money market and bond funds;

> There was an increase of 1.7% in the probability that participants would allocate more than half of their contributions to money market funds; and

> There was an increase of 3.1–4.6% in the probability that participants would not allocate any of their contributions to equity funds.

In other words, as plan diversification increased—presumably a good thing—fewer employees chose to participate at all—a decidedly bad thing. And among those who did participate, there was a pronounced gain in loss aversion, as ref lected in both higher allocations to money market and bond funds and a higher probability that participants would not invest in equity funds.

Display 31

TheAverageDCPlanContains18–28InvestmentOptions

Number of Funds Offered in Surveyed DC Plans, by Plan Size

Fund All Micro Small Mid Large

Stable Value 1 1 1 1 1

Balanced 2–4 1–2 1–3 2–4 2–4

Domestic equities 3–5 3–5 3–5 5+ 5+

Bonds 3–5 2–4 3–4 3–5 4–5

Global/International 3–5 2–4 3–4 3–5 3–5

Other Specialty 1–3 1–2 1–3 2–5 2–5

Allocation (TD, LC, FoF)* 5+ 5+ 5+ 5+ 5+

Range of total 18–28 15–23 17–25 21–29 22–29

*TD = target-date, LC = lifecycle, FoF = fund of fundsSource: AllianceBernstein Research 2005

In Their Own Words: Investment Options

“Our choices to increase fund options have killed us. So much choice, and at the end of the day, most of our people put their money in one or two funds. I don’t know that the funds are right for them, either. In fact, I think they are probably wrong for most.”

“We offered so many fund options because it was the rage a few years ago. Everyone told us it was a great thing to do. Now we look at why many employees feel lost in the maze of options and are afraid to do the right thing. We spent a lot of time telling people to diversify and use more than a few funds. We told them that they could choose from all of the options in the plan. No one got it. They just got overwhelmed by the investment choices. So here we are and I don’t know what to do to change the plan.”

“Why can’t the plan run the way it was promised—plug and play? ‘The plan will run itself,’ is what one person told me. The funds are a challenge in themselves because there are so many. Did I really need to offer 35 funds?”

8 Sheena Iyengar and Wei Jiang, “How More Choices Are Demotivating: Impact of More Options on 401(k) Investments,” working paper, Columbia University, New York, 2003.


SponsorsWanttoMakeTheirPlansMuchSimplerIn our first chapter, we used the examples of the Lucky 7 and Unlucky 11 plan features to illustrate how sponsors wanted to simplify their plans. This same idea of simplicity applies to investment options as well. The consensus among sponsors these days is that the shorter a menu of options is, the better.

And so it appears that the pendulum of plan composition has swung from the provider-driven arms race back to a desire to keep things more basic for participants. If sponsors could design their plans all over again, they’d make the plans much simpler.

Target-DateRetirementFunds:Win-WinforParticipantsandSponsorsTarget-date retirement funds are an investment option that meets the need for simplicity in several ways. In the process, these funds have significant appeal for plan participants and sponsors alike.

Typically, target-date retirement funds (also known as “lifecycle funds”) are broad asset allocation vehicles that are offered as a series of portfolios managed toward specific years when investors expect to retire (e.g., 2025, 2030, 2035, etc.). They’re designed to try to maximize returns when retirement is many years away and then gradually reduce overall risk as the target-date year approaches.

A key benefit of target-date retirement funds is that they relieve the investor of most of the decisions associated with managing a broadly diversified retirement portfolio such as a 401(k). These decisions are made instead by the investment manager, who’s responsible for allocating assets among a variety of asset classes; determining and maintaining the appropriate risk level; and systematically rebalancing the portfolio with the target date in mind.

According to PLANSPONSOR’s 2005 annual survey of DC sponsors, 54.5% of DC plans offer “Asset Allocation/Lifestyle/Lifecycle” funds (a category that includes target-date retirement funds) as an investment option.9

Display 32

DCPlanParticipationFallsastheNumberofInvestmentOptionsRises

50

60

70

80

594939291992Number of options offered

Participation Rate per Number of Options Offered

(%)

The graph above plots the relationship between participation rate (all explanatory variables except the number of funds offered are set at their respective mean values) and the number of funds offered using the Robinson two-stage semiparametric estimation method. Source: Iyengar and Jiang, 2003

In Their Own Words: Simplicity

“If I could do it differently, I would avoid the temptation to offer so many features and investments. Choice, in this case, proved to be a problem for running the plan and for participants.”

“I am putting my plan up for review, and I am going to ask the plan providers to offer a simple structure with fewer options so my employees can put their money in funds that perform the way they need them to. A firm that can help with simplicity and a simple menu of great funds will win my business.”

“The plan is feature-heavy and tough to deal with. Why don’t we get religion and make things simple and easy to use?... No one ever told me that more choice was such a bad thing. It is time for the industry to slow down and help us get back to basics.”



Our research suggests that many employees embrace the idea of using target-date retirement funds in their DC plans. Accidental investors especially liked the funds’ ease of use and minimal decision-making. For Confident investors, the funds’ main sources of appeal were that they would help get investors to retirement and keep them appropriately invested thereafter.

Sixty percent of Accidental non-participants and 38% of Confident non-participants said that target-date retirement funds would enhance their desire to participate in their company’s plan (Display 33, left). In addition, clear majorities of Accidental and Confident

participants—76% and 65%, respectively—said that they’d consider using target-date retirement funds if their company’s plan offered them as an option (Display 33, right).

As for plan sponsors, they potentially derive several major benefits from offering target-date retirement funds in their DC plans. The most notable include:

Theyencourageparticipation.As we’ve shown, target-date retirement funds’ simplicity makes them a great means of encouraging employees to participate in their plans. This represents a big opportunity for sponsors to stimulate interest in their plans and make participants feel more positively about saving for retirement.

Theyhelpfiduciaries. Offering target-date retirement funds as an investment option could be considered a suitably prudent act by plan fiduciaries such as sponsors. It might also help reduce fiduciaries’ exposure to claims that they breached their fiduciary obligations.

Theyserveasaneffectivedefaultoption. We described earlier how “stable value” portfolios (i.e., money market funds and guaranteed accounts) are, by far, the most popular default investment option in DC plans. But stable value portfolios aren’t an appropriate vehicle for the kind of long-term growth that investors seek to generate in their retirement plans.

By contrast, most target-date retirement funds are deliberately structured to achieve long-term capital appreciation and preservation with a well-diversified asset allocation and built-in risk reduction over time. Congress recognized this in the Pension Protection Act of 2006, which encourages the use of “investments that include a mix of asset classes consistent with capital preservation or long-term capital appreciation or a blend of both” as DC default options.

We therefore fully expect that most DC plans will ultimately adopt target-date retirement funds as their default option.

Display 33

ManyDC-EligibleEmployeesEmbraceIdeaofUsingTarget-DateRetirementFunds

Confidentinvestors

Accidentalinvestors

Confidentinvestors

Accidentalinvestors

Percentage of Non-Participants Saying that TD Funds Would

Enhance Desire to Participate in Plan

Percentage of Participants that Would Consider

Using TD Funds If Offered

65%76%

38%

60%


What Are Target-Date Retirement Funds?

Our survey of DC plan-eligible employees defined target-date retirement funds as “Allocation funds that allow you to simply pick the fund that corresponds closest to your expected retirement date. You then let a professional money manager do the rest. They choose the mix of stocks, bonds, and cash, and they change it over time throughout your lifetime.

“Target-date retirement funds eliminate the need for you to choose among the other investments in your employer’s retirement plan. They also eliminate the need for you to make changes to your investment mix as you grow older, even after you have started retirement.”


For those who’d like to explore the specific topic of target-date retirement funds more deeply, we recommend several other recent publications by AllianceBernstein Investments:

> Target-Date Retirement Funds: A Blueprint for Effective Portfolio Construction, by Thomas J. Fontaine, Senior Portfolio Manager for Core/Blend Services (October 2005)

> Target-Date Retirement Funds and the Defined Contribution Plan Sponsor’s Fiduciary Responsibility, by Daniel A. Notto, Senior Retirement Plan Counsel (September 2005)

> Myths and Realities About Defined Contribution Plans, by Daniel P. Gangemi, Managing Director of Market Research (August 2005)

> Implications of Participant Behavior for Plan Design, by Shlomo Benartzi, Ph.D., Partner, Benartzi & DiCenzo, LLC ( January 2006)

InvestmentAdvice:MostlyUnavailable,butWantedandOntheWayMany sponsors say their participants need advice to help them combine investment options into an effective allocation, but relatively few plans are offering it.

According to the Employee Benefit Research Institute, in fact, 73% of eligible DC plan participants say that their employer did not give them access to investment advice for retirement purposes in the past year.10 Of eligible DC plan participants who requested advice from their employer, about half received it.11

This isn’t surprising since, until recently, ERISA rules prevented or discouraged many sponsors and service providers from offering advice. The Pension Protection Act of 2006, however, contains several measures that collectively serve to make prudent and objective investment advice far more widely accessible than previously, beginning in 2007. These include:

> Plan sponsors will be relieved of fiduciary liability for participant investment advice provided by third-party advisors, if certain conditions are met.

> Fund providers and others who receive compensation based on sales of plan assets will be allowed to give advice.

> Advisors will be required to acknowledge that they’re ERISA fiduciaries and to make extensive written disclosure to plan participants.

> Advisor fees won’t vary based on the investment selected, unless the advice arrangement uses a computer model that meets certain requirements and is certified by an independent investment expert.

This is good news for participants, because there’s clear evidence that they want advice and value it. Of the 53% of eligible DC plan participants who requested advice from their employer and received it, for instance, 70% implemented some or all of the recommendations made to them (Display 34).

10 “2006 Retirement Confidence Survey,” EBRI Issue Brief, April 2006.11 Ibid.

Display 34

MostDCParticipantsUseInvestmentAdviceIfTheyGetIt

no

don't know

yes

All

Some

None

53%Yes

30%None of the recommendations

57%Some of therecommendations

13%All of therecommendations

45%No

2%Don’t know

“Did You Request and Receive Investment Advice?”

“If Yes, Did You Implement Any of the Advice?”



Due to the passage of the Pension Protection Act, we expect to see much more advice-related activity among sponsors and financial advisors. We also expect financial advisors to devote more of their efforts to educating plan participants about basic investment concepts and retirement-oriented financial issues. Indeed, sponsors really want their advisors to be educators: Eighty-nine percent of our respondents told us that they think advisors should spend 70–79% of their plan-related time on educating employees.

AdviceShouldBeSpecificandComefromPeopleSponsors gave us a lot of feedback about advice in the course of responding to our survey. When we asked them to define what they thought advice was, they were as unambiguous about what it did not mean as they were about what it did mean. Eighty-six percent of respondents agreed that it did not include any of five things that are commonly presented as “guidance tools” by plan providers (Display 35).

When we followed up with respondents to discuss their survey responses in greater detail, their definitions of advice were uncannily similar.

We find two aspects of sponsors’ comments about advice (see text box at left) to be especially meaningful. The first is the idea that advice is something specific, to be tailored to the individual participant’s needs and goals. This is fundamental to our own approach to investing.

The comments also reveal that sponsors see advice as a personalized process that emphasizes human interaction between an advisor and a participant. This perception underscores a point we made in the previous chapter, that there needs to be much more of a personal dimen-sion in the delivery of plan services.

In Their Own Words: Advice

“Advice happens when an advisor directs a participant into specific investments based on their specific situation.”

“Advice is a process where an advisor recommends specific investments to individuals based on their needs.”

“It entails people (advisors) working directly with people on their needs and goals, and helping them make great choices in order to achieve their goals.”

“I know that advice is something more than an online calculator or some other static feature in a plan. It is a dynamic process between an advisor and a participant that yields an investment strategy that is appropriate for the participant.”

Display 35

NearlyAllDCSponsorsDon’tBelievethatIndustry“GuidanceTools”AreAdvice

“GuidanceTools”OfferedbyProviders

Product brochures

86% of sponsors said that none of these represented advice

Integrated plan software

Online calculators & hypothetical models

Group meetings

Presentations from advisors in a group setting



Participants reinforce this point further, as they say they’re much more likely to use advice if it’s provided to them in person than if available online or by telephone (Display 36).

The fact that sponsors and participants strongly prefer personalized advice presents a great opportunity for financial advisors. We’ve described how sponsors gave their financial advisors low grades for interaction, trust and plan knowledge. Given the much greater access to advice provided by the Pension Protection Act, advisors now have the chance to overcome these low grades by actively delivering the face-to-face advice that sponsors and participants say they want.

TheConclusionIsClear:SponsorsandParticipantsWantStreamlinedOptions,MoreAdviceWe’ve shown how DC plan sponsors feel that their plans offer participants far too many investment options. The impact of having too many options is negative for sponsors, participants and the plans themselves. And at the same time that participants are facing more choices, they’re not getting the advice they need to make sense of it all.

The combination of these two things has left many sponsors looking for help and many participants unprepared for their retirement planning.

These are our primary observations:

1. Having too many options can discourage plan participation and make it tougher for participants to come up with an appropriate asset allocation. A recent study linked an increase in plan options to lower participation rates and unduly loss-averse investment decisions.

2. Given the opportunity to design their plans all over again, sponsors would significantly reduce the number of investment options offered and emphasize overall simplicity.

3. Target-date retirement funds are an investment option that has great potential benefits for sponsors and participants alike. These funds can help plan fiduciaries meet their fiduciary obligations, and encourage participation by making it easier for participants to invest appropriately.

4. Both sponsors and participants are eager to have investment advice be a part of their plans, although relatively few plans currently offer it. The Pension Protection Act of 2006 includes several measures that, collectively, serve to make advice far more widely accessible than previously.

5. Sponsors and participants each prefer that investment advice be delivered in person.

Display 36

DCParticipantsPreferInvestmentAdviceIfProvidedinPerson

By telephone

Online

In-person

Very likely

Not too likely

Somewhat likely

Not meaningfulNot at all likely

9%

14%

30%

25%

36%

42%

28%

19%

12%

38%

29% 2%

16%

Percentage of Participants that Would Use Investment Advice If Offered, by Delivery Mechanism



It’s clear to us that DC plan sponsors must take an active back-to-the-basics approach to address the issues we’ve described in the preceding chapters. Our suggestion is that they start with the big picture. Sponsors should keep two concepts uppermost in their minds as they strive to come up with solutions:

> “Makeitsimple!”As we’ve already discussed, sponsors badly want their plans to be simpler and more user-friendly.

With the passage of the Pension Protection Act of 2006, there is substantial low-hanging fruit for sponsors to pick—particularly in the areas of enrollment and plan features—by turning “Make it simple!” into a mantra of plan-related activity.

We believe that simplifying plans gives sponsors the best opportunity to truly help those participants who ask, “What should I do?” And sponsors can best help those participants by building their plans around our second concept, which we call “Just do it for me!”

> “Justdoitforme!”This is a catch-all phrase for seeing to it that all aspects of the plan—especially enrollment and investment decisions—involve as little work for participants as possible. Accomplishing this should make participants feel more positively about their plans, which should help to push participation rates upward and make sponsors’ jobs that much easier.

Specialists in behavioral finance have found psychological validation for the “Just do it for me!” idea by identifying counterproductive decision-making tendencies (e.g., procrastination, inertia, chasing hot performers, not rebalancing) among

existing and prospective plan participants. They suggest trying to overcome these tendencies by structuring plans to minimize the number of decisions and choices that employees must make.

Woven together, the “Make it simple!” and “Just do it for me!” concepts form the common thread that unites sponsors and service providers in meeting the needs of participants. They are the fundamental drivers of our own thoughts on how sponsors should go about improving their plans.

We’ve come up with several specific suggestions, which we describe in the sections that follow. None is a single, all-encompassing way to implement plan improvement; instead, we believe that all of them are necessary, and they work best when used together.

UsinganOldPlaybookforaNewGamePlanTaken together, our research observations about improving DC plans lead us to conclude that the overall DC industry is poised at an inf lection point of historical change, one perhaps more significant than the advent of daily valuation in the early 1980s.

This change will be for DC plans to take on some of the essential characteristics of the traditional defined benefit (DB) plan. In DB plans, the employer assumes the investment risk and participants have little active responsibility. While participants will continue to bear the investment risk in DC plans, we think their need to make decisions will greatly decline.

The key to this decline will be what we consider the likely adoption of our three top suggestions for plan improvement, all of which involve automation.

Suggestions for Improving the Status Quo

We’ve shown how DC plan sponsors have a great desire to see their plans improve, and how there’s plenty of room

for improvement. We also note that DC plan participants continue to ask, “What should I do?” to make effective plan

choices, as they have for years.


These suggestions—automatic enrollment, automatic increases in salary deferral rates, and the emergence of target-date retirement funds as the standard default investment option—directly respond to participants who ask “What should I do?” by embracing the “Make it simple!” and “Just do it for me!” concepts. The prospects for all three are much brighter due to the passage of the Pension Protection Act.

The potential implications of these suggestions are very positive for sponsors and participants alike: Plans should run more smoothly; enrollment should rise; the percentage of salaries deferred for investment should increase; the likelihood of plans passing their required compliance tests should be higher; and communication of plan information should become simpler.

Automaticenrollment. We endorse the automatic enrollment of employees in a DC plan unless they indicate otherwise. We think this has the potential to revolutionize DC plans, much as daily valuation previously did.

Congress gave its blessing to automatic enrollment in the Pension Protection Act, which removes a legal obstacle and offers DC sponsors a compelling inducement to include it in their plans.

The key to automatic enrollment is that it changes the nature of the employee’s decision. Instead of making an active choice to participate in their plans, employees must make an active choice to “opt out,” or not participate.

For sponsors, the biggest appeal of automatic enroll-ment is that it’s the easiest, most efficient way to raise participation rates. Academic studies have reported that automatic enrollment has dramatically increased participation in some plans to the 80–90% level.12,13

There is considerable upside for automatic enrollment, both in degree of usage and as measured by employee sentiment:

> Just 14.2% of DC plans currently use automatic enrollment.14

> Around 70% of non-participating workers feel favorably about the idea of automatic enrollment (Display 37, top).

> Two-thirds of non-participating workers say that they’d probably stay in a plan if they had been automatically enrolled in it (Display 37, bottom).

Sponsors, therefore, are faced with an attractive combination: Automatic enrollment is not yet widely used, but workers feel positively about it and Congress has given it a high-profile vote of confidence. It would appear that sponsors have a huge opening to boost plan participation by adding a feature that they already know their employees would welcome.

12 Brigitte C. Madrian and Dennis F. Shea, “The Power of Suggestion: Inertia in 401(k) Participation and Savings Behavior,” Quarterly Journal of Economics, 116, 2001b, pp. 1149–1525.13 James J. Choi, David Laibson, Brigitte Madrian and Andrew Metrick, “For Better or For Worse: Default Effects and 401(k) Savings Behavior,” in David Wise (ed.), Perspectives in the Economics of Aging, University of Chicago Press, 2004, pp. 81–121.14 “2005 PLANSPONSOR DC Survey,” PLANSPONSOR, November 2005, p. 58.

Display 37

ManyDCNon-ParticipantsFeelFavorablyAboutAutomaticEnrollment

Not at all likely

Not too likely

Somewhat likely

Very likely

2%Neutral

28%Oppose

69%Favorable

22%

11%

26%

40%

“How Do You Feel About Automatic Enrollment?”*

“If You Were Automatically Enrolled in Your DC Plan, Would You Stay in the Plan?”*

*Totals add to 100% by rounding.Source: EBRI 2006 Retirement Confidence Survey (top), EBRI 2005 Retirement Confidence Survey (bottom)


Automaticincreasesinsalarydeferralrates. Sponsors can improve plan demographics by increasing the percentage rate of salaries that participants defer for investment.

We suggest two easy ways for sponsors to increase salary deferral rates. The first is to have the plan automatically implement annual deferral-rate increases as a benefit of participation. [Note: The Pension Protection Act specifically mandates the offering of this type of automatic deferral increase program if sponsors want to legally avoid burdensome plan testing rules.] The second is to have participants actively choose to automatically increase their rates when they receive pay raises or according to some other specific timetable.

Although automatically increasing salary deferral rates is not yet a widespread practice among DC plans, studies show that it has been very successful when utilized15 (Display 38), and that participants strongly favor it as a plan feature.16 Participants appear to like that it increases the amount they save for retirement as it reduces the number of decisions they have to make.

Betterdefaultinvestmentoptions. In our third chapter (“Plan Management Is a Challenge and a Burden”), we established that sponsors have stumbled with regard to their plan’s default investment options in three important ways:

> A majority of sponsors don’t know that their plan has a default option;

> The most common default option isn’t necessarily the most effective from an investment perspective; and

> Sponsors have frequently accepted external recommendations without thoroughly vetting the options themselves.

We believe that sponsors can serve their participants more effectively by placing greater importance on the selection of “smart” default options that make the investment process easier by doing most of the work.

Target-date retirement funds are an excellent example of what a smart default option should be (Display 39). They’re set up with an asset allocation and risk profile

Display 38

AutomaticSalaryDeferral-RateIncreasesHaveBeenVerySuccessfulWhenUsed

0

3

6

9

12

15

0201009998

AdviceSMT*Neither

Average Savings Rates When Participants Automatically Raise Deferral Rates, by Influencing Factors

(%)

*SMT: “Save More Tomorrow” automatic deferral-rate increase plan Source: Benartzi and Thaler, 2004

15 Shlomo Benartzi and Richard Thaler, “Save More Tomorrow: Using Behavioral Economics to Increase Employee Savings,” Journal of Political Economy, Vol. 112, Part 2, February 2004, pp. S164-S187.

16 “2006 Retirement Confidence Survey,” EBRI Issue Brief, April 2006.

Display 39

Target-DateRetirementFunds:A“Smart”DefaultOptionforDCParticipants

“Active”Investors “Accidental”Investors39% 61%



Employees See Themselves as “Active” or “Accidental” Investors


Why All Kinds of Investors Like Target-Date Retirement Funds

ActiveInvestors

Clear investment benefit

Helps investors reach retirement

Appropriate investment mix during retirement

Appealing methodology and design

AccidentalInvestors

One-stop investment option

Simplicity

Ease of use

Minimal decision-making

Investment manager determines asset allocation

Automatic rebalancing


that change appropriately over time as the participant’s targeted retirement year approaches. In addition, they’re easy to conceptually understand, have built-in diversification and rebalancing, and help sponsors meet their fiduciary obligations.

Bolstered by the Pension Protection Act, we expect target-date retirement funds to eventually become the standard default investment option in most DC plans.

In studying the impact of automatic enrollment on plan participation rates, the Investment Company Institute found that lifecycle funds (exemplified by target-date retirement funds) were notably successful when used as a default option. The Institute’s study concluded that plans typically generate a higher income replacement rate—the percentage of a participant’s pre-retirement income paid out by his/her retirement plan—when the default option is a lifecycle fund, rather than a money market fund.17

AdditionalSuggestionsSimple,yeteffective,communicationplan. Sponsors should communicate plan-related information to employees clearly and consistently. Ultimately, even the best plan in the world won’t succeed unless there is great communication to get key messages across and help participants feel good about the investment decisions they make.

While many people take effective communication as a given, they’re wrong to do so: Participant confidence and investment sophistication would undoubtedly be higher if plan communication was as strong as it should be.

We recognize that communicating well is no easy task. Nonetheless, its potential benefits—in terms of education and employee morale—are so big that we urge sponsors to invest the time and resources necessary to create a truly simple, yet effective, communication plan.18

The two keys to good communication are the content itself and how sponsors convey that content to the employee audience. It’s not just what you say, it’s how you say it.

> Plan-related content is mostly about investing and procedures. Neither of these tends to grab the attention of the Accidental investors who account for the majority of plan participants. Sponsors need to design communication plans that can engage Accidentals with a simplistic, non-technical approach that eases their discomfort with the subject matter. [Remember our “Make it simple!” mantra.]

At the same time, sponsors must communicate the same content in a style that appeals to more sophisticated Active investors. This involves a higher level of detail, as well as thoughtful explanations of how Actives can make the most of their plan’s features and investment options.

> The most common means of communication are hardcopy materials, Web-based applications and live gatherings. All are vital, but we especially encourage sponsors to take their own belief in the value of human interaction to heart, and develop compelling in-person sessions for employees accordingly.

These sessions can be discussions or presentations about investment options, the basics of investing, salary deferral rates, or any other topic that plan participants need to know about. Featured speakers can include a service provider, investment manager, training specialist, human resources representative, etc.

Live gatherings should be held on an ongoing basis and not only when the plan is in the process of converting from one provider to another. The point is to get people engaged on a personal level to attract their interest and then keep them interested. This applies to Accidental and Active investors alike.

17 “The Influence of Automatic Enrollment, Catch-Up, and IRA Contributions on 401(k) Accumulations at Retirement,” ICI Perspective, Vol. 11, No. 2, July 2005, p. 4.18 For a more detailed discussion of plan communications, see Fontaine, Target-Date Retirement Funds: A Blueprint for Effective Portfolio Construction, pp. 59–61.


Investmentadvice. We think DC sponsors should give plan participants access to professional investment advice as a standard feature of their plans. As we dis-cussed in the preceding chapter, advice is something that participants want and know they need, and spon-sors strongly want them to have it.

The passage of the Pension Protection Act has given sponsors a green light to make advice more readily

available. We urge them to do so, and similarly urge financial advisors to take a much more active approach to delivering advice.

Mandatoryplanreviews. We’ve made clear how sponsors typically don’t spend enough time working on their plans’ design and don’t fully understand their plans’ fees. With that in mind, we believe that sponsors should conduct mandatory reviews of their plans at fixed intervals (ideally quarterly, at least semiannually).

Plan reviews should cover overall plan design and key features like investment options, enrollment procedures, fees and investment policy statements. Sponsors should use the review process both to assess the plan’s compliance with ERISA and other relevant rules, and to gauge how effectively they and their service providers are meeting the needs of participants.

Investmentandfiduciaryeducation. As we pointed out in “Plan Management Is a Challenge and a Burden,” many sponsors have an incomplete understanding of basic investment concepts such as asset allocation, and aren’t sufficiently aware of their fiduciary status and corresponding obligations.

As a result, we urge sponsors to periodically brush up on each of these areas. They should engage their plan provider or investment manager(s) to reacquaint them with investment fundamentals, and meet with legal counsel for a thorough review of their fiduciary responsibilities.

Newgoalsforserviceproviders. In general, sponsors should set new, higher goals for their service providers (such as recordkeepers, third-party administrators, enrollment specialists, etc.) to achieve. As we’ve demonstrated, sponsors and their participants no longer accept the provider-driven arms race as the plan industry’s basic mode of operation. The ascendance of the “Make it simple!” and “Just do it for me!” ideas means that providers have an important opportunity to better serve their customers.

Basic Investment Principles That DC Plan Fiduciaries Must Communicate*

> Regular contributions are necessary to build retirement savings.

> Choosing a good investment plan is critical to helping you build savings.

> Retirement savings are built by investing for the long term, not betting on near-term market movements: Chasing the performance of hot funds or stocks is a losing strategy.

> If you’re primarily invested in cash, you’re probably invested far too conservatively.

> If you’re primarily invested in company stock, you’re probably taking far too much risk.

> To reduce risk, you need to diversify by investing in a number of complementary asset classes.

> It is the performance of the whole portfolio that matters, not the pieces.

> In a well-diversified portfolio investing in several asset classes, something will always be out of favor. The performance of the individual parts should get back to, or close to, historical norms.

> Systematically bringing your portfolio back to its target asset allocation can add to return and reduce risk, by requiring you to sell high and buy low.

> Your risk and return objectives change over time as you age and approach retirement—and thereafter. You should reassess your asset allocation as you age, but not in response to short-term market movements.

* Reprinted from Fontaine, Target-Date Retirement Funds: A Blueprint for Effective Portfolio Construction, p.60.


Based on our earlier chapter on service, here are some specific things we think sponsors should require from their service providers:

> Highly accountable, dedicated contact people to coordinate and oversee provision of services

> High level of accessibility

> High level of responsiveness

> High level of knowledge

> Increased frequency of contact

> More opportunities for participants to get retirement counseling, investment advice and other assistance on a face-to-face basis

> Easily measurable standards of service providers’ effectiveness, and more frequent reviews of whether providers have met those standards

> Better enrollment education and servicing


DC sponsors have told us that in order to be most effective, plans should become simpler and require participants to make fewer decisions. Service providers should be more responsive to the needs of participants and sponsors, most notably by emphasizing benefits over features. Sponsors themselves should better understand their own role as plan fiduciaries.

These are our key observations:

> DC sponsors’ need for improvement in their plans closely aligns with the feelings of plan-eligible employees, who aren’t confident about retirement and thus need help with their plans.

> Many sponsors of smaller DC plans find it challenging and burdensome to manage their plans.

> Increased human interaction with their service providers could help DC sponsors close some important gaps.

> The number of investment options offered in DC plans is out of synch with sponsors’ preference for a streamlined menu of choices.

> Target-date retirement funds have significant appeal for sponsors and participants alike, and should eventually become the standard default investment option in most DC plans.

> Many DC sponsors would like their plans to offer investment advice to participants. Due to the passage of the Pension Protection Act, we expect to see much more advice-related activity among sponsors and financial advisors.

> DC sponsors should keep two concepts—“Make it simple!” and “Just do it for me!”—uppermost in their minds as they strive to help participants make effective plan choices.

It’s our hope that plan sponsors, financial advisors and the other constituents of the DC industry will review this report and use it to help them serve participants more successfully. The ultimate goal is for participants to do a better job of saving for retirement, and then be able to enjoy the fruits of their efforts when retirement arrives.

If we all can do our respective parts to make this goal a reality, we’ll directly contribute to improving the lives of millions of people. It doesn’t get any more important than that.

In Conclusion

So there you have it. We’ve presented the results of our survey of defined contribution plan sponsors, analyzed the

results, and explained our conclusions. The bottom line is that sponsors feel that there’s much room for improvement

in their plans.


SummaryofResearchMethodology:PlanSponsorsAllianceBernstein conducted a research survey of sponsors of smaller, traditionally advisor-serviced U.S. defined contribution plans in 2005.

A total of 1,200 plan sponsors completed the survey. The 1,200 respondents, in turn, consisted of 300 respondents in each of four asset-based plan segments:

> Micro plans: Less than $2 million in plan assets



> Large plans: $20–400 million in plan assets (Note: 73% were in the $20–100 million range.)

The following table captures the total universe of smaller U.S. defined contribution plans as viewed in terms of the four segments we’ve just described. Please note that the data do not include plans with $400 million and above in assets, notably the “mega plans” offered by the biggest U.S. companies.

To f lesh out our written survey results, we followed up by conducting qualitative interviews with a total of 585 respondents across all segments. These interviews generated the quotations used in this report’s “In Their Own Words” sections.

SummaryofResearchMethodology:Plan-EligibleEmployeesIn 2005 and early 2006, AllianceBernstein conducted research surveys of a nationally representative sample of full-time employees eligible to participate in their companies’ defined contribution plans.

A total of 1,000 employees completed the survey and were then divided into four attitudinal categories based on their responses. We combined two of the four categories to form a segment known as “Active investors,” and combined the remaining two categories into a segment known as “Accidental investors.”

The Active investors segment consists of the Aggressive and Confident investor categories. Active investors are people who take an interest in investing early in their careers. They truly enjoy it and are comfortable with their current financial situation. Actives also pay a lot of attention to their investments and actively manage them, and generally have a positive view of their prospects for a comfortable retirement.

The Accidental investors segment consists of the Unpre-pared and Reluctant investor categories. Accidental investors are people who have invested inconsistently due to lack of confidence in their ability to make good investment decisions. They don’t pay much attention to their investments and generally have a negative view of their prospects for a comfortable retirement.

Research Methodology

Asset-basedsegments

Percentageofindustryplans

Percentageofindustryassets

Percentageofparticipants

Micro 89% 6% 23%

Small 6% 3% 8%

Mid-size 3% 5% 13%

Large 1% 86% 56%

Total 100%* 100% 100%

*Column adds to 100% by rounding.Source: 401(k) Exchange, AllianceBernstein Research 2005

EmployeesSeeThemselvesas“Active”or“Accidental”Investors

“Active”Investors “Accidental”Investors



39% 61%


You should consider the investment objectives, risks, charges and expenses of any AllianceBernstein fund/portfolio carefully before investing. For free copies of our prospectuses, which contain this and other information, visit us online at www.alliancebernstein.com or contact your AllianceBernstein Investments representative. Please read the prospectus carefully before investing.

© 2006 AllianceBernstein L.P.

Target-DateRetirementFunds:ABlueprintforEffectivePortfolioConstructionOctober 2005

Thomas J. FontaineSenior Portfolio Manager for Core/Blend Services

Investments

MythsandRealitiesAboutDefinedContributionPlansAugust 2005

Daniel P. GangemiManaging Director of Market Research

Investments

ImplicationsofParticipantBehaviorforPlanDesignJanuary 2006

Shlomo Benartzi, Ph.D.Partner, Benartzi & DiCenzo, LLC

Other Important Research from AllianceBernstein

Investments

Investments

Target-DateRetirementFundsandtheDefinedContributionPlanSponsor’sFiduciaryResponsibilitySeptember 2005

Daniel A. NottoSenior Retirement Plan Counsel

Investments

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