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Investments
Inside the Minds of Plan Sponsors:
What They Care About and Want
	 Significant Research Conclusions
>	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
Plan sponsor white paper 0906
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
AllianceBernstein Investments, Inc. is an affiliate of AllianceBernstein L.P., the manager of the funds, and is a member of the NASD.
About the Authors
Daniel P. Gangemi
Managing 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.
Matthew P. Mintzer
Managing 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.
About this Research
Our research study highlights sponsors of smaller,
traditionally advisor-serviced defined contribution
(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 | 
Sponsors of defined contribution (DC) retirement plans feel
that there’s much room for improvement in their plans.
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.
Our research study highlights sponsors of smaller,
traditionally advisor-serviced DC plans.
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
 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)
Sponsors’ need for improvement in DC plans closely aligns
with the feelings of DC plan-eligible employees, who aren’t
confident about retirement and thus need help with their
plans.
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).
Over the past two decades, the emphasis of DC plan
features and services has evolved away from meeting the
needs of plan participants.
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
Investor Confidence About Retirement Is Low	
(Display 8, page 10)
Active
Investors*
Accidental
Investors*
All
Investors
49%
10%
25%
Percentage of Investors Confident/Very Confident
About 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
The DC Arms Race Adds Features, but Has Migrated Away
from Participant Benefits	
(Display 3, page 7)
00s90s80s
401(k) Features Added Over Time
First 401(k)
Daily valuation
Loans
Voice response units
Multi-manager
Self-directed brokerage
Web access
Advice tools
Multiple share classes
Co-fiduciary
Source:AllianceBernstein Research 2005
| Inside the Minds of Plan Sponsors: What They Care About and Want
As a practical matter, many sponsors of smaller DC plans
find it challenging and burdensome to manage their plans.
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.
Increased human interaction with their service providers
could help DC plan sponsors close some important gaps.
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).
The number of investment options offered in DC plans is
out of synch with sponsors’ preference for a streamlined
menu of choices.
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 reflected in both higher allocations to money
market and bond funds and a higher probability that
participants would not invest in equity funds.
Target-date retirement funds have significant appeal for 	
DC plan sponsors and participants alike.
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-Thirds of DC Sponsors Spend a Day or Less 	
on Plan Design Each Year  (Display 16, page 16)
More than
1 week
At least
1 full week
Several
days
A full day1–5
hours
Less than
1 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
DC Sponsors Give Plan Specialists Conflicting Grades for
Importance and Knowledge  (Display 23, page 20)
Percentage of sponsors considering this specialist
knowledgeable/very knowledgeable
Percentage of sponsors considering this specialist
important/very important
Financial
advisor
ERISA
specialist
Enrollment
specialist
Senior
relationship
manager
Client service
representative
18%13%
78%
22%
95%
9%5%
33%
16%
77%
Source:AllianceBernstein Research 2005
AllianceBernstein | 
We expect target-date retirement funds to eventually
become the standard default investment option in most
DC plans.
Many DC plan sponsors would like their plans to offer
investment advice to participants. It’ll be available soon.
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.
Due to the passage of the Pension Protection Act of 2006,
we expect to see much more advice-related activity among
sponsors and financial advisors (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.
Conclusion and Suggested Action Steps
DC plan participants continue to ask, “What should I do?”
to make effective plan choices, as they have for years. We
believe that DC plan sponsors should keep two concepts—
“Make it simple!” and “Just do it for me!”—uppermost in
their minds as they strive to come up with solutions.
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.
DC Plan Participation Falls as the Number of Investment
Options Rises  (Display 32, page 27)
50
60
70
80
594939291992
Number 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
Most DC Participants Use Investment Advice 	
If They Get It  (Display 34, page 29)
no
don'tknow
yes
53%
Yes
30%
None of the
recommendations
57%
Some of the
recommendations
13%
All of the
recommendations
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
| Inside the Minds of Plan Sponsors: What They Care About and Want
Taken together, our research observations about improving
DC plans lead us to conclude that the overall DC industry
is poised at an inflection point of historical change. This
change will be for DC plans to take on some of the
essential characteristics of the traditional defined
benefit plan.
We suggest that sponsors consider the following measures
when refreshing existing plans or establishing new ones:
	Automatic enrollment (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).
	Better default investment options (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, yet effective, communication plan (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.
	Investment advice as a standard feature (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:
	Mandatory reviews of plans at fixed intervals (Page 36)
	Increased education for sponsors about basic investment
concepts and fiduciary responsibilities (Page 36)
	New goals for service providers (Pages 36–37)
Target-Date Retirement Funds: A “Smart” Default Option for DC Participants (Display 39, page 34)
“Active”	Investors “Accidental”	Investors
39% 61%
Confident 31%
Aggressive 8%
Unprepared 37%
Reluctant 24%
Employees See Themselves as
“Active” or “Accidental” Investors
Source:AllianceBernstein Research 2006
Why All Kinds of Investors Like
Target-Date Retirement Funds
Active Investors
Clear investment benefit
Helps investors reach retirement
Appropriate investment mix
during retirement
Appealing methodology
and design
Accidental Investors
One-stop investment option
Simplicity
Ease of use
Minimal decision-making
Investment manager determines
asset allocation
Automatic rebalancing
AllianceBernstein | 
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.
The Story In a Nutshell: DC Sponsors Want More—	
and Less—from Their Plans
The 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.”
| Inside the Minds of Plan Sponsors: What They Care About and Want
 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.
But First, Let’s Put This into Perspective
We’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?
The Big Picture I: DC Plans Are Dominant
DC 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
The Big Picture II: 	
Participants Get Lost in the Shuffle
While 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
Breakdown of the Employer-Based DC Plan Market 	
in 2005
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) Plans Accounted for the Biggest Share of the
Employer-Based DC Plan Market in 2005
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.
AllianceBernstein | 
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 shuffle.
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: A Recurring Theme
Despite 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
The DC Arms Race Adds Features, but Has Migrated Away
from Participant Benefits
00s90s80s
401(k) Features Added Over Time
First 401(k)
Daily valuation
Loans
Voice response units
Multi-manager
Self-directed brokerage
Web access
Advice tools
Multiple share classes
Co-fiduciary
Source:AllianceBernstein Research 2005
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.”
| Inside the Minds of Plan Sponsors: What They Care About and Want
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.
Absolute Participation Rates Are Low
Plan 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
The Need for Simplicity
Services Plan Sponsors Especially Want and Don’t Want
The Lucky 7	
(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
	
The Unlucky 11	
(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
Source:AllianceBernstein Research 2005
Display 5
Half of DC Plans Have Participation Rates Below 80%
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
Source:AllianceBernstein Research 2005
AllianceBernstein | 
Employees See Themselves as “Active” or “Accidental”
Investors
In 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
Employees See Themselves in Four Investor Categories
AggressiveReluctantConfidentUnprepared
8%
24%
31%
37%
Source:AllianceBernstein Research 2006
10 | Inside the Minds of Plan Sponsors: What They Care About and Want
Employees Aren’t Confident About Retirement
Within 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
Most Employees See Themselves as “Accidental” Investors
“Active”	Investors “Accidental”	Investors
Confident 31%
Aggressive 8%
Unprepared 37%
Reluctant 24%
39% 61%
Source:AllianceBernstein Research 2006
Display 8
Investor Confidence About Retirement Is Low…
Active
Investors
Accidental
Investors
All
Investors
49%
10%
25%
Percentage of Investors Confident/Very Confident
About a Comfortable Retirement
Source:AllianceBernstein Research 2006
Display 9
…and in Line with the Recent Historical Trend
06050403020100
25%24% 24%
21%
23%22%
25%
Percentage of Workers Very Confident in
Their Ability to Live Comfortably in Retirement
Source: EBRI 2006 Retirement Confidence Survey
3
“2006 Retirement Confidence Survey,” EBRI Issue Brief,April 2006.
AllianceBernstein | 11
The Conclusion Is Clear: 	
Employees Need Help Now
1. 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
More Than Half of Workers Feel Behind Schedule in Planning and Saving for Retirement
55%
Behind	
schedule
32%
A lot behind
schedule
27%
A lot behind
schedule52%
Behind	
schedule
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
12 | Inside the Minds of Plan Sponsors: What They Care About and Want
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 reflection 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.
Most Sponsors Don’t Consider Themselves Fiduciaries
A 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
Most DC Sponsors Don’t Consider Themselves Fiduciaries
$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)
Source:AllianceBernstein Research 2005
AllianceBernstein | 13
Sponsors Are Behind on Some of the Basics
If 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.
Asset allocation. 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.
14 | Inside the Minds of Plan Sponsors: What They Care About and Want
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.
Investment policy statements. 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.
Selection of default investment option. 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
Most DC Sponsors Don’t Think They Understand 	
Asset Allocation Well
FDCBA
2%
19%
45%
20%
14%
“What Grade Would You Give Yourself for
Understanding Asset Allocation?”
(Percentage of Respondents)
66%
Source:AllianceBernstein Research 2005
Display 13
Many DC Sponsors Don’t Intend to Have 	
an Investment Policy Statement
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?”
Source:AllianceBernstein Research 2005
AllianceBernstein | 15
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 influenced 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).
More Time Is Needed for Plan Design and Maintenance
A 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
Most DC Default Investment Options Aren’t 	
the Best Choice for Participants
Lifecycle
fund
Other
specialty
funds
Equity
fund
Balanced
fund
Stable
value
3%6%
13%
27%
55%
Percentage of DC Plans Offering
This Default Investment Option
Source:AllianceBernstein Research 2005
4
Thomas J. Fontaine, Target-Date Retirement Funds:A Blueprint for Effective Portfolio Construction,AllianceBernstein Investments, Inc., NewYork, October 2005,
pp. 26–27.
Display 15
Almost All DC Sponsors Feel They Spend Enough Time 	
on Plan Design
LargeMidSmallMicroAll
91%87%90%93%90%
Response by Plan Size
(Percentage of Respondents)
Source:AllianceBernstein Research 2005
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.
	Opportunity cost. 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.
16 | Inside the Minds of Plan Sponsors: What They Care About and Want
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).
Fees Aren’t Fully Understood
Our 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
Most DC Sponsors Feel They Don’t Understand Plan Fees…
LargeMidSmallMicroAll
56%
34%
18%21%
32%
Sponsors Confident/Very Confident About
Understanding Plan Fees, by Plan Size
(Percentage of Respondents)
Source:AllianceBernstein Research 2005
Display 19
…and They’re Right
33%
Yes
45%
Not Sure
23%
No
44%
The fees have
been waived
22%
The investments
cover the fees
34%
The participants
pay the fees
“Are You Paying
Explicit Fees for
Plan Services?”
“If Not, Why?”
Source:AllianceBernstein Research 2005
Display 16
Two-Thirds of DC Sponsors Spend a Day or Less 	
on Plan Design Each Year
More than
1 week
At least
1 full week
Several
days
A full day1–5
hours
Less than
1 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-Quarter of Large-Plan DC Sponsors Spend 	
a Day or Less on Plan Design Each Year
25%
65%
88%
92%
LargeMidSmallMicro
Percentage of Plans Spending One Day
or Less on Plan Design, by Plan Size
Source:AllianceBernstein Research 2005
AllianceBernstein | 17
 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.
Sponsors Are Unfamiliar with Section 404(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
Around One-Quarter of DC Sponsors Think They Don’t Pay
Fees for Key Plan Services
Other
fees
Wrap fees
on outside
funds
Record-
keeping
fees
Plan
admin.
fees
Investment
mgmt.
fees
Insurance
wrap fees
21%21%23%
25%25%27%
Percentage of Sponsors Saying
They Don’t Pay These Fees
Source:AllianceBernstein Research 2005 Display 21
Many DC Sponsors Need to Develop Familiarity 	
with ERISA Section 404(c)
404(c)-related
issues keep
me up at night
Plan is
404(c)-compliant
Don’t know
what section
404(c) is
Know what
section
404(c) is
61%
20%
37%
31%
Percentage of Sponsors Response
Describes Well/Very Well
Source:AllianceBernstein Research 2005
18 | Inside the Minds of Plan Sponsors: What They Care About and Want
The Conclusion Is Clear: Managing a DC Plan Is
Challenging and Burdensome
This 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.
AllianceBernstein | 19
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
Sponsors Need More from Their Service Providers
It’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 flip 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.
20 | Inside the Minds of Plan Sponsors: What They Care About and Want
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
The Perceived Importance of Some DC Plan Specialists
Exceeds Their Availability
Percentage of sponsors considering this specialist
important/very important
Percentage of sponsors receiving this specialist
ERISA
specialist
Enrollment
specialist
Senior
relationship
manager
Client service
representative
4%
18%18%
100%
13%
78%
22%
95%
Source:AllianceBernstein Research 2005
Display 23
DC Sponsors Give Plan Specialists Conflicting Grades 	
for Importance and Knowledge
Percentage of sponsors considering this specialist
knowledgeable/very knowledgeable
Percentage of sponsors considering this specialist
important/very important
Financial
advisor
ERISA
specialist
Enrollment
specialist
Senior
relationship
manager
Client service
representative
18%13%
78%
22%
95%
9%5%
33%
16%
77%
Source:AllianceBernstein Research 2005
6
We added financial advisors to the mix of service specialists for the questions about importance and knowledge.
AllianceBernstein | 21
The Service Process Needs More of a Human Touch
One 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 flesh 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
DC Sponsors Consider People-Based Services 	
Most Important, By Far
Periodic due diligence
responsibilities
Plan design or compliance
updates/issues
Retirement program review
Investment research,
monitoring or updates
Periodic checks to make
sure 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%
Source:AllianceBernstein Research 2005
Display 25
DC Sponsors’ Interaction with Many 	
Service Providers Is Low
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”
Source:AllianceBernstein Research 2005
22 | Inside the Minds of Plan Sponsors: What They Care About and Want
Sponsors Could Have More Trust in Their Providers
Our 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
DC Sponsors Don’t Have Enough Trust in 	
Their Service Providers
Employee benefits specialist
Financial advisor
Consultant
Sr. product/relationship mgr.
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%
Source:AllianceBernstein Research 2005
Display 27
DC Sponsors Don’t View Their Service Providers 	
as Trusted Partners
Employee benefits specialist
Consultant
Financial advisor
Sr. product/relationship mgr.
Accountant
Third-party admin.
Plan provider/recordkeeper
Client service rep.
0 25 50 75 100
Percentage of Sponsors Viewing This Provider
as “Trusted Partner”
4%
10%
20%
15%
18%
25%
70%
54%
Source:AllianceBernstein Research 2005
AllianceBernstein | 23
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.
Even So, Sponsors Don’t Often Change 	
Plan Providers
DC 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
Regular Interaction with Service Providers Builds Trust
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
Source:AllianceBernstein Research 2005
Display 29
DC Sponsors Don’t View Their Service Providers 	
as Experts in Retirement Plans
Employee benefits specialist
Consultant
Financial advisor
Sr. product/relationship mgr.
Accountant
Third-party admin.
Plan provider/recordkeeper
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%
Source:AllianceBernstein Research 2005
24 | Inside the Minds of Plan Sponsors: What They Care About and Want
The Conclusion Is Clear: Sponsors Want a Renewed
Emphasis on Service—and People
As 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.”
AllianceBernstein | 25
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.
How Many Investment Options Are Enough?
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-Thirds of DC Sponsors Feel a Diverse Plan 	
Should Offer at Least 16 Investment Options
5 or fewer5–1015–1116–20More
than 20
0%
12%
21%
42%
25%
67%
Percentage of All Sponsors Viewing This
Number as Required Number of
Investment Options for “Diverse” Plan
Source:AllianceBernstein Research 2005
7
“2005 PLANSPONSOR DC Survey,” PLANSPONSOR, November 2005, p. 60.
26 | Inside the Minds of Plan Sponsors: What They Care About and Want
Adding Options: 	
Lower Participation, Higher Loss Aversion
It 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 reflected in both higher
allocations to money market and bond funds and a
higher probability that participants would not invest
in equity funds.
Display 31
The Average DC Plan Contains 18–28 Investment Options
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 funds
Source: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, NewYork, 2003.
AllianceBernstein | 27
Sponsors Want to Make Their Plans Much Simpler
In 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-Date Retirement Funds: 	
Win-Win for Participants and Sponsors
Target-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
DC Plan Participation Falls as the Number of 	
Investment Options Rises
50
60
70
80
594939291992
Number 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.”
9
“2005 PLANSPONSOR DC Survey,” PLANSPONSOR, November 2005, p. 60.
28 | Inside the Minds of Plan Sponsors: What They Care About and Want
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:
They encourage participation. 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.
They help fiduciaries. 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.
They serve as an effective default option. 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
Many DC-Eligible Employees Embrace Idea 	
of Using Target-Date Retirement Funds
Confident
investors
Accidental
investors
Confident
investors
Accidental
investors
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%
Source:AllianceBernstein Research 2006
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.”
AllianceBernstein | 29
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)
Investment Advice: 	
Mostly Unavailable, but Wanted and On the Way
Many 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
Most DC Participants Use Investment Advice 	
If They Get It
no
don'tknow
yes
53%
Yes
30%
None of the
recommendations
57%
Some of the
recommendations
13%
All of the
recommendations
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
30 | Inside the Minds of Plan Sponsors: What They Care About and Want
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.
Advice Should Be Specific and Come from People
Sponsors 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
Nearly All DC Sponsors Don’t Believe that Industry
“Guidance Tools” Are Advice
“Guidance Tools” Offered by Providers
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
Source:AllianceBernstein Research 2005
AllianceBernstein | 31
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.
The Conclusion Is Clear: Sponsors and Participants Want
Streamlined Options, More Advice
We’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
DC Participants Prefer Investment Advice 	
If Provided in Person
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
Source: EBRI 2006 Retirement Confidence Survey
Plan sponsor white paper 0906
Plan sponsor white paper 0906
Plan sponsor white paper 0906
Plan sponsor white paper 0906
Plan sponsor white paper 0906
Plan sponsor white paper 0906
Plan sponsor white paper 0906
Plan sponsor white paper 0906
Plan sponsor white paper 0906
Plan sponsor white paper 0906
Plan sponsor white paper 0906

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Plan sponsor white paper 0906

  • 1. Investments Inside the Minds of Plan Sponsors: What They Care About and Want Significant Research Conclusions > 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
  • 3. 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
  • 4. AllianceBernstein Investments, Inc. is an affiliate of AllianceBernstein L.P., the manager of the funds, and is a member of the NASD. About the Authors Daniel P. Gangemi Managing 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. Matthew P. Mintzer Managing 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. About this Research Our research study highlights sponsors of smaller, traditionally advisor-serviced defined contribution (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)
  • 5. 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
  • 6. 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
  • 7. AllianceBernstein | Sponsors of defined contribution (DC) retirement plans feel that there’s much room for improvement in their plans. 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. Our research study highlights sponsors of smaller, traditionally advisor-serviced DC plans. 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 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) Sponsors’ need for improvement in DC plans closely aligns with the feelings of DC plan-eligible employees, who aren’t confident about retirement and thus need help with their plans. 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). Over the past two decades, the emphasis of DC plan features and services has evolved away from meeting the needs of plan participants. 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 Investor Confidence About Retirement Is Low (Display 8, page 10) Active Investors* Accidental Investors* All Investors 49% 10% 25% Percentage of Investors Confident/Very Confident About 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 The DC Arms Race Adds Features, but Has Migrated Away from Participant Benefits (Display 3, page 7) 00s90s80s 401(k) Features Added Over Time First 401(k) Daily valuation Loans Voice response units Multi-manager Self-directed brokerage Web access Advice tools Multiple share classes Co-fiduciary Source:AllianceBernstein Research 2005
  • 8. | Inside the Minds of Plan Sponsors: What They Care About and Want As a practical matter, many sponsors of smaller DC plans find it challenging and burdensome to manage their plans. 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. Increased human interaction with their service providers could help DC plan sponsors close some important gaps. 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). The number of investment options offered in DC plans is out of synch with sponsors’ preference for a streamlined menu of choices. 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 reflected in both higher allocations to money market and bond funds and a higher probability that participants would not invest in equity funds. Target-date retirement funds have significant appeal for DC plan sponsors and participants alike. 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-Thirds of DC Sponsors Spend a Day or Less on Plan Design Each Year  (Display 16, page 16) More than 1 week At least 1 full week Several days A full day1–5 hours Less than 1 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 DC Sponsors Give Plan Specialists Conflicting Grades for Importance and Knowledge  (Display 23, page 20) Percentage of sponsors considering this specialist knowledgeable/very knowledgeable Percentage of sponsors considering this specialist important/very important Financial advisor ERISA specialist Enrollment specialist Senior relationship manager Client service representative 18%13% 78% 22% 95% 9%5% 33% 16% 77% Source:AllianceBernstein Research 2005
  • 9. AllianceBernstein | We expect target-date retirement funds to eventually become the standard default investment option in most DC plans. Many DC plan sponsors would like their plans to offer investment advice to participants. It’ll be available soon. 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. Due to the passage of the Pension Protection Act of 2006, we expect to see much more advice-related activity among sponsors and financial advisors (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. Conclusion and Suggested Action Steps DC plan participants continue to ask, “What should I do?” to make effective plan choices, as they have for years. We believe that DC plan sponsors should keep two concepts— “Make it simple!” and “Just do it for me!”—uppermost in their minds as they strive to come up with solutions. 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. DC Plan Participation Falls as the Number of Investment Options Rises  (Display 32, page 27) 50 60 70 80 594939291992 Number 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 Most DC Participants Use Investment Advice If They Get It  (Display 34, page 29) no don'tknow yes 53% Yes 30% None of the recommendations 57% Some of the recommendations 13% All of the recommendations 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
  • 10. | Inside the Minds of Plan Sponsors: What They Care About and Want Taken together, our research observations about improving DC plans lead us to conclude that the overall DC industry is poised at an inflection point of historical change. This change will be for DC plans to take on some of the essential characteristics of the traditional defined benefit plan. We suggest that sponsors consider the following measures when refreshing existing plans or establishing new ones: Automatic enrollment (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). Better default investment options (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, yet effective, communication plan (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. Investment advice as a standard feature (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: Mandatory reviews of plans at fixed intervals (Page 36) Increased education for sponsors about basic investment concepts and fiduciary responsibilities (Page 36) New goals for service providers (Pages 36–37) Target-Date Retirement Funds: A “Smart” Default Option for DC Participants (Display 39, page 34) “Active” Investors “Accidental” Investors 39% 61% Confident 31% Aggressive 8% Unprepared 37% Reluctant 24% Employees See Themselves as “Active” or “Accidental” Investors Source:AllianceBernstein Research 2006 Why All Kinds of Investors Like Target-Date Retirement Funds Active Investors Clear investment benefit Helps investors reach retirement Appropriate investment mix during retirement Appealing methodology and design Accidental Investors One-stop investment option Simplicity Ease of use Minimal decision-making Investment manager determines asset allocation Automatic rebalancing
  • 11. AllianceBernstein | 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. The Story In a Nutshell: DC Sponsors Want More— and Less—from Their Plans The 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.”
  • 12. | Inside the Minds of Plan Sponsors: What They Care About and Want 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. But First, Let’s Put This into Perspective We’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? The Big Picture I: DC Plans Are Dominant DC 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 The Big Picture II: Participants Get Lost in the Shuffle While 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 Breakdown of the Employer-Based DC Plan Market in 2005 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) Plans Accounted for the Biggest Share of the Employer-Based DC Plan Market in 2005 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.
  • 13. AllianceBernstein | 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 shuffle. 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: A Recurring Theme Despite 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 The DC Arms Race Adds Features, but Has Migrated Away from Participant Benefits 00s90s80s 401(k) Features Added Over Time First 401(k) Daily valuation Loans Voice response units Multi-manager Self-directed brokerage Web access Advice tools Multiple share classes Co-fiduciary Source:AllianceBernstein Research 2005 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.”
  • 14. | Inside the Minds of Plan Sponsors: What They Care About and Want 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. Absolute Participation Rates Are Low Plan 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 The Need for Simplicity Services Plan Sponsors Especially Want and Don’t Want The Lucky 7 (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 The Unlucky 11 (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 Source:AllianceBernstein Research 2005 Display 5 Half of DC Plans Have Participation Rates Below 80% 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 Source:AllianceBernstein Research 2005
  • 15. AllianceBernstein | Employees See Themselves as “Active” or “Accidental” Investors In 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 Employees See Themselves in Four Investor Categories AggressiveReluctantConfidentUnprepared 8% 24% 31% 37% Source:AllianceBernstein Research 2006
  • 16. 10 | Inside the Minds of Plan Sponsors: What They Care About and Want Employees Aren’t Confident About Retirement Within 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 Most Employees See Themselves as “Accidental” Investors “Active” Investors “Accidental” Investors Confident 31% Aggressive 8% Unprepared 37% Reluctant 24% 39% 61% Source:AllianceBernstein Research 2006 Display 8 Investor Confidence About Retirement Is Low… Active Investors Accidental Investors All Investors 49% 10% 25% Percentage of Investors Confident/Very Confident About a Comfortable Retirement Source:AllianceBernstein Research 2006 Display 9 …and in Line with the Recent Historical Trend 06050403020100 25%24% 24% 21% 23%22% 25% Percentage of Workers Very Confident in Their Ability to Live Comfortably in Retirement Source: EBRI 2006 Retirement Confidence Survey 3 “2006 Retirement Confidence Survey,” EBRI Issue Brief,April 2006.
  • 17. AllianceBernstein | 11 The Conclusion Is Clear: Employees Need Help Now 1. 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 More Than Half of Workers Feel Behind Schedule in Planning and Saving for Retirement 55% Behind schedule 32% A lot behind schedule 27% A lot behind schedule52% Behind schedule 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
  • 18. 12 | Inside the Minds of Plan Sponsors: What They Care About and Want 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 reflection 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. Most Sponsors Don’t Consider Themselves Fiduciaries A 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 Most DC Sponsors Don’t Consider Themselves Fiduciaries $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) Source:AllianceBernstein Research 2005
  • 19. AllianceBernstein | 13 Sponsors Are Behind on Some of the Basics If 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. Asset allocation. 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.
  • 20. 14 | Inside the Minds of Plan Sponsors: What They Care About and Want 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. Investment policy statements. 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. Selection of default investment option. 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 Most DC Sponsors Don’t Think They Understand Asset Allocation Well FDCBA 2% 19% 45% 20% 14% “What Grade Would You Give Yourself for Understanding Asset Allocation?” (Percentage of Respondents) 66% Source:AllianceBernstein Research 2005 Display 13 Many DC Sponsors Don’t Intend to Have an Investment Policy Statement 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?” Source:AllianceBernstein Research 2005
  • 21. AllianceBernstein | 15 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 influenced 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). More Time Is Needed for Plan Design and Maintenance A 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 Most DC Default Investment Options Aren’t the Best Choice for Participants Lifecycle fund Other specialty funds Equity fund Balanced fund Stable value 3%6% 13% 27% 55% Percentage of DC Plans Offering This Default Investment Option Source:AllianceBernstein Research 2005 4 Thomas J. Fontaine, Target-Date Retirement Funds:A Blueprint for Effective Portfolio Construction,AllianceBernstein Investments, Inc., NewYork, October 2005, pp. 26–27. Display 15 Almost All DC Sponsors Feel They Spend Enough Time on Plan Design LargeMidSmallMicroAll 91%87%90%93%90% Response by Plan Size (Percentage of Respondents) Source:AllianceBernstein Research 2005 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. Opportunity cost. 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.
  • 22. 16 | Inside the Minds of Plan Sponsors: What They Care About and Want 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). Fees Aren’t Fully Understood Our 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 Most DC Sponsors Feel They Don’t Understand Plan Fees… LargeMidSmallMicroAll 56% 34% 18%21% 32% Sponsors Confident/Very Confident About Understanding Plan Fees, by Plan Size (Percentage of Respondents) Source:AllianceBernstein Research 2005 Display 19 …and They’re Right 33% Yes 45% Not Sure 23% No 44% The fees have been waived 22% The investments cover the fees 34% The participants pay the fees “Are You Paying Explicit Fees for Plan Services?” “If Not, Why?” Source:AllianceBernstein Research 2005 Display 16 Two-Thirds of DC Sponsors Spend a Day or Less on Plan Design Each Year More than 1 week At least 1 full week Several days A full day1–5 hours Less than 1 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-Quarter of Large-Plan DC Sponsors Spend a Day or Less on Plan Design Each Year 25% 65% 88% 92% LargeMidSmallMicro Percentage of Plans Spending One Day or Less on Plan Design, by Plan Size Source:AllianceBernstein Research 2005
  • 23. AllianceBernstein | 17 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. Sponsors Are Unfamiliar with Section 404(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 Around One-Quarter of DC Sponsors Think They Don’t Pay Fees for Key Plan Services Other fees Wrap fees on outside funds Record- keeping fees Plan admin. fees Investment mgmt. fees Insurance wrap fees 21%21%23% 25%25%27% Percentage of Sponsors Saying They Don’t Pay These Fees Source:AllianceBernstein Research 2005 Display 21 Many DC Sponsors Need to Develop Familiarity with ERISA Section 404(c) 404(c)-related issues keep me up at night Plan is 404(c)-compliant Don’t know what section 404(c) is Know what section 404(c) is 61% 20% 37% 31% Percentage of Sponsors Response Describes Well/Very Well Source:AllianceBernstein Research 2005
  • 24. 18 | Inside the Minds of Plan Sponsors: What They Care About and Want The Conclusion Is Clear: Managing a DC Plan Is Challenging and Burdensome This 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.
  • 25. AllianceBernstein | 19 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 Sponsors Need More from Their Service Providers It’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 flip 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.
  • 26. 20 | Inside the Minds of Plan Sponsors: What They Care About and Want 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 The Perceived Importance of Some DC Plan Specialists Exceeds Their Availability Percentage of sponsors considering this specialist important/very important Percentage of sponsors receiving this specialist ERISA specialist Enrollment specialist Senior relationship manager Client service representative 4% 18%18% 100% 13% 78% 22% 95% Source:AllianceBernstein Research 2005 Display 23 DC Sponsors Give Plan Specialists Conflicting Grades for Importance and Knowledge Percentage of sponsors considering this specialist knowledgeable/very knowledgeable Percentage of sponsors considering this specialist important/very important Financial advisor ERISA specialist Enrollment specialist Senior relationship manager Client service representative 18%13% 78% 22% 95% 9%5% 33% 16% 77% Source:AllianceBernstein Research 2005 6 We added financial advisors to the mix of service specialists for the questions about importance and knowledge.
  • 27. AllianceBernstein | 21 The Service Process Needs More of a Human Touch One 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 flesh 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 DC Sponsors Consider People-Based Services Most Important, By Far Periodic due diligence responsibilities Plan design or compliance updates/issues Retirement program review Investment research, monitoring or updates Periodic checks to make sure 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% Source:AllianceBernstein Research 2005 Display 25 DC Sponsors’ Interaction with Many Service Providers Is Low 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” Source:AllianceBernstein Research 2005
  • 28. 22 | Inside the Minds of Plan Sponsors: What They Care About and Want Sponsors Could Have More Trust in Their Providers Our 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 DC Sponsors Don’t Have Enough Trust in Their Service Providers Employee benefits specialist Financial advisor Consultant Sr. product/relationship mgr. 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% Source:AllianceBernstein Research 2005 Display 27 DC Sponsors Don’t View Their Service Providers as Trusted Partners Employee benefits specialist Consultant Financial advisor Sr. product/relationship mgr. Accountant Third-party admin. Plan provider/recordkeeper Client service rep. 0 25 50 75 100 Percentage of Sponsors Viewing This Provider as “Trusted Partner” 4% 10% 20% 15% 18% 25% 70% 54% Source:AllianceBernstein Research 2005
  • 29. AllianceBernstein | 23 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. Even So, Sponsors Don’t Often Change Plan Providers DC 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 Regular Interaction with Service Providers Builds Trust 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 Source:AllianceBernstein Research 2005 Display 29 DC Sponsors Don’t View Their Service Providers as Experts in Retirement Plans Employee benefits specialist Consultant Financial advisor Sr. product/relationship mgr. Accountant Third-party admin. Plan provider/recordkeeper 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% Source:AllianceBernstein Research 2005
  • 30. 24 | Inside the Minds of Plan Sponsors: What They Care About and Want The Conclusion Is Clear: Sponsors Want a Renewed Emphasis on Service—and People As 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.”
  • 31. AllianceBernstein | 25 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. How Many Investment Options Are Enough? 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-Thirds of DC Sponsors Feel a Diverse Plan Should Offer at Least 16 Investment Options 5 or fewer5–1015–1116–20More than 20 0% 12% 21% 42% 25% 67% Percentage of All Sponsors Viewing This Number as Required Number of Investment Options for “Diverse” Plan Source:AllianceBernstein Research 2005 7 “2005 PLANSPONSOR DC Survey,” PLANSPONSOR, November 2005, p. 60.
  • 32. 26 | Inside the Minds of Plan Sponsors: What They Care About and Want Adding Options: Lower Participation, Higher Loss Aversion It 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 reflected in both higher allocations to money market and bond funds and a higher probability that participants would not invest in equity funds. Display 31 The Average DC Plan Contains 18–28 Investment Options 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 funds Source: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, NewYork, 2003.
  • 33. AllianceBernstein | 27 Sponsors Want to Make Their Plans Much Simpler In 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-Date Retirement Funds: Win-Win for Participants and Sponsors Target-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 DC Plan Participation Falls as the Number of Investment Options Rises 50 60 70 80 594939291992 Number 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.” 9 “2005 PLANSPONSOR DC Survey,” PLANSPONSOR, November 2005, p. 60.
  • 34. 28 | Inside the Minds of Plan Sponsors: What They Care About and Want 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: They encourage participation. 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. They help fiduciaries. 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. They serve as an effective default option. 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 Many DC-Eligible Employees Embrace Idea of Using Target-Date Retirement Funds Confident investors Accidental investors Confident investors Accidental investors 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% Source:AllianceBernstein Research 2006 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.”
  • 35. AllianceBernstein | 29 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) Investment Advice: Mostly Unavailable, but Wanted and On the Way Many 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 Most DC Participants Use Investment Advice If They Get It no don'tknow yes 53% Yes 30% None of the recommendations 57% Some of the recommendations 13% All of the recommendations 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
  • 36. 30 | Inside the Minds of Plan Sponsors: What They Care About and Want 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. Advice Should Be Specific and Come from People Sponsors 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 Nearly All DC Sponsors Don’t Believe that Industry “Guidance Tools” Are Advice “Guidance Tools” Offered by Providers 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 Source:AllianceBernstein Research 2005
  • 37. AllianceBernstein | 31 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. The Conclusion Is Clear: Sponsors and Participants Want Streamlined Options, More Advice We’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 DC Participants Prefer Investment Advice If Provided in Person 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 Source: EBRI 2006 Retirement Confidence Survey