When it comes to retirement plans, bigger isn’t always better.
A report released by Judy Diamond Associates, a Washington-based retirement and benefits plan analyst, breaks down retirement plans by plan size and industry showing that there’s little difference in outcomes between smaller plans and larger plans.
“As it turns out, a defined contribution plan’s success has nothing to do with the kinds of choices investors are being offered in terms of mutual funds,” says Eric Ryles, managing director of Judy Diamond Associates. “What seems to be the driver is how much the employer can convince employees to put into their retirement package. It’s all about participation.”
In the 401(k) Benchmarking Report, a study of approximately 480,000 401(k) plans, the 12-month rate of return for participants in small plans with fewer than 100 participants was 5 percent, little different from larger plans with their collective 6 percent rate of return.
Furthermore, plans serving profitable industry groups did not perform better than plans serving other sectors. Plans serving lawyers, finance and insurance professionals, and physicians fared no better on average in 2014 than plans serving construction workers, waste management workers and miners — all reported rates of return ranging between 5 and 7 percent.
“There’s nothing in our data to suggest that blue-collar professions receive advice, investment options or services that are of a lesser quality than white-collar professions,” Ryles says. “They may be getting less from their employers in terms of a matching contribution.”
Chad Parks, CEO of Ubiquity Retirement + Savings, a San Francisco-based company that provides IRA and 401(k) solutions to the small business space, says that plan performance is flattening out due to the widespread adoption of automation and passive investment products.
“In good times, a rising tide floats all boats, and in bad times it sinks them,” Parks says. “If people receive the advantage of compound growth just from participating in a savings plan, then the decision to auto-enroll employees as a company makes a significant difference for their future with little cost or effort.”
Average account balances formed a barbell distribution across plan size. The smallest plans, those with one to 10 participants or 11 to 25 participants, had the highest average account balances, at $76,000 and $57,000 respectively.
Other small-, mid- and large-sized plans, those between 26 and 5,000 participants, averaged account balances between $41,000 and $49,000.
Very large plans with more than 5,000 participants reported average account balances of $55,000.
“My guess is that with the very small plans and the very large plans you’re looking at less turnover,” Ryles says. “These are employees who are sticking around longer and have more opportunity to accrue assets within their plan.”
Savings behaviors were radically different across industry groupings. Employees in more profitable industries were not only more likely to participate in their defined contribution plan, if offered, but also socked away more money.
For example, lawyers in large plans with more than 5,000 participants participated at an 89 percent rate, while agricultural workers in similarly sized plans reported a 59 percent participation rate.
“Some of these professions have companies that are offering plans, but the workers can’t afford to pay for retirement,” Ryles says. “Their participation rate suffers, they don’t contribute as much, and the retirement picture becomes less secure as a result.”
While Certified Public Accountants in plans with between 51 to 100 participants reported average account balances of $108,000, while retail employees in similarly sized plans reported average account balances of $40,000.
Parks argues that the discrepancy in participation and account balance shows that retirement planning is being taken seriously, even among high-income professionals who may already be affluent.
“The people who can save, do save,” Parks says. “It shows that they’re aware that in the modern retirement system, this is one of the best options available to them for saving. In a roundabout way, that discrepancy shows that the modern retirement system is working, people are starting to pay closer attention to what they’re saving and they’re starting to plan — but we still have a long way to go.”
Larger plans tended to have more ‘red flags,’ which Judy Diamond loosely defined as flaws in the plans’ design, administration or performance. Plans with more than 5,000 participants average 2.3 red flags per plan, while those with 51 to 100 participants averaged 1.4 red flags per plan.
“Larger plans are more complicated,” Ryles says. “There’s more opportunity for something to go wrong and there’s more regulatory scrutiny there.”
For its report, Judy Diamond Associates studied every 401(k) plan in the U.S., excluding those with fewer than $3,000 in assets, in the 2014 plan year using Form 5500, a reporting requirement from the U.S. Department of Labor and the Internal Revenue Service.
“Reports like this are great because they give a birds-eye view of the retirement plan space,” says Parks. “One of the things that we could do better, a small tweak that the DOL or the IRS could implement, would be fee disclosure at the sponsor and the participant level on the form. If fees were disclosed on Form 5500, then the DOL would not have to worry about enforcement on egregious fees and overcharging, the market would self-regulate. My firm would look at every company that pays fees above a certain level and have a conversation with them about why they’re paying too much for their plans.”
Judy Diamond Associates is a subsidiary of ALM, a New York-based industry information and media firm.