S.I.F.I (K) Plan
Over the past thirty years, defined contribution (DC) plans have become the preeminent retirement vehicle for the U.S. workforce. Retirement service providers have traditionally been measured based on metrics like the quality of their technology and websites, the flexibility of their investment menu and the strength of their participant education program. But as plan sponsors see the yawning gap between participants and a secure retirement, priorities are changing. Under the new paradigm, DC plans and service providers will be evaluated on actual participation and savings rates and the ways they improve these rates, and on the availability of low cost investment products that perform to documented performance criteria. In short, DC plans will be evaluated not by the effort put forth by providers, but by how well they deliver results and prepare workers to retire with dignity.
To illustrate the savings gap, consider an employee with annual income of $50,000 who seeks to replace 80% of income in retirement. After considering Social Security, which will generate an estimated $13,000 per year, this employee needs to accumulate a retirement balance of $590,000 by age 65. For the $25,000 wage earner, the savings goal after considering an estimated $8,900 per year in Social Security benefits is $295,000. Yet consider that in 2009, the average 401(k) account balance for workers between the ages of 50 and 55 was only $70,970 (per EBRI). In terms of retirement income security, the average American worker remains well off track.
To further the goal of creating DC plans that deliver results, BPAS has created the S.I.F.I. (K) Plan.
The key elements of retirement planning
To reach a secure retirement, participants, supported by their plan sponsors, need to follow a basic formula:
- Save a significant percentage of annual compensation
- Start saving early in one’s career
- Invest in a diversified and disciplined glide path strategy
- Monitor fees to ensure that they are reasonable and appropriate for the services provided
The key elements of the S.I.F.I. (K) Plan include:
- Eligible Automatic Contribution Arrangement Plan (EACA) design
- Automatic Enrollment at a 3% default savings rate
- Automatic Salary Deferral Escalation – each plan sponsor chooses annual increase amount (e.g., 1% or 2%) and escalation ceiling (e.g., 10% of pay).
- Matching Contribution – plan sponsor chooses matching formula (if any), including safe harbor QACA formula
- Vesting – plan sponsor chooses vesting schedule
Fiduciary Service Model
- S.I.F.I. (K) Plan is marketed and serviced by 3(21) Investment Advisors and Trust Companies, both of whom serve as plan fiduciaries
- To produce operational and cost efficiencies, BPAS serves as Discretionary Trustee within the program, which represents the highest level of investment liability transfer by plan sponsors under ERISA
A pre-selected menu of investment options
- Selection and monitoring of investments from open architecture universe (performed by a discretionary trustee)
- Menu includes low cost index funds as well as actively managed funds that continuously perform to the standards of an Investment Policy Statement
- Target date funds serve as QDIAs
- Schwab brokerage account for plan sponsors who wish to offer additional investment flexibility
Fully transparent fee arrangement
- 408(b)(2) compliant fee disclosures
- Expense ratios of index offerings range from 7 to 32 basis points
- Level compensation arrangement by fund – all participants pay the same asset based fees regardless of personal asset allocation (a significant improvement versus the ERISA Recapture Account approach used by many other providers)
- All shareholder servicing fees (where applicable) credited back to the specific fund from which they are (using institutional share classes)
Plans that Deliver Results
When you consider young participants – those who have 31 to 40 working years before they retire – the probability of reaching a comfortable retirement is significantly less under voluntary savings plans compared with programs like SiFi. The following chart (per EBRI Issue Brief 349) shows the percentage of highly and non-highly compensated employees who are expected to reach an 80% income replacement ratio by retirement age under two plan types:
Voluntary Savings Plans
Non-highly compensated employees 45.7%
Highly compensated employees 27.0%
S.I.F.I. Type Plans
Non-highly compensated employees 79.2%
Highly compensated employees 64.0%
When you consider all of these factors, it is clear that the time for S.I.F.I. (K) Plan has come.