Strategy Three — Design the Plan to Work: Intentional Structure Can Enhance Expected Outcomes

In Strategy One of this series, we established the importance of strong fiduciary governance. In Strategy Two, we emphasized the prudent delegation of responsibilities to qualified service providers.

Now we turn to a principle that is often underestimated and under-utilized — and yet it may influence participant outcomes more than any other:

A retirement plan should be intentionally designed to help improve the likelihood of successful outcomes.

Strong retirement outcomes are often associated with deliberate design, disciplined thinking, and a clearly defined objective from the outset. A prudent plan begins with the end in mind — identifying the level of income needed in retirement — and then builds a structured, repeatable process to advance that goal. Every minute detail of the plan, from the intuitive knowledge of employee and employer contribution behavior to a solid default investment, must be intentionally aligned toward achieving the desired outcome of income replacement in retirement. Without this conscientious level of thoughtful design, results become inconsistent and dependent on participant behavior; but with it, outcomes may become more predictable and measurable.

Designing a Plan for Success — Begin with the End in Mind

Before selecting features or providers, a plan sponsor must first answer a fundamental question:

What is the objective of this plan?

The answer should be both clear and measurable:

To help participants work toward an income preacment target (e.g. approximately 80%) in retirement.

This outcome is supported by three primary sources:

• Retirement plan assets
• Personal savings
• Social Security

A well-designed plan aligns its structure to ensure these components work together — not independently or accidentally.

The Reality: Participant Behavior is Influenced by Plan Design — Structure Plays a Significant Role

It is a common assumption that participant results reflect participant choices. In reality, however, outcomes are often influenced by plan structure, defaults, and simplicity.

Participants do not behave like professional investors — because they are not investment professionals. If we want participants to arrive at the outcomes they need for retirement success, we need to understand their behavior — and leveraging those behaviors to the advantage of their future selves.

Shlomo Benartzi, a widely cited behavioral economist whose research I greatly admire, focuses on how thoughtful retirement plan design has shown to improve savings behavior and, long-term financial outcomes.

In his book Save More Tomorrow, and other articles and research, Bernartzi emphasizes that good participant outcomes are not driven by individual willpower, but by intentional plan architecture that aligns with how people really behave as opposed to how they "ought" to behave. Rather than expecting participants to make optimal financial decisions in complex and uncertain situations, Benartzi advocates for designing systems that "nudge" individuals toward better behavior through defaults, simplicity, and automation. His research suggests that features such as automatic enrollment, automatic escalation, and thoughtfully structured incentives leverage inertia in a positive way — can help guide participants to save more, stay invested, and potentially make fewer costly mistakes. In this framework, prudent plan design does not attempt to change human behavior; it leans into it and works with it, quietly steering participants toward better outcomes through plan design structure rather than instruction.

Bernartzi's research has collectively shown that employees respond to:

• What is automatic
• What is easy
• What is emphasized

This leads to a fundamental design principle:

If you seek to improve outcomes, do not depend on better participant decisions — design a better system.

Automatic Enrollment: Establishing Participation as the Default

Automatic enrollment is often a cornerstone of a well-designed retirement plan. Rather than requiring participants to take action by opting into the plan, the plan makes participation the default.

Enacted in December 2022, SECURE Act 2.0 significantly expanded the role of automatic enrollment and automatic escalation in defined contribution plans, making them a central feature of modern retirement plan design. The Act generally requires most 401(k) and 403(b) plans established after December 29, 2022 to include automatic enrollment beginning in plan years after December 31, 2024 (i.e., 2025).

Plans subject to the rule must:

• Automatically enroll eligible employees unless they opt out
• Set an initial default contribution rate between 3% and 10%
• Increase contributions automatically by 1% annually, with an escalation between 10% and 15% of compensation

Important Exception for Church Plans

Importantly, non-ERISA Church plans are explicitly exempt from SECURE 2.0's mandatory automatic enrollment requirement. However, required or not, automatic enrollment and auto-escalation are widely considered effective features and may be appropriate for many defined contribution plans — this exemption is not a recommendation to avoid auto features — it simply reflects the unique legal structure of church plans.

Key Design Principles

• Automatic Enrollment Works: Automatic Enrollment Has Been Shown to Be Associated With Higher Participation Rates
• Auto-Escalation Drives Savings: Helps reach 10%–12% contribution levels
• Defaults Define Outcomes: Contribution rates, escalation, and investments matter most

Imbuing the Spirit of SECURE 2.0 in Church Plans

While SECURE 2.0 does not impose requirements on church plans, it reflects practices that are commonly observed in leading plan design:

1. Automatic Enrollment Works

• Plans with automatic enrollment have generally shown higher participation rates than voluntary enrollment designs

• SECURE 2.0 reflects legislative recognition that participation should be the default state

2. Auto-Escalation Drives Adequate Savings Outcomes

The new Secure 2.0 law embeds automatic escalation because participation alone is not sufficient. Participants must contribute at levels that support long-term income replacement, somewhere between 10%-12% of annual pay, but most participants are not able to save even half of that (4%-6%) when just starting in the plan. Automatic escalation addresses this gap by gradually increasing participant contributions over time. By doing this, participants have the opportunity to become accustomed to saving for retirement, ideally seeing the benefit of the plan, and incrementally escalating the contribution commensurately with merit increases or cost of living adjustments.

An optimal approach to escalation:

• Increase deferrals by 1% annually
• Target a long-term combined employer/employee total contribution rate of 10% or higher
• Align increases with compensation cycles where appropriate

This creates a sustainable pathway from initial and nominal participation to meaningful retirement readiness.

3. Plan Design Defaults Define Outcomes

SECURE 2.0 implicitly reinforces that the primary drivers of participant outcomes are:

• Default contribution rates
• Default escalation and a high cap
• Default investment options

Undoubtedly, you notice a common theme here: "Default".

Strategic Takeaway for Non‑ERISA Church Plans

Even though church plans are exempt, the best practice is clear:

Adopting SECURE 2.0-style automatic features proactively as a fiduciary best practice is not as a regulatory obligation, but it may lead to improved expected outcomes. SECURE 2.0 did not invent automatic enrollment — it validated it. For church plan sponsors, the message is not "you must do this," but rather: "This is what effective plan design looks like."

A well-designed church plan may consider:

• Automatically enroll participants at eligibility (4%–6% starting rate)
• Annual auto-escalation (+1% to a total of 10%+)
• Cooperatively sharing the burden by aligning employer contribution in a matching strategy (e.g., stretch match)
• Utilize a professionally managed default investment (e.g., Lifecycle, Target Date Portfolios)
• Provide a simple, respectful opt-out

This approach transforms inaction from a barrier into a benefit.

Matching Strategies to Maximize Wealth Accumulation

Employer contributions are not just a benefit — they are one of the most powerful behavioral tools in plan design.

Traditional Matching Structure

Common structures (e.g., 100% of the first 3%) are simple, but often inadvertently limit participant contribution behavior.

Stretch Match: A More Effective Model

A stretch match encourages higher savings without increasing employer cost.

Example:

• Traditional: 100% of first 3%
• Stretch: 50% of first 6%

The total employer contribution remains the same — but participants must save more to receive the full match. This approach is intended to support wealth accumulation by:

• Increasing contribution rates
• Aligning incentives with outcomes
• Reinforcing long-term saving behavior

Evaluating Matching Metrics with Intent

Matching strategies should not be static or assumed. They should be measured and evaluated based on:

• Participant contribution behavior
• Match utilization rates
• Alignment with retirement income goals

The goal is not simply to offer a match — it is to ensure that the match is functioning as intended.

Roth Contributions: Expanding Participant Flexibility

A well-designed plan should include both pre-tax and Roth contribution options. Roth contributions offer:

• Tax diversification
• Flexibility in retirement income planning
• Potential long-term tax advantages

Providing both options allows participants to construct a more resilient financial strategy over time.

Removing the Guesswork with Managed Investment Solutions

For most participants, investment decision-making is the most difficult aspect of retirement planning. The solution is not to provide more choices — it is to provide better defaults.

Custom Target Date Model Portfolios

A professionally managed default investment solution:

• Aligns asset allocation with age and retirement horizon
• Adjusts risk over time
• May help reduce participant error

A well-governed custom model portfolio framework allows the plan to:

• Reflect the specific needs of its participant population
• Maintain consistent investment discipline
• Provide institutional-quality oversight

Participants who do not engage may still be placed on a prudent path forward.

Emphasis on Education and Solid Data

While plan design drives outcomes, education still plays a critical supporting role.

Effective plans:

• Reinforce key behaviors (save more, stay invested, understand benefits)
• Provide clear and simple communication
• Use data to evaluate effectiveness

Key metrics to monitor include:

• Participation rates
• Average deferral rates
• Percentage of participants reaching match thresholds
• Utilization of default investment solutions

Education should support the design — not replace it.

The Integrated Design Framework

A successful Church retirement plan does not rely on a single feature. It integrates multiple elements into a cohesive structure:

• Automatic enrollment establishes participation
• Automatic escalation builds adequacy
• Stretch matching drives higher savings
• Roth options add flexibility
• Managed investment solutions improve outcomes

Together, they create a system where:

Doing nothing may lead to a reasonable outcome — and doing more may improve results.

A Critical Fiduciary Reminder

Even in non‑ERISA Church plans, fiduciary responsibility remains.

Plan sponsors must:

• Act prudently
• Act in the best interest of participants
• Follow a consistent and documented process

And as emphasized in Strategy Two:

You may delegate functions — but you may not delegate responsibility.

The same principle applies here:

You cannot delegate a poorly designed plan into successful outcomes.

Bottom Line

A well-designed retirement plan does more than offer a benefit — it can shape behavior and influence outcomes. It anticipates human tendencies, reduces friction, and aligns incentives with long-term success. It makes the right action automatic. And ultimately, it fulfills the true purpose of a Church retirement plan: to provide for those who have faithfully served.

Looking Ahead

In Strategy Four, we will focus on Cost Management and Fee Discipline — and why controlling costs is one of the most immediate and measurable ways to improve participant outcomes.

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Disclosure: This material is provided for informational and educational purposes only and reflects the opinions of the author as of the date of publication. It is not intended as investment, legal, or tax advice. Forward-looking statements and assumptions are based on current expectations and are subject to change; actual outcomes may differ. There can be no assurance that any plan design features discussed will achieve their intended results or that participants will experience improved outcomes. Plan sponsors should evaluate all decisions based on their specific circumstances and consult appropriate professionals. Content is AI-assisted. Content is AI-assisted. Index Fund Advisors, Inc. is a registered investment adviser. For additional information, please visit adviserinfo.sec.gov or www.ifa.com.