Participants August 25, 2022

Funding the Future Self

To their detriment, plan participants often fail to opt in to in-plan financial advice—but that may be changing.
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Art by Alessandro Gottardo

Retirement plan research shows that making enrollment automatic is crucial to plan participation. However, auto enrollment only goes so far in addressing retirement preparedness. It tends to put people into the plan’s base model, and while this approach is prudent from a fiduciary perspective, it doesn’t always result in an approach to retirement savings that remains relevant to individuals throughout their lives.

Although many plans have a customization option that could help with this issue, low-information investors aren’t likely to take advantage of that without being prompted. Plan sponsors and recordkeepers are attempting to change this, but current behavioral science research suggests there is still considerable room for improvement.

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The Big Disconnect

“The problem is people are disconnected from their future selves and they tend to hyperbolically discount the future,” says Professor Punam Keller of the Center for Business, Government & Society at Dartmouth’s Tuck School of Business. “That creates a number of problems when we are thinking about financial planning. People tend to focus on the financial issues right in front of them and put off savings, as we know. But also, the user experience within financial services and retirement is not great from a behavioral science perspective. People are flooded with information and questions that lack any tangible context.”

Examples of this range from basic investment risk questionnaires to the more in-depth questions financial advisers tend to ask about big goals like retirement.

“When we look at how these questions are presented, it really goes against everything we know about good survey design or effective information gathering,” Keller says. “People get asked about what their goals are and they say, ‘I want to have enough money to do what I want in retirement.’ That’s not a goal. But most people don’t know what they want to do in retirement, so it makes no sense to ask people this question. We’re asking people to value their net worth and their risk tolerance and we aren’t giving them any context about how to do it or what it means, and those are the first questions in the list—so people get panicked and turned off immediately.”

She notes that, based on her research into how people tend to respond to questionnaires and other types of information gathering, if someone can’t answer a question easily and it feels like there are big stakes attached to it, the individual is more likely to put off answering for as long as possible. This means people are less likely to take a proactive approach to retirement preparedness until they are very near retirement, which limits their options and their ability to course-correct if they find out that they have some gaps to fill.

There are generational issues, too. Asking a Millennial or member of Generation Z about their financial goals is more likely to elicit ironic laughter than a conversation about investment strategy. Both generations are faced with high financial hurdles such as student debt, which, according to the Center for Retirement Research at Boston College, means that they tend to contribute less to their retirement plans, as they instead put more toward paying down debt. Consequently, they have significantly fewer retirement assets.

Many other financial milestones that could help build wealth, such as owning a home, are largely out of reach for these generations, which puts more pressure on retirement contributions to cover the gaps. Relevant financial information and advice could be especially helpful for these generations as they look for solutions, but experts say the information would have to be put within this broader context to get people to engage.

‘People Don’t Compartmentalize Their Finances’

David John, senior policy adviser for AARP’s Public Policy Institute, notes that recent innovations such as financial wellness programs can help get plan participants more engaged earlier on.

“These programs are obviously new and are still being adopted, but what we have seen from the really high-quality programs is that it is easier to get people to engage if you’re offering them current and future solutions,” he explains. “So, for example, emergency savings funds that can be used anytime—having that frees people up to start thinking about the future. Or having a student debt payoff matching program can free up dollars that can then go into a retirement fund.”

John emphasizes that participants of all ages are looking for not only relevant advice and solutions, but also information that comes from unbiased sources. “There are big trust gaps everywhere,” he says. “Plan sponsors really have to think critically about who is giving the information and what the information says.”

He notes that some European plans have had success with providing information through user dashboards. This information can help spur people to do more research or further engage by providing information to the plan or an adviser in order to get more customized services.

Some recordkeepers in the U.S. are also starting to rethink how information is presented on their retirement platforms. Empower Retirement, a Colorado-based recordkeeper, has recently updated its onboarding experience to guide participants through a process that is designed to get more information and provide a customized experience.

“What we’re trying to do is pull people into the site and keep them engaged,” says Claudia Step, senior vice president and chief customer experience officer at Empower Retirement. “We’re working with our plan sponsors to craft messages that are targeted to their participants and have a clear call to action. Employees don’t compartmentalize their retirement savings. So we’re really focused on having very customized messaging that is relevant not just to retirement but to their broader financial plan.”

Pay Attention to Stories

Ongoing participant engagement shouldn’t begin and end with questions. Recent research on target-date funds from Morningstar suggests that greater customization within product design could also help keep retirement plans relevant throughout the life of a participant. The research notes that when participants get put on the same glide path regardless of factors like age, wages or goals, they could end up working longer to cover gaps in their retirement savings.  

AARP’s John notes that setting up automatic financial counseling sessions at certain ages might help people course-correct if the one-size-fits-all plan no longer serves their needs. “To the extent that you can make interventions opt-out rather than opt-in, like we’ve done with enrollment, you’re likely to have a better uptake rate,” he says.

Keller adds that giving people stories and scenarios to think through can also help participants see themselves in their financial plan. “Our research shows that the context you give to women, for example, is going to be different than what men need. Women live longer, they tend to think about what goes to their kids, they just tend to think about more eventualities than men,” she says. “If you can help women understand how to plan for that so that they don’t end up in situations they wouldn’t otherwise choose, that’s going to be helpful. People learn through stories. If they can relate to a story, they will try to emulate what they learned.”

Participants August 25, 2022

Target-Date Glide Paths Are Not Personalized Across Industries

Plan sponsors across industry sectors and with widely different wages for workers are using essentially the same target-date fund glide paths, research shows.
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Art by Alessandro Gottardo

PLAN SPONSORS MAY WANT to take new research from the Morningstar Center for Retirement & Policy Studies personally, because according to the research, many are not inspecting the target-date funds provided to participants for personalization—likely leading to suboptimal retirement preparedness for workers.

Morningstar’s July 2022 publication “Right on Target?” says plan sponsors do not always consider participants’ behavior or needs when selecting target-date glide paths.

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The paper states that TDF glide paths—across diverse sectors that employ varied workers with widely differing personal circumstances—are significantly similar, despite considerable variation in workers’ average wages and the percentage of workers in each industry that are working after age 65.

“We see a lot of sponsors who are basically accepting the dominant glide paths, regardless of pretty big differences in their employee population compared to other plans,” says Aron Szapiro, head of retirement studies and public policy at Morningstar and Morningstar Investment Management. “The other big tell to me is that everybody has moved to these ‘through’ glide paths, and we just see very little association between the decision to elect to offer a glide path that is supposed to run through retirement and therefore takes on more equity risk and the actual propensity of plan participants to stay in a plan.”

A target-date glide path aligns participants’ asset allocation based on the number of years until their target retirement date. Because the glide path creates an asset allocation that typically becomes more conservative as a participant gets closer to retirement age, it includes more fixed-income assets and fewer equities as time goes by.

Despite variations in compensation, time in the workforce and expected retirement date, with few exceptions, plan sponsors’ TDF glide paths’ average equity exposure at age 55 is set at 66%, while at age 65, with few outliers above or below, it is set at 47%, the Morningstar paper says. 

“There are definitely plan sponsors who are making adjustments based on their plan populations, and maybe a lot of them, but there are also a lot that clearly aren’t, or you wouldn’t be seeing the kind of homogeneity or similar-ness of glide paths across industries and across employers with very different characteristics,” Szapiro, a co-author of the white paper, says.

Participants enrolled in an insufficiently personalized TDF may sacrifice asset growth by turning to de-risk to bonds earlier than needed. Conversely, for a participant with outside assets, a defined benefit plan or another source of retirement income, a glide path that is not personalized can take on more equity risk than is comfortable.

The industry sectors that Morningstar studied ranged from finance and insurance, with average wages of $81,240; to information services, with average wages of $91,930; to accommodation and food services, with average wages of $30,850. Morningstar’s analysis also suggests that the percentage of workers who are working past age 65 varies by industry: 18.68% for workers employed in agriculture, forestry, fishing and hunting, which is greater than the comparable figure for mining (4.64%), utilities (4.64%), real estate rental and leasing (12.82%) and accommodation and food services (3.36%).  

Szapiro says that, for example, TDF glide paths for workers employed in an industry “where people typically work past age 65, you’d like to see that reflected” in the asset allocation.

“You might consider taking on more equity risk. There’s different ways that that can be reflected; regardless, that glide path should look different from the one that is serving people in an industry with higher salaries, a much lower Social Security replacement rate, where people tend to retire before age 65, and we don’t see that. We just see the same equity allocation,” he says.

Szapiro adds that for employers, “You want those risks to be calibrated, at least to some extent, to what your employee population is likely to need … unless for some reason you have so much money saved up you can fully defuse your risk with bonds, which I don’t think is going to be the case for most plan participants.”

Accounting for ‘Life’

While TDFs have been a good way to get employees enrolled in a defined contribution account and to begin to plan for retirement, older workers may need additional support to reach optimal retirement readiness.

Managed accounts are an investment product that can accommodate additional personalization for workers’ circumstances, says Mike Moran, senior pension strategist at Goldman Sachs Asset Management. A Goldman Sachs article, “Why Personalization and Goals-Based Solutions Matter,” makes a case for managed accounts as solutions that can lead to greater personalization and more optimal retirement outcomes.

“One of the issues that tends to impede retirement savings is, as we say in the paper, life. Life gets in the way: you have unexpected expenses, there are times you may be out of the workforce. So you’re not saving for retirement,” Moran says.

Caring for a loved one, saving for a child’s education and attending to other life events can throw workers off in their retirement savings. But Moran says that such challenges can be mitigated with a goals-based approach to retirement planning that includes a managed account.  

“If you are out of the workforce for a while, maybe your personal retirement plan has to take on more risk or you have to save more,” he says. “Maybe you’ve actually done well in your investments and maybe you actually can take less risk. So it’s really a way to say that as we think about the challenges that many individuals face for retirement, one of the big challenges is life gets in the way—and having a more personalized or goals-based approach can help overcome that.”

‘Managing’ Personalization 

The search for personalization may lead some plan sponsors “to more of a managed account type of product or solution for their participants—something that can personalize the experience and recalibrate the retirement needs as an individual goes along their financial journey,” Moran says. “You’re obviously also seeing a lot more , including financial wellness type programs within their benefit offerings, as a way to help their participants understand their retirement needs, and then, again, manage some of those financial issues that come up outside of retirement that sometimes impede the ability to save for retirement.”

One impediment to plan sponsors’ greater adoption of managed accounts could be that there are higher fees for them than for target-date funds. Excessive-fee claims are regularly the crux of plaintiff litigation over breach of fiduciary duty.

“The onus is on the industry to show that there’s value in adding something that’s a little bit more personalized in terms of what the plan lineup is going to offer,” Moran says. 

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