Benefits February 26, 2014

Don’t Know Much About… Investment Options

February 26, 2014 (PLANSPONSOR.com) - About one-third of Americans who participate in a workplace-sponsored retirement plan say they are not familiar with its investment options, research finds.
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The first culprit could be menu construction, according to David Ray, managing director, head of institutional retirement plan sales at TIAA-CREF. “A lot of research shows that too many options are too many options,” Ray tells PLANSPONSOR.

A finding from the TIAA-CREF Investment Options Survey: 36% say they have either too many or too few investment choices. The survey results were not particularly surprising, Ray feels, but plan sponsors and advisers should see it as an opportunity to help employees navigate their investment options.

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Citing research by Sheena Iyengar, a Columbia Business School professor known for her research about choice, Ray notes that with every 10 new options offered, enrollment in a plan drops 1.5% to 2%. The best approach is to keep the menu simple. While there is no one magic number that works for all plans, Ray says a number in the range of five to 10 is probably right.

So many benefits have shifted to a self-service model for employees; they educate themselves and make their choice. But many struggle with retirement choices, Ray says, because the concepts can be difficult to grasp.

Only a very small percentage of participants are experienced investors, Ray says, but plan sponsors expect them to make investment decisions the same way as an investment committee. This is unrealistic. “Those employees need help, and advice is the best way to give it to them,” he says.

A substantial majority of participants (81%) trust the education they get from plan sponsors, the survey found, which Ray calls a real opportunity for plan sponsors to engage employees. Effective engagement would be one-on-one advice, since investments are complex, and participants are reluctant to raise their hands in group advice sessions to ask for information.

The shift from mostly defined benefit (DB) plans to defined contribution (DC) plans shifted the risk, but not the best practices, Ray feels. One basic goal of a DB plan is provide income replacement in retirement, but DC plans are not necessarily set up that way. The focus in DC plans has been mainly on accumulation of assets, but this could be changing.

Outcome is gaining attention, and plan sponsors should consider creating a retirement policy statement to help shift the focus to outcomes. It is more common to focus on these intentions with the investment policy statement, Ray says, paying attention to how investments are performing. But the real question should be how the plan is performing.

“It’s not about the best-performing investments,” Ray says. Such a statement would outline the employer’s vision for their retirement plan, such as how replacement income can be achieved. Other issues to address could be gender and age differences, and how people digest information.

“We have older workers and more females in the workplace,” Ray notes. “Are there ways to address that in a retirement policy statement with education, with seminars, and other methods of education?”

The retirement policy statement could address the importance of face-to-face advice, rather than Web-based advice at the employee’s convenience.

Regardless of what’s on the investment menu or how you do education, utilization has to be a plan’s key driver. The biggest variety of investment offerings counts for little if users can't use the Web-based advice or planning tools, Ray says.

The survey was conducted by an independent research firm and polled a random sample of more than 1,000 adults nationwide about their retirement plans. A summary of the findings can be downloaded here.

Benefits February 26, 2014

Better Outcomes Through Better Websites?

February 26, 2014 (PLANSPONSOR.com) - Recordkeepers and other retirement plan service providers are not meeting client demand for online tools and reporting technologies shown to improve outcomes and ease administrative burdens.
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That’s the conclusion drawn by Julia Binder, director of e-business research at the financial services consulting firm kasina, in two new white papers. Binder’s research examines both the participant-facing and sponsor-facing Web capabilities of a list of well-known providers. She tells PLANSPONSOR that, with a few notable exceptions, the majority of companies her firm examined could do substantially more with current technology to support both sponsors and participants.

And it’s not just the latest data mining and visualization capabilities being skipped over by many providers, Binder says. Most defined contribution (DC) plan sponsor websites still have much room for improvement even in basic functionality to help fiduciaries analyze their plans and take action to improve them. And on the participant-facing side, the ubiquitous use of Internet devices and online information among all segments of the working population supports far greater use of interactive websites, social media and mobile applications for targeted communication and education.

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“We’re hitting a point where user expectations, from the sponsors and the participants, are hitting a very high level for these types of technology-based experiences,” Binder says. “And at the same time, recordkeepers have access to more data than ever before, about the plan participants, about the participation rates and historic market data and everything going on in a plan.”

That should be the perfect formula for providers to add more digital capabilities into their retirement plan services, Binder says, but apart from a few notable leaders, many companies are lagging behind. She points to the example of data visualization technology to demonstrate the point.

In basic terms, data visualization tools help a sponsor or adviser pick out and analyze both positive and negative patterns in retirement plan usage among specific subsets of employee populations, such as inappropriate equity allocations per a participant’s specified risk tolerance or investing time horizon. Sponsors and advisers can also diagnose participants’ investing behaviors across metrics such as age, salary, geography, years of service, business line and employee role, among others.

The most advanced technologies can automatically turn this data into easy-to-grasp, visually oriented reports. In an ideal plan, Binder says, data would be coming into the data visualization tools directly from the recordkeeper, asset custodians, and others in the investment chain in real time, giving fiduciaries a deeper appreciation for what’s happening in their plan. And by making the data and reporting available through sponsor and participant websites, providers could ensure it would be put to good use.

“That’s one of the factors that sets apart the top performers in our study,” Binder explains. “We’ve seen that Putnam Investments does this, and JP Morgan does this, and Vanguard to some extent. What you have at the top providers are tools that can quickly produce highly informative snapshots of different aspects of the plan.”

Binder adds: “For example, you would be able to look across the different age ranges in the plan and see where the clusters are of participants who are investing in different vehicles. That could alert you to the fact that you have a large cluster of younger plan participants, say under 30, who are invested in a single bond fund, thereby missing out on the opportunity to increase their savings significantly through a more aggressive or diversified investment strategy.”

Binder says that, for sponsors and advisers, being able to use data mining tools to zero in on very particular participant insights is really attractive. Once the trends are recognized, it becomes much easier for fiduciaries to plan what types of messages to send to different groups of participants. And, she says, participants seem to value messaging that is clearly directed towards their unique investing and savings outlook.

“The next step then would be to isolate the names of those participants that are inappropriately allocated and contact them,” she explains. “You can use the data to provide specific guidance and suggestions, that’s a key part of the plan sponsor’s role.”

In her reports, Binder is fairly scathing in her review of the recordkeeping industry at large. In analyzing 15 recordkeepers’ Web presence on three factors—availability, quality, and user experience—she gives scores averaging in the 60s for participant sites and the 50s for sponsor sites, out of a possible 100.

Binder says the poor results were not exactly surprising—as this is the fourth edition of her research, and retirement plan service providers are not exactly known as technology innovators compared with other industries. But she expects providers will continue to face mounting pressure to improve their offerings.

“This is very action-oriented business intelligence that we’re talking about,” she says. “You see where there is a gap or a shortfall or an opportunity to remedy a problem, and then you want to do something about it. You can’t do that as easily just looking at the spreadsheets, it’s something where the visualization and mining technology is really essential. And it’s there. The technology is ready, but it’s still something that recordkeepers need to make an effort to take advantage of.”

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