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.

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.”

Helping Low-Income Workers Prepare for Retirement

February 26, 2014 (PLANSPONSOR.com) - Witnesses during a U.S. Senate subcommittee hearing shared issues and proposals policymakers should consider to ensure the retirement security of low-income workers.

Diane Oakley, executive director of the National Institute on Retirement Security (NIRS) in Washington, D.C., noted that with the disappearance of secure pensions, significant retirement security challenges face Baby Boomers and the upcoming generations of working families. “A sustained increase in retirement savings is needed to put all Americans on a path toward financial security,” she said.

She suggested that given Americans’ low level of retirement-readiness, strengthening the Social Security safety net; expanding access to low-cost, high-quality retirement plans such as the recently announced myRA and other proposals designed to extend workplace retirement coverage at both the state and federal levels; and expanding incentives like the Saver’s Credit are important policy considerations.

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NIRS data shows more than 38 million U.S. working-age households do not have retirement accounts, and most are in the bottom half of the income distribution. Among households with at least one earner, four in five have retirement savings that amount to less than their annual income. NIRS data also shows people of color face particularly severe challenges in preparing for retirement, Oakley added.

J. Mark Iwry, senior adviser to the Secretary and Deputy Assistant Secretary of (Tax Policy) Retirement and Health Policy at the United States Department of the Treasury in Washington, D.C., discussed details and the intent of the myRA proposal, noting it is a start for those who do not have access to a workplace plan (see “myRA Program Details and Intent”).

Under the myRA program, workers looking to start saving will be able to purchase a specially designed Treasury retirement savings bond held in a Roth individual retirement account (IRA). The bond will have an add-on feature, meaning that additional contributions will increase the value of a single security, instead of requiring the purchase of multiple securities. The Treasury intends to begin phasing in the myRA program by the end of 2014.

“Starting to save is only the first step toward a secure retirement, and Treasury and the administration want to help more Americans save for their future,” Iwry said.

During an initial phase, myRAs will be offered—only by payroll deduction—to employees of employers that choose to participate. According to Iwry, there is reason to expect that linking saving to an employment-based payroll deduction system could be an important step in boosting participation. He cited as an example that millions of employees bought U.S. savings bonds annually through the Treasury’s former payroll-deposit savings bond program, which for decades allowed employees to buy savings bonds through workplace-based payroll deductions.

However, Judy A. Miller, director of Retirement Policy and executive director for the American Society of Pension Professionals & Actuaries (ASPPA) and ASPPA College of Pension Actuaries in Arlington, Virginia, discussed the advantage current employer-sponsored plans have in the form of tax incentives.

Miller noted that in the Employee Retirement Income Security Act (ERISA), Congress decided to direct tax incentives for employer-sponsored plans toward coverage of substantially full-time employees. “Nearly 80% of full-time civilian workers now have access to workplace savings, so the incentives have been effective in providing coverage for the targeted group,” she said.

Miller argued the incentives are very effective at providing coverage to all income groups, due in large part to two features that set the retirement savings incentives apart from other individual tax incentives:

  • The retirement savings incentive is income deferral, not a permanent exclusion. Every dollar that is excluded from income this year will be included in income in a future year. “Unfortunately, that is not reflected in the cash basis measurement of the retirement savings ‘tax expenditure,’” she said, adding that the current methodology overstates the true cost by more than 50%; and
  • Nondiscrimination rules for employer-sponsored plans assure the plans do not discriminate in favor of highly compensated employees, and limit the amount of compensation that can be included in determining benefits and testing for nondiscrimination. “As a result, this tax incentive is more progressive than the current progressive tax code,” she contended.

Miller noted that IRAs share the incentive of tax deferral. However, if a small business owner makes a personal contribution to an IRA, there is no corresponding obligation to contribute to other employees’ IRAs. In addition, annuities purchased outside of a qualified plan share the benefit of “inside buildup”—the deferral of income tax on investment earnings until distributed from the arrangement—but have no limit on contributions or benefits, and no nondiscrimination requirements.

Citing Employee Benefit Research Institute (EBRI) data, Miller said the availability of a defined contribution (DC) plan at work is a key determinant in an individual's likelihood of having a secure retirement, regardless of his level of income. EBRI projections based on voluntary enrollment in 401(k) plans show a 76% success rate of achieving 70% income replacement for the lowest income quartile with more than 30 years of eligibility in a 401(k) plan. If automatic enrollment and auto-escalation are added to the projection, that success rate increases to 90%. The success rates for the top quartile are 73% and 81%, respectively.

“The success of lower-income workers with access to workplace savings relative to higher-income workers is due in part to the higher income replacement Social Security provides for lower income workers, and in part to the nondiscrimination rules and the limits on contributions that affect primarily higher-income workers,” Miller said. “The current system is working very well for millions of working Americans. Expanding availability of workplace savings is the key to improving the system. There is no need for dramatic changes, but measures should definitely be considered to make it easier for employers, particularly small businesses, to offer a workplace savings plan to their employees.”

In her testimony, Miller offered suggestions for how the framework for operating a small qualified plan could be simplified.

Stephen P. Utkus, principal and director of the Vanguard Center for Retirement Research in Malvern, Pennsylvania, encouraged policymakers to consider different levels of low-income workers when making proposals. Improvements in Social Security could be one way to address the concerns of workers with low lifetime earnings. For low-income workers with rising income prospects, automatic enrollment in the defined contribution system is gradually extending the benefits of these plans to workers who are covered by but not currently participating in their employer’s plan. For those with low incomes today but rising income prospects for the future, as their incomes grow, Social Security benefits will come to represent a smaller fraction of their retirement resources, and the need for private retirement savings will increase, Utkus explained.

According to Utkus, features such automatic enrollment, automatic deferral increases and automatic investments like target-date funds (TDFs) help. He added that Vanguard strongly believes all employers and workers have a third lever for influencing retirement outcomes, both when accumulating savings and in the drawdown or retirement phase—namely, costs.

“All other things equal, the lower the costs that workers bear in their retirement programs, the larger the nest egg they will accumulate during their working years, and the longer the money will last when it is spent in retirement,” Utkus stated. He noted that as a result of the plan sponsor fee disclosure regulations issued by the Department of Labor (DOL), combined with intense competition in the marketplace, both recordkeeping costs and investment costs are declining.

“On the administrative side, we are seeing substantial downward pressure on recordkeeping fees due to DOL disclosure regulations and competitive re-pricing efforts. On the investment side, we are experiencing a resurgence of interest in low-cost indexing strategies as sponsors look to ways to reduce DC plan investment costs and improve relative investment performance.”

Testimony from the hearing may be downloaded from here.

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