Workers say getting benefits right this year is more important than it was in the past, citing the coronavirus pandemic, according to a MetLife survey on open enrollment. Forty-eight percent of respondents say open enrollment is more important this year than it was last year.
Of particular note is workers’ interest in specific benefits, namely life insurance, dental insurance, health and flexible spending accounts, and financial planning tools. Roughly one in four are more interested in life insurance and dental insurance, and one in five are more interested in pre-tax health and flexible savings accounts, i.e., health savings accounts (HSAs) and flexible savings accounts (FSAs), as well as financial planning and educational tools.
A similar survey by Aflac found that 63% of workers are looking for at least one benefit, such as supplemental insurance or telemedicine, to be expanded. Forty-five percent expressed great interest in insurance that helps offset financial costs related to COVID-19 or other pandemics.
The Aflac survey also found that 33% of employees are either not confident or are unsure it their health benefits will protect them if they are affected by COVID-19.
Forty percent in the MetLife survey say they intend to invest more time this year selecting employer benefits this year, and 57% have already spent a few hours researching and choosing their benefits.
Sixty-seven percent say the reason why they are paying more attention to their benefits this year is the pandemic. However, they say they also have other concerns, including personal finance issues (34%). These include worries over financial security and potentially losing income due to COVID-19. Thirty-one percent are worried about rising health care costs.
“The pandemic has caused a serious disruption to employees’ lives, fundamentally changing the way they approach nearly every aspect of their short- and long-term decisionmaking—including their benefits selections,” says Meredith Ryan-Reid, head of financial wellness and engagement at MetLife. “Workers understand that benefits play a vital role in achieving financial security and will use this year’s enrollment to be more deliberate in how they use these offerings moving forward.”
Sixty-nine percent of workers say improving their financial health is one of their most important goals this year, with 45% saying they feel insecure about some aspect of their finances. This includes feeling behind compared with their peers and lacking experience with personal finance.
One in eight employees say they feel insecure about making a benefits decision, and 51% say discussing benefits with their loved ones makes them more anxious than discussing fitness and nutrition goals. MetLife suggests that sponsors can assuage these concerns by providing their workers with benefits tools.
“In this tough environment, it’s important that employers demonstrate an understanding of employee stress, anxiety and insecurities,” Ryan-Reid says. “People have an overwhelming amount of information to digest, so benefits education and enrollment should be easy and accessible. The goal is to give workers a sense of ownership even when the rest of their lives are filled with uncertainty.”
Speaking on the opening day of the 2020 PLANSPONSOR National Conference at the virtual panel New Thoughts About QDIAs, Julie Varga, vice president, product and investments, Morningstar Investment Management, said an important turning point with respect to qualified default investment alternatives (QDIAs) in retirement plans was the passage of the Pension Protection Act (PPA) in 2006.
“Back in 2006, when the PPA was enacted, this was a big step forward,” Varga said. “Prior to that, stable value was typically the default in DC [defined contribution] plans.” The PPA permitted plan sponsors to replace stable value funds with three options: target-date or target-risk funds, balanced funds and managed accounts. All three can deliver much better outcomes for participants, Varga said.
Since then, custom target-date funds (TDFs) have been created, Varga said. “These consider demographics provided by the plan sponsor about the plan as a whole,” she said. Whether it is a target-risk, target-date or custom target-date fund, 80% to 85% of plans use one of these choice as the QDIA, she said.
Balanced funds, typically 60/40—60% allocated to equities and 40% to fixed income—remain committed to the mix and do not have the variable glide path of a TDF, which tamps down equity exposure the closer an investor gets to retirement. Ten percent of plans use balanced funds as the default, Varga said.
The remaining plans, 5% to 10%, use managed accounts as the QDIA, she said, likening this choice to “a financial planner in a box.” Varga said managed accounts are automated solutions that take into consideration a number of data points, such as an investor’s outside assets and risk tolerance. “It is the closest you can get to sitting down with a financial planner” without actually doing so, she said.
Philip T. Maffei II, managing director, product development and actuarial, TIAA Financial Solutions Product Group, said making a choice between a managed account and a balanced fund can hinge on whether there are demographic similarities in a company’s workforce. If that is the case, then a balanced fund might fit the bill, he said. If not, perhaps a managed account is a better way to go.
“Off-the-shelf TDFs have been wonderful but cannot account for other assets,” he said. “You may not know that a participant’s spouse has a DB [defined benefit] plan.” Asset managers have compensated somewhat for that by creating conservative, moderate and aggressive off-the-shelf TDFs, but, as a QDIA for an entire workforce, it is not an easy decision for a plan sponsor to know which iteration to select, he said. A TDF as the QDIA for an entire workforce cannot take into account each participant’s financial situation.
Of course, participants can opt out of their company’s QDIA selection, but even if they do move into an appropriate TDF in the conservative, moderate or aggressive spectrum, their personal situations could change. “Participants don’t recheck their investments very often,” Maffei said.
Sponsors might want to consider managed accounts, he said. “We are at a very good time for managed accounts,” Maffei said. “The technology supporting these platforms has improved, which has helped reduce fees, and the types of investments that can be included are more extensive.” More managed accounts use data aggregation to automatically populate the account with information on participants, he added.
“The hesitation on managed accounts is the perception that the fees are hard to justify for participants at younger ages,” Maffei said. This has led to what is called a “hybrid QDIA,” whereby younger participants are defaulted into a TDF and then, when they reach age 50 or 55, and their financial profile becomes more complex, they are defaulted into a managed account.
“The dynamic QDIA is something we should be keeping our eyes on for the next 25 years,” Maffei said. “Critical questions that sponsors need to ask about QDIAs are not just about fees, but value. I think we will see the growth of managed accounts across all age groups.”
Varga agreed that QDIAs need to become more personalized. “TDFs are less expensive, but all they take into account is an individual’s age,” she said. “Custom TDFs go more in-depth to meet the needs of each individual plan. We see larger plans using this.
“Managed accounts are the most personalized of the solutions,” Varga continued. In 2003, Morningstar debuted its own managed account, which takes into account where the participant lives, their account balance, their projected Social Security benefit, their age, whether they have a DB or other retirement account, their deferral rate, their gender, their salary and, finally, the sponsor match. “One 50-year-old looks nothing like another 50-year-old,” she said.
Today’s managed accounts can pull in basic data from recordkeepers, including a participant’s age, balance, salary and savings rate, Varga said.
Hugh Penney, senior adviser of benefits planning at Yale University, said the university’s plan is a 403(b), and, as such, it can only use a mutual fund or annuities as its QDIA. When Yale was considering a new QDIA and learned that TIAA had developed a product that was technically a managed account but could act like a custom TDF by having each participant take a risk questionnaire, Penney said that was very appealing to the university.
“That personalization is where we started,” Penney said. “We were then able to put lifetime income into the program. It should be no surprise to anyone that lifetime income can improve your income security and give you the ability to leave a larger legacy. Our challenge was really figuring out what participants would be giving up in term of return. Our consultants did a Monte Carlo analysis and found that participants were giving up risk by investing in a guaranteed income annuity. Rather than investing in an indexed bond fund, the guaranteed income annuity reduced volatility and means better returns.”
Yale then adjusted its target-date program so that it can adjust participants’ portfolios based on what they are holding in their personal annuity accounts, Penney said. “This was put in over a year ago,” he said. “We redefaulted all 27,000 participants into this QDIA managed account hybrid. One-and-a-half years later, we have close to 93% of participants still in this QDIA.”
Penney attributes participants’ acceptance of the new QDIA to their “realization that by offering them real security, with an option to annuitize a portion of their accounts in retirement, it gives them many of the benefits of a DB plan in a DC wrapper.”
Maffei agreed that, beyond customization, including “lifetime income in the QDIA as a turn-key solution is probably the bigger story in today’s environment,” noting that the Setting Every Community Up for Retirement Enhancement (SECURE) Act’s annuity portability and safe harbor provisions are making this possible. “It is important for fiduciaries to become comfortable with annuities to improve on the QDIA.”
It is also incumbent on plan sponsors to “improve annuitization take-up rates, to get them to understand lifetime income across the whole savings journey, as opposed to hitting them with that hammer at retirement,” Maffei said. “There are a lot of benefits to including annuities early on in the investment process,” one of which is helping investors to remain invested, he said. “But fiduciaries need to do their due diligence.”