Administration October 20, 2020

Repositioning Financial Wellness and Retirement Benefits for 2021

Plan sponsors can take steps now to make sure their plans are ready to meet fiduciary obligations and participants’ needs in the new year.
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Employers are looking to the new year with hopes for a stronger 2021, both for their businesses in general and for their retirement plans.

While COVID-19 has been the dominant force affecting nearly every aspect of life this year—including retirement plans—expert sources say retirement plan legislation, litigation, education and a push for diversity in and outside of plans were the other big takeaways of this year for the industry, as well as what will shape financial wellness going into the new year.

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Jim Scheinberg, managing partner, founder and chief investment officer (CIO) at North Pier Search Consulting, says many of the new terms and plan features from the Coronavirus Aid, Relief and Economic Security (CARES) Act had a big effect on employers and their participants, especially for those in the hospitality and travel workforces. Some employers opened up their plans to allow participants to take out larger distributions or loans to help them with any financial hardship they faced as a result of the coronavirus pandemic.

And, depending on the outcome of the presidential election in November, Mike Swann, client portfolio manager at SEI Institutional Group, says employers may see new legislation similar to the CARES Act and the Setting Every Community Up for Retirement Enhancement (SECURE) Act.

Swann also says recent litigation targeting Employee Retirement Income Security Act (ERISA) plans with accusations of alleged imprudent investment options during the height of market volatility in March and April could have a big impact on retirement plans. Not only has there been an increase in the number of ERISA plan litigation lawsuits, but there has also been a rise in activity from plaintiff attorneys actively soliciting clients, Swann says. He notes that most of these cases end up in settlements.

“The case law is fairly shallow because many of the cases end up being settled,” he says. “They don’t get to the discovery or pleading phase. At some point, someone will take a stand, but that’s been an area where it’s easy for a plaintiff’s attorney to get a settlement, and that’s going to create a larger number of cases.”

To avoid litigation, experts encourage employers to keep an eye on plan investments, examine their fiduciary processes for risk and seek guidance from an investment adviser. Scheinberg recommends employers contemplate repricing exercises or evaluate whether the plan is priced appropriately. Some advisers may even initiate a cost analysis for clients concerned with opaque investments.

“The change in demographics may have changed meaningfully, and, for those with asset-based pricing, any changes in plan assets could have a meaningful impact if the market were to head down again, especially if they’re mispriced,” Scheinberg says.

Employers should also assess whether their current plan model is appropriate or if outsourcing some of their fiduciary liability through a 3(38) investment manager would make sense, Swann says. “ERISA plan litigation isn’t just here to stay, but it will most likely grow. Plan sponsors should determine how exposed they are to risk,” he adds.

Scheinberg also suggests employers initiate partial terminations if they’ve had significant staff reductions, typically defined by cuts of 20% or more. Employers can seek advice from their adviser, recordkeeper, plan administrator or ERISA counsel, or pursue guidance from a combination of those sources.

The coronavirus pandemic and its effects have also highlighted the importance of financial wellness education. A survey by Bank of America recently reported that fewer workers feel good or excellent about their financial wellness. Forty-nine percent of employees said they were happy with their financial wellness this year, compared with 61% in 2018.

“Plan sponsors are starting to understand the anxiety that their employees are facing,” explains Stan Milovancev, executive vice president at CBIZ Retirement Plan Services. “The pandemic has highlighted that these workers have a lot of financial stress, and that stress affects mental health, physical health and any other relationship in their lives.”

Ed Farrington, executive vice president with Natixis Investment Managers, says it’s important for plan sponsors to continue to have good communication and education within the employee base as they look to next year. For example, if a plan sponsor offers an employer match contribution, communicate what that match means for workers, Farrington says. Plan sponsors should also consider implementing options such as automatic enrollment if that’s not already an option in the plan.

“It’s these small plan features that should be on everyone’s mind that will recreate this sense of wellness,” says Farrington. “These are all things you can do without tremendous overhaul of the plan.”

Milovancev urges employers to select retirement planning and financial wellness tools, features and professionals now instead of in the future, in the case of another coronavirus wave. “I would tell my clients to not forget how you and your employees felt a couple of months ago. Just because things calmed down a bit, use this time to prepare for a stronger 2021,” he states. Understand who is going to help you in the longer term. Who is going to help your employees, and how are they going to help your organization be more successful? Maybe it’s your recordkeeper or adviser, but there are tools out there to help you make a good, informed decision to help your employees.”

As diversity and inclusion develops into a core topic for 2021, Farrington urges employers not only to diversify the plan’s investments, but also to diversify the committee as well. “What we know from many studies throughout the world is that companies with diverse boards, diverse executives, diverse management teams and diverse teams in general tend to perform better and they tend to attract and retain talent,” he notes. “Make sure you’re getting the opinions of your entire employee bases. That will reflect in your plan and how it is designed.”

Products October 16, 2020

Plan Providers Supplement Lifetime Income Projections

Concerned that lifetime income projections on participant statements may not be reliable, providers are offering more personalized online tools.
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Even before the passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act, the defined contribution (DC) retirement plan industry was increasingly focused on the topic of retirement income, or “DC plan decumulation.”

With the landmark retirement legislation’s mandate that plan sponsors provide their participants with regular lifetime income disclosures, the issue remains top of mind, even during a viral pandemic and a hotly contested presidential election. Notably, the U.S. Department of Labor (DOL) is currently in the process of digesting public comments about its proposed SECURE Act lifetime income projection framework.

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In recent conversations with PLANSPONSOR, some of the leading retirement plan recordkeepers offered insight about how they currently generate lifetime income disclosures. For the most part, what recordkeepers are doing today is far more individualized and sophisticated than the methodology that will apparently be mandated by the DOL. This fact has raised concerns among many, but not all, retirement industry stakeholders. In simple terms, the DOL’s proposed approach will generate several different income projections based on a uniform set of assumptions that some worry may not be reliable for all participants in an increasingly diverse workforce.

Comparing the DOL’s proposed approach with how Fidelity tackles lifetime income projections, Shankar Saravanan, a senior vice president focused on client experience, says the firm takes a three-tiered approach. First, on the home page of the participant portal, Fidelity provides a basic retirement confidence analysis that takes into account such factors as salary, past contribution history, investment philosophy, etc.

“This initial estimate is meant to provide a basic understanding of how a person’s savings strategy stacks up in terms of general recommended milestones,” Saravanan says. “This straightforward presentation uses a color-coded system that is based in behavioral economics to show someone right away whether they are on track to generate sufficient lifetime income.”

Second, the same landing page also shows the participant a lifetime income projection presented in terms of a monthly payment, as the DOL’s proposed framework would do. However, Fidelity’s number is presented in direct comparison with what a person may reasonably expect to need in terms of monthly income to cover their projected expenses. This framing is designed to prompt those who are behind their savings goals to consider taking action to improve their outlook.

The final part of the lifetime income analysis is the provision of what Saravanan describes as “a more sophisticated retirement planning tool.”

“Our sophisticated retirement income calculator tool allows a person to essentially play around with their age, to input their spouse or partner’s financial details, and more,” he says. “You can input whether you are planning to delaying taking Social Security, for example. The goal is to provide a much more robust and personalized outlook for the participant, complemented with educational resources. When you add this all up, you get a good perspective about whether a person is on track.”

Keri Dogan, senior vice president, retirement income, Fidelity, says that plan sponsors are already asking a lot of questions about the DOL’s lifetime income disclosure mandate. Some say they are concerned that participants with low balances could be essentially scared away from investing further, because the DOL’s approach will seemingly not factor in future expected contributions. Others are more focused on the liability that could potentially come along if they fail to meet the DOL’s expectations once a specific disclosure framework is finalized. For these reasons and others, Dogan expects, recordkeepers and other service providers are likely to play a leading role in the creation and distribution of the DOL’s mandated lifetime income disclosures.

Fidelity’s approach to presenting income-oriented information is far from unique among today’s recordkeepers, though not all of them present a lifetime income projection figure on the first view of the participant portal. T. Rowe Price’s participant webpage, for example, immediately presents a color-coded retirement confidence score, similar to Fidelity, but the main feature on the landing page is a graphic presentation that compares a person’s balance with the recommended savings goal for their age. This presentation allows one to see immediately if they are ahead, on track, or behind when it comes to achieving a secure retirement. One click allows the participant to shift the graph to view how their retirement years may look, with a focus on demonstrating how long savings will last if the person annually withdraws 75% of their final working salary.

In the case of Empower Retirement, an employee’s projected income is also the focal point of the participant website experience, allowing them to quickly view the percent of their estimated income they are on track to replace. Participants can compare their savings to their peers’ savings and factor in their estimated health care costs in retirement. Similar to the T. Rowe Price and Fidelity websites, Empower’s participant portal allows individuals to engage in much more sophisticated income planning by inputting additional information, such as outside asset amounts and expectations about when and how they will enter retirement.

Vanguard tells PLANSPONSOR it is currently in the process of overhauling its participant experience, including the way it will present lifetime income information. This is in no small part because Infosys is assuming day-to-day operations for Vanguard’s DC plan recordkeeping business, including software platforms, administration and associated processes. Through a strategic partnership, Infosys and Vanguard will provide a cloud-based recordkeeping platform, which they say will provide “greater insights and unprecedented personalization to help deliver better participant outcomes.”

Though not itself a DC plan recordkeeper, Pacific Life Insurance Co. has recently introduced the Retirement Income Translator, an online tool to help individuals understand what their retirement savings can mean when translated to retirement income. Pacific Life says the Retirement Income Translator tool can be a great resource to help educate individuals about the projected monthly value of their retirement savings.

Pacific Life’s tool creates a two-minute personalized video that aims to illustrate the potential benefits of protected lifetime retirement income delivered through an annuity. The company says the tool also can encourage individuals to start the retirement income conversation with a financial professional.

“There is an information gap,” says Christine Tucker, vice president of marketing for Pacific Life’s Retirement Solutions Division. “Many consumers don’t know what their savings mean when it comes to retirement income, nor do they know if or how an annuity can help them.”

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