Benefits April 25, 2014

Increasing the Impact of Participant Statements

April 25, 2014 (PLANSPONSOR.com) – Retirement plan sponsors can do more to increase the power of participant account statements as a retirement savings communications tool.
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Amy Reynolds, U.S. Defined Contribution consulting leader for Mercer, and co-author of the paper, “Retirement Income Statements May Help Avert a Looming Crisis,” released jointly by Mercer and the Stanford Center on Longevity, tells PLANSPONSOR, “The concern is that participants have potentially lost track of the statements, and the data contained in them.” Part of the problem, she says, is a lower level of engagement from participants.

Reynolds contends when participants were sent paper statements in the past, they had a tangible reminder to review this information. Now that most plans have made statements electronic, it can very much be a case of out of sight, out of mind, she says.

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Another problem is participants’ understanding of the information contained in the statements and how it specifically applies to them, contends the Richmond, Virginia-based Reynolds. “Plan sponsors need to start looking at these statements and ask if their participants can translate those numbers into an income stream for retirement,” she says. “People look at their retirement account balances and are unsure if it’s enough to live on for 20 years or so. That needs to change.”

Reynolds points out efforts are already being made by the Department of Labor (DOL) to require plan sponsors to provide participants with statements containing lifetime income projections (see “Income Projections: Showing Participants a Better Way”). Some employers are also being preemptive and moving in that direction ahead of the DOL, says Reynolds, adding, “The statements will act as a personal communication to the participant, telling them what their own account balance means in terms of an income stream during retirement.”

Reynolds adds, “Plan statements have become more like banking statements—more numbers and less explanation. Plan sponsors need to explain what these numbers mean to an individual participant, but participants also need to play a part in the process and engage more.”

As a supplement to these statements, plan sponsors should provide participants with access to online tools that use methods such as scenario modeling and mapping, Reynolds recommends. “Participants need to be shown that if they save such-and-such an amount, then it will translate into supporting them for a set number of years of retirement,” she says. She explains these estimates and projections need to factor in market conditions and how the participant saves.

Plan sponsors need to work with their recordkeepers to find online tools that are the most appropriate for the needs of their participants, as well as create an efficient learning process for participants, Reynolds suggests. For example, she says, plan sponsors may anticipate that if a participant wants to model how saving more will impact their retirement income stream, they may also wish to explore related factors such as how market conditions and using investment advice can impact things. “The numbers in the participant statement do not exist in a vacuum,” she says.

Reynolds notes Mercer’s MyView platform, as well as solutions from Financial Engines and HelloWallet, can map out individual situations and give participants guidance about how to budget accordingly.

When it comes to delivering information about these statements and tools to participants, Reynolds reminds plan sponsors it is not a case of one size fits all. “Plan sponsors need to utilize multiple strategies for engagement, moving away from a broad approach and instead using a more targeted and focused approach,” she says. Plan sponsors need to figure out who they are addressing—breaking participants into groups by age, where they are in their career, income level or job duties—and determine what method of information delivery works best for each group. This can include one-on-one meetings, videos, webcasts or print materials. For those participants with a technology preference, Reynolds advises plan sponsors to make sure content is smartphone-friendly.

A copy of the paper from Mercer and the Stanford Center on Longevity can be requested here.

Benefits April 25, 2014

Benefit Adequacy Hottest Retirement Benefits Issue

April 25, 2014 (PLANSPONSOR.com) – The hottest issue for those in the retirement benefits industry right now is benefit adequacy, according to Fred Reish.
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Reish, partner and chair of the Financial Services Employee Retirement Income Security Act (ERISA) team at the law firm of Drinker, Biddle & Reath LLP, noted the focus in the industry has traditionally been savings accumulation, but now the industry is asking, will workers have enough, and how will they withdraw their money so as not to exhaust accounts before they die? “I think the decumulation period will be more difficult [than the accumulation period],” Reish told attendees of the Retirement & Benefits Management Seminar, hosted by the University of South Carolina Darla Moore School of Business, and co-sponsored by PLANSPONSOR.

During the decumulation phase, participants will no longer have centralized education and support from their employer-sponsored retirement plan, and the move to retail support means more possible conflicts of interest and higher fees, Reish said. He contended that is what the anticipated regulations redefining the definition of fiduciary are really all about—individual retirement accounts (IRAs). “There’s lots of money involved expected to be rolled over from defined contribution plans,” he said, adding that he expects more regulations about IRAs in the coming years, providing protections such as individuals get in employer-sponsored plans.

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One thing the Department of Labor is working to address the benefit adequacy issue and concerns about the decumulation phase for retirement plan participants is lifetime income projections on participant statements (see “Income Projections: Showing Participants A Better Way”). Reish says he believes there will be final regulations about this within two years and it will mandate plan sponsors or providers put projections on statements. “This is the rule that will have the biggest impact on participants, even though the fiduciary rule and fee disclosures have gotten more press,” he noted.

Reish asked attendees to think about employees getting this projection on their statements every quarter for 10 years, not just as a one-time thing they can ignore. “It will be like drip torture; after years of seeing it, it will make a difference,” he contended. He told attendees they do not have to wait for the government mandate to offer this to participants, as many recordkeepers have the capability now, and some are already doing it.

Reish said the impact on benefit adequacy comes from projecting the results of current behavior, providing a reasonable benchmark for comparing to typical needs, and providing guidance for helping to close the gap. The projection of the results of current behavior is all that will be required on statements; the other two may be offered by providers or are an opportunity for advisers to do participant education or offer to their retail business, he added.

Two risks to benefit adequacy are longevity of participants and withdrawal rates. Reish noted half of today’s 65-year-old men are expected to live to age 85, and half of today’s 65-year-old women are expected to live to age 88. He showed an example from the Congressional Research Service of how a 4% withdrawal rate could give some participants a 94% chance their money will last for 30 years, but moving the withdrawal rate up to 5% drops the chance to 77%, and moving it to 6% drops the chance to 48.5%.

Reish conceded that it is not a plan sponsor’s job to educate participants about this, “but, if not plan sponsors, who will?” he queried. “It’s inefficient to leave folks on their own.”

Reish pointed out that, for decades, 403(b) plan sponsors have successfully been using in-plan annuities, which could be a model for other defined contribution (DC) plans (see “What 401(k)s Can Learn from 403(b)s”). There are a number of available products plan sponsors may use to address the risks to benefit adequacy: traditional annuities, guaranteed minimum withdrawal benefits (GMWBs), longevity insurance, managed payout and retirement income mutual funds, and managed retirement income accounts.

Why should plan sponsors offer such products? Because of the success rate for participants, Reish said. He noted that more participants use in-plan products than rollover into or purchase such products during the 60-day window for rollovers at plan termination. In addition, in-plan products are institutionally priced and cost much less for participants than retail products.

There is another benefit for having a pre-arranged distribution methodology for participants, according to Reish; it helps address the risk of diminished cognitive abilities on the decumulation phase. “There’s something to be said for getting your financial future in order before your cognitive abilities diminish,” he said. “It will be helpful to participants’ families too.”

One topic Reish wanted to make a point about that is brought up with the issue of benefit adequacy is the focus on plan and investment fees. “The mantra now is that plan sponsors need to make plans as cheap as possible,” he said, “but, the best plans I’ve seen are high-cost.” This is because of better services, he noted.

According to Reish, the single most expensive thing plan sponsors can do is also of most value to participants—one-on-one advice. Reish admitted he was an advocate early on about fiduciaries watching plan costs, but now he feels the industry is in a death spiral. “Focus on providing the best services for participants,” he told seminar attendees.

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