Plan Progress Webinar: Elements to Help Participants Prepare for Retirement

Defined contribution plan sponsors have a big lift ahead: to communicate to participants that they will likely need sufficient savings to create a reliable income stream in retirement.

As experts explained during “Elements to Help Participants Prepare for Retirement,” part of the 2022 PLANSPONSOR Plan Progress Webinar Series, plan sponsors must make clear to participants that a plan for decumulation, in addition to one for asset accumulation, is a critical aspect of retirement planning.

David Harris, director or retirement and risk management services at Gwinnett County Public Schools, said that retirement plan participants can access seven different pension programs. With county participants having access to a 403(b) and 457 plan with a Roth option for each, as well as a pension, it can be hard for participants to determine how much to save and in what contribution type, he said.

“It can be very, very confusing for them in the process of what to be in and how to save,” he explained.

Plan sponsors must be thoughtful when setting automatic features such as automatic escalation, said Lew Minsky, president and CEO of the Defined Contribution Institutional Investment Association, a Washington, D.C.-based nonprofit retirement industry trade group.

Incorporating auto-features such as auto-escalation—which increases participant contributions to their retirement plans by 1% each year—requires robust communication, because participants often conflate the message that a savings floor is a sufficient contribution rate over the lifetime of their savings, rather than a necessary initial step that should be revisited.

“When we auto-enroll people, they tend to stick with it, and that inertia is a very strong force,” Minsky said. “And we also know that as we auto-escalate people they tend to ride with us up in the savings rates. We’ve done research in the past where we’ve identified that if you put in robust initial defaults, and auto-escalation programs that are relatively aggressive, [which] escalate people up to 10[%], maybe 15% over time, the vast majority of people who are in the system who have access to retirement savings plans will be accumulating benefits appropriate to meet the retirement income that security needs.”

Michelle Richter, executive director of the Institutional Retirement Income Council, a nonprofit organization of retirement industry advisers, agreed that employers can use their trusted messenger status to correct the record that participants need to save more.  

“All of us truly hear from the from the financial media that that we should do our due diligence, do our homework before we make financial decisions,” she said. “We very consistently hear that whom we can trust is our employer, and is not necessarily our relatives, who might be giving us financial advice and may not be all financial professionals that we should feel are trustworthy. It’s the case, though, that employees naturally and rightfully trust their employer as a party that is interested in their interests.”

She added that for plan participants to achieve sufficient savings that will create reliable retirement income to mitigate longevity risk—that of exhausting savings in retirement—it will require both better communication from plan sponsors and for employers to recommend optimal default rates for auto-enrollment and auto-escalation.

“It’s incredibly common for participants to feel that whatever the default is, whether we’re talking about contribution rates or enrollment in the first place or the qualified default investment alternative, that your employees are going to believe that the default is what you’re recommending,” she said. “And that’s why it’s useful to consider what the default strategy is going to be. Are [employers] going to deploy something different for those participants that are either approaching or are now in retirement where plans historically have not always needed to serve their participants through retirement years?”