Administration January 12, 2017

Plan Sponsors’ and Advisers’ Goals Sometimes Misaligned

Plan sponsors are more concerned with operating their plans and avoiding potential liabilities, while plan advisers are more focused on participant outcomes, a survey suggests.
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There are several disconnects between the perceptions of defined contribution (DC) retirement plan sponsors and advisers, according to surveys by Voya Investment Management.

The study report, “Sponsor Perceptions of Retirement Plan Services: Challenges and Opportunities for Advisors,” includes findings from surveys of plan sponsors and advisers that were fielded in March and April of 2016. The surveys suggest that helping plan participants become retirement ready is an important concern for sponsors, but they place less emphasis than advisers on the means to achieve it, e.g., participant education, enrollment, communications and increasing savings rates. Plan sponsors are concerned with operating their plans and avoiding potential liabilities; the study shows if the plan is running smoothly and employees are contributing, sponsors tend to believe participants are preparing effectively for retirement.

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By contrast, advisers look at potential outcomes and can see participants generally are not saving enough or investing wisely enough to provide for their retirement income needs. Nearly half of advisers say participants are “poorly prepared” for retirement, whereas only one in six plan sponsors agree. Seven in 10 sponsors say participants are “somewhat prepared” to retire, and four in 10 advisers concur. Yet only one in six sponsors and one in 10 advisers say participants are “well prepared” for retirement.

In other findings, plan sponsors cited the challenges of meeting compliance requirements as a major concern over the next two years. Other significant challenges respondents cited included educating plan participants, increasing participant savings and managing plan expenses.

“Our research found plan sponsors were most concerned with plan fees, the retirement readiness of participants and investment performance,” says Michael De Feo, head of Retirement and Investment Only at Voya Investment Management. “While advisers agreed that plan fees were a top priority, they also thought sponsors were more concerned with managing plan complexity and less concerned about participants’ retirement readiness.”

NEXT: Investments, managing fees and helping participants

According to the study, plan sponsors and advisers generally agree that offering a tiered investment menu—target-date funds, core funds and a brokerage/mutual fund window—for different types of plan participants can result in better investment outcomes. Investment performance is the leading factor driving change of plan investment options, followed by the availability of lower-cost options. Sponsors and advisers closely agree that most participants are best served by investing in target-date funds rather than selecting individual funds or plan choices. Sponsors want more frequent review than the annual meetings that advisers typically offer: nearly three-fourths want at least semiannual reviews, and half want quarterly reviews.

The key regulatory concern for sponsors is ensuring reasonable plan fees and expenses, followed by complying with Department of Labor (DOL) fiduciary standards. Advisers believe they are effective in controlling plan costs. They also believe their fee disclosures are easy to understand, but sponsors do not agree with this perception. Sponsors tend to focus on absolute cost, which suggests they are missing the point of DOL guidance about seeking reasonable value for the fees they pay, Voya says.

Helping plan participants become retirement ready is an important concern for sponsors, but they place less emphasis on participant education, enrollment, communications and savings rates than advisers do. This represents an opportunity for advisers to add value by educating sponsors about the factors that contribute to retirement readiness, according to Voya.

"Based on the data, sponsors don't recognize all of the services that advisers provide," says De Feo. "Since we found that 95% of sponsors want to work with a retirement specialist, it is crucial that advisers highlight their skills and the value that they bring in this regard. It is also critical that advisers push for greater emphasis on participant education and communication between plan sponsors and participants to enhance the potential for participants to meet their savings goals."

Participants January 11, 2017

Gen X Must Commit to Personal Savings to Secure Retirement

As the first wave of Generation X workers begins to catch a glimpse of retirement age, the demographic group continues to face struggles in financial planning. 

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Baby Boomers and Millennials are the two age groups most frequently considered by retirement industry research, but an increasing number of experts have stressed that Generation X, also called the “sandwich” generation, should be analyzed on its own.

The generation, often described as those born between 1965 to roughly 1980, established their careers during a period of serious global reform, both politically and economically. Investors in Generation X faced down both the Internet market crash of the early 2000s and the credit crisis of 2008 relatively early in their careers—leading many to hold off on saving.

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“Gen Xers have really kind of been on their own to do it themselves,” says Catherine Collinson, president of Transamerica Center for Retirement Studies (TCRS). “They were, in many ways, at the bleeding edge of the use of 401(k)s and of personal retirement savings responsibility.”

While the financial crisis occurred almost 10 years ago, challenges still linger in the future for Gen Xers. According to the 2016 report by TCRS, “Perspectives on Retirement: Baby Boomers, Generation X, and Millennials,” 41% of Gen Xers say they have only “somewhat recovered” from the recession, while 14% have not yet recovered and 8% believe recovery will never happen.

“It definitely is a generation that was squeezed the most over the past 15 years,” agrees George Walper, president of Spectrem Group.

With such challenges looming, it’s no wonder why Gen X workers express less interest in plan participation compared with both the older and younger generations. A study released by Spectrem Group found that Gen Xers hold the least amount of concern with active saving/investment participation than any other generation. Additionally, a study conducted by the Insured Retirement Institute (IRI) reported that about eight in 10 Gen Xers believe they are either somewhat or not very knowledgeable in investing, and two-thirds rate their financial IQ as average or low.

NEXT: Helping Gen X is possible 

Collinson notes Gen Xers should be looking at saving more than 10% to 15% of annual salary. That may be tough, as the median annual contribution rate for Gen Xers has been much lower than that over the past several years.

“The median annual salary contribution is only 7%, which tells us that many are likely not saving enough,” she says. “Of the three generations, they’re also the least likely to be saving more than 10%.”

In order to combat these challenges and lack of knowledge, Collinson encourages plan sponsors and advisers to emphasize meeting the needs of Gen Xers in specific life phases, starting by organizing educational campaigns.

“One of the most important things they can do is simply decide to make a concerted effort to focus on Gen X,” says Collinson. “Knowing that they’re between ages 39 and 52, building out communication and education campaigns catered to the life phase that they’re already in right now.” 

And a little encouragement and education may be all that some Gen Xers really need to accomplish success in saving. According to the TCRS report, when asked how much they believe they should be saving for retirement, 52% of Gen Xers guessed their response, while only 12% utilized a retirement calculator or completed a worksheet.

For Gen Xers taking early withdrawals from 401(k) savings—whether it be for a serious medical expense, credit card debt or another major payment—Collinson suggests sponsors and advisers establish education sessions dedicated to the importance of emergency savings and alternative ways to address short-term financial needs.

NEXT: More on Gen X 

According to the TCRS report, Gen Xers were found most likely to have taken out an early withdrawal, at 30%. Twenty-three percent reported taking out a loan from a 401(k), IRA or similar plan, and 15% took an early and/or hardship withdrawal. 

“For some steps forward they have taken, many have also taken steps backward with their retirement savings,” she says. “Gen Xers are turning to the retirement account, which can help that short-term need but also can negatively affect their long-term savings retirement.” 

Another way sponsors and advisers can boost engagement is through reminding Gen Xers of special tools that may be available as part of the plan, such as retirement calculators. While retirement calculators are efficient, Walper believes they highlight certain key points while downplaying others, rather than establishing a holistic financial outlook.

“They’re not really a financial plan, they’re kind of a point in time in calculation,” he says. “Gen Xers require more holistic guidance.”

He encourages advisers to work with Gen X participants on painting a general financial plan tailored to their own personal needs.

“Advisers need to help these people understand how to manage their debt, and make decisions about where they should allocate their discretionary savings,” he concludes. 

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