Data and Research March 14, 2022

Plan Sponsors Have Various Methods to Improve Participant Outcomes

In a new issue brief, the American Academy of Actuaries explains four categories of plan design features that might affect retirement outcomes, depending on the participant.

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In its fifth and final issue brief in a series about retirement policy and principles, the American Academy of Actuaries separates plan provisions or features that affect retirement plan outcomes into four categories.

The first is where no choice is provided. The paper explains that not all aspects of plan design allow individual choice. For example, a plan could require that a portion of a participant’s account balance be used to provide lifetime income. Though this is not common in defined contribution plans subject to the Employee Retirement Income Security Act, it is a possible approach to improving lifetime income. The academy says that because each person’s circumstances differ, plan provisions that do not allow for choice could provide favorable outcomes for most participants but might lead to less favorable outcomes for others.

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The second plan design category is where some level of choice is provided and a range of options is offered. While a wide range of options can add tremendous flexibility and customization of plan benefits to fit employee preferences and circumstances, the inclusion of too many options can potentially confuse some plan participants, the paper warns. In addition, more choices could increase the need for education to assist individuals in making selections that are appropriate for them. The use of only low-cost, well-designed target-date funds is an example of a restriction of investment choices that can benefit some plan participants.

The third plan design category is the use of defaults, for which options exist but, if no action is taken, a selection is automatically made according to the terms of the plan. This approach is the cornerstone of automatic enrollment and default automatic contribution arrangements. This approach is also used for default investment choices when participants fail to select an investment option. For example, the academy says, the use of a well-designed TDF as a plan’s qualified default investment alternative, or QDIA, has the potential to improve retirement outcomes.

The last category of plan design is where incentives (or disincentives where penalties apply) are used, where certain decisions are encouraged or rewarded (or penalized). The academy notes that participant decisions can be influenced by incentives. An example is the use of employer matching contributions to encourage plan participation and certain savings rates. On the other hand, a penalty tax on early withdrawals discourages the use of retirement savings for nonretirement purposes.

The academy says these plan design methods might not improve outcomes for all individuals. For example, a participant might be automatically enrolled into a plan, reducing his salary, but then be in a financial position where he has to take a hardship withdrawal from the plan. That withdrawal could be subject to taxes and a penalty, which would not be a desired outcome.

Plan sponsors should also consider that younger individuals may be interested in different types of investment options than older ones. Plan designs that offer alternatives might thereby increase plan participation. In making such decisions—for example, to include environmental, social and governance investments on the fund menu—plan sponsors must make sure they are satisfying their fiduciary obligations, which might necessitate additional due diligence.

“Plan sponsors might consider the impact their plan design can have on different demographic groups covered by the plan and whether there are specific features or communications that may be appropriate,” the academy says. “For example, while encouraging positive saving behavior, employer contributions that rely on matching employee contributions negatively impact those who do not contribute. Each employee has unique financial circumstances that may inhibit their ability or willingness to contribute to the plan and obtain the full match. While matching contributions provide a strong incentive for first-dollar savings to go to the retirement plan, other uses may be a higher priority for any particular individual. In contrast, non-matching contributions do not provide a direct incentive for employee contributions but guarantee some level of contribution to all participants, regardless of an individual’s circumstances.”

Data and Research March 14, 2022

Responding to Health Care Workers’ Retirement Readiness Concerns

As health care employees’ worry about outliving their assets, plan sponsors can help them prepare for income in retirement.

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Plan sponsors with health care employees can help their workers bolster retirement readiness by assessing the employee population, building lifetime options for participants, and providing access to personalized advice, according to industry experts.

Health care workers remain on the frontlines of the ongoing COVID-19 pandemic. COVID-19-related disruptions and illness has had large impacts on the workplaces and retirement readiness confidence of health care workers, says Colin Pierce, managing director, Healthcare National Practice, at TIAA.

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To bolster retirement readiness for these workers, employers must focus on options to mitigate longevity risk—workers’ outliving their retirement assets—by listening to their concerns and responding appropriately, he explains.  

Research from the TIAA Institute’s “Healthcare Sector Financial Wellness Survey” provides additional context on the impact the pandemic has had on health care workers’ retirement readiness and what plan sponsors with health care employees can do to help. Among workers that are likely to look for new employment within two years, 67% would find it valuable if their employer offered an option that could provide stable monthly income guaranteed for life in retirement, the survey finds.

Gilliane Isabelle, chief distribution officer at AIG Retirement Services and VALIC Financial Advisors, says help from health care plan sponsors must be simple and easy to understand, specifically address participant concerns, and be flexible and accessible to workers on different shifts who likely have many demands on their time. “Health care workers [are] not sitting in front of a computer,” she says. “They’re on their feet, they’re working multiple shifts, so what’s important is to be flexible.”

A plan sponsor can, for example, commit to being on-site and/or available 24 hours a day to connect with workers, Isabelle adds. “Essentially [it’s] like different shifts that are necessary so that we can connect with those workers that typically don’t have the same opportunities as those working day shifts,” she explains.

Plan sponsors must also personalize communications and advice to address workers’ needs. “[It’s plan sponsors] making sure that they understand what’s important for their employees, especially, as a result of the last couple of years and [knowing] that people are just exhausted [from having been] on the front line,” Isabelle says. “[For] retirement planning, because health care workers don’t have a lot of time, it’s really important to be flexible, be simple and the messaging be personal.”

Priority: Lifetime Income

The TIAA survey found that workers’ retirement priorities are not outliving their assets (69%), maintaining a standard of living throughout retirement (60%), and having an income stream that doesn’t drop with the market (57%).

“The North Star really for retirement is income, and what that really means is income that’s going to last your lifetime,” Pierce says. “Then you really have to have a vehicle in the plan that provides that.”

Pre-pandemic, many health care workers were feeling positive about their retirement readiness but as it has continued, their retirement confidence has decreased, he explains. Overall, 24% of full-time hospital and health care workers are not confident that they will have enough money to live comfortably throughout retirement, and 13% have become less confident throughout the course of the pandemic, the survey found. Additionally, 27% are not confident that they are saving an adequate amount, and 18% are not confident that retirement savings are invested appropriately.

Plan sponsors should focus on ensuring participants are defaulted properly, ideally into lifetime income, Pierce says. “If they’re defaulted into a solution that includes that and they never look at the plan again, it can operate almost like a [defined benefit pension plan] for their employees: they can be defaulted and the target-date fund can adjust over time,” he says.

With the “North Star” being lifetime income, Pierce adds that plan sponsors can ensure that employees have a pension-like arrangement. The first step is assessing the retirement readiness of the workforce with an income-based score to examine what amount of their pre-retirement income workers will be able to replace in retirement, Pierce explains. Second, the plan sponsor should engage employees to maintain and improve workforce retirement readiness scores.

“Including income in a default vehicle or a way to create a personal pension sets up employees for success,” he says.

Adding Advice

Plan sponsors’ providing access to advice is also a powerful way to improve participants retirement readiness, particularly in the wake of the pandemic, according to the TIAA survey. Health care workers value personalized advice and investment options.

The survey finds that in the last two years, 50% of individuals saving for retirement have received professional retirement planning and saving advice, with 26% of those very confident they will have sufficient retirement savings to live comfortably throughout retirement and 60% somewhat confident. Meanwhile, only 15% of those who received advice said they are not confident.

“When we talk about engaging appropriately, the call to action in those outreaches should be advice,” Pierce says. It should include savings rate advice, investment vehicle advice on funds, and then “probability of success in the income lasting over their lifetime,” he adds.

Advice is “a really important component to helping people feel better about where they are,” Pierce explains. “They leave those meetings with very specific actions that they can take to stay on track for their goals.”

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