Benefits June 3, 2014

PSNC 2014: Moving the Needle

June 4, 2014 (PLANSPONSOR.com) – Other than automatic enrollment in a retirement plan and automatic escalation of employee deferrals into their plans, what are the top strategies for moving the needle on employees’ retirement readiness?
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According to David Gray, vice president of Client Experience at Charles Schwab, there are three main strategies. “For the past 30 years we have spent untold millions of dollars trying to educate accidental investors into individuals who can decide how much to invest, how to invest, how often to reallocate,” he told attendees of the 2014 PLANSPONSOR National Conference. “We would have been better off just giving people the money we spent on education because it didn’t work. Accidental investors don’t want education, they want solutions.”

Gray said to move the needle for participants, plan sponsors need to:

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  • Drive down investment expenses;
  • Give participants investment help – have a professional do it for them using multiple data points to offer a personalized solution; and
  • Press the reset button in the plan – put all participants in personalized, professional managed account solution, and let the few that want to do it on their own, do so.

Jeffrey Hemker, national sales director in the Retirement Division at Invesco, added that he thinks plan sponsors should take away loan and in-service withdrawal provisions in addition to using auto features and professional money management.

To the point of using automatic features, Hemker told the story of his brother, whom he calls “the accidental retiree.” When discussing whether his brother was able to retire, he discovered his brother had enough retirement savings to generate a 102% income replacement rate. “What did you do?” he asked his brother. The answer was, basically, “nothing.” His brother’s employer switched from a profit sharing plan in which the company put 7% of each participant’s salary into the plan to a 401(k) in which participants automatically deferred 6%. In addition, the company asked employees if they wanted to invest the money themselves or have it done for them. His brother said, “I figured if they put me in at 6%, that was the right amount.” And he let the company invest for him. With Social Security and a pension, Hemker’s brother was set to get 102% of his final salary in income per year in retirement.

Hemker noted that if his brother’s logic was whatever the company automatically made him save was the “right amount,” then plan sponsors who do not use automatic enrollment are telling employees that saving 0% is fine. He added that employers force employees into a health plan when the employee doesn't choose one on their own, “because we are so concerned about their health care coverage.” He queried: “Why don’t we have the same concern/mindset for employees’ retirement?”

Steven Dorval, managing director of Retirement and Investment Strategy at New York Life Investment Management, contended, “If you don’t combine auto enrollment with auto escalation, inevitably you are going to keep people at the auto enrolled percent.” In the absence of auto enrollment, plan sponsors may use easy enrollment, such as simple post cards, but Dorval said, “It is hard to wrap my head around plan sponsors wanting easy enrollment but not auto enrollment.”

According to Dorval, some plan sponsors may feel that if they auto enroll, participants will be less engaged, but New York Life is finding auto enrollment starts engagement. “Not huge numbers, but more than what would have been engaged without it.” He said plan sponsors can take advantage of the opportunity auto enrollment gives to re-direct education. “Replace the seminar about compounding interest with one about budgeting that allows employees to save and invest more.”

Gray contended life circumstances are what cause participant engagement. “Don’t look at your retirement plan as an engagement vehicle, just a savings vehicle,” he said. “When things happen in [participants’] lives that make them want to take action, make it easier to take action and help them know where to go.”

Hemker added, “Do you know everything that is being put in front of your employees, have you read it yourself, and is it necessary? Ask, ‘is this what we want to be doing?’  It’s time to narrow the scope after 30 years of putting everything in front of them we can.”

Benefits June 3, 2014

PSNC 2014: Plan Health and Retirement Readiness

June 4, 2014 (PLANSPONSOR.com) – The concept of “retirement plan health” means different things for plan sponsors and participants, but well-run plans can meet both sponsor and participant needs.
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For participants, retirement plan health can be understood as a function of the plan’s ability to replace income in retirement, says Stephen Jenks, head of defined contribution product and marketing for Putnam Investments. There are many factors involved in a participant’s ability to retire comfortably beyond income replacement ratios, he admits, but it’s a sensible place to start building a meaningful benchmark for participant success (see “PSNC 2014: Success is in the Eye of the Beholder”).

Jenks addressed the topic of plan health and retirement readiness during a panel discussion on the second day of the 2014 PLANSPONSOR National Conference, in Chicago. For sponsors, the question of plan health is not so straightforward, he explains. While sponsors have a fiduciary duty to make all plan-related decisions in the best interest of plan participants, they are also beholden to the employer and the financial reality of the company. It is therefore the sponsor’s lot, Jenks says, to assess the plan’s return on investment (ROI) and ensure the benefit to participants justifies the expense to the employer.  

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“Assessing the ROI is not just a matter of adding up the investment and recordkeeping fees, and deciding whether you want to pay them,” Jenks says. “The sponsor also must consider factors like, how much staff time are you spending on the plan? How much are you putting into the match? To what extent is the plan serving as a recruiting tool? You can get to the cost side of this pretty easily, but it’s harder to assess the return for the total amount of money, time and effort spent on the plan.”

Jenks says Putnam and others have conducted research showing roughly seven in 10 plan sponsors currently benchmark the success of their plan simply by measuring participation rates, with relatively little attention paid to what the plan gives back to the employer. The remaining 30% considers such metrics as deferral rates or the rate of age-appropriate asset allocation in plan portfolios. Those are all important metrics, Jenks says, but none tells the whole story of plan health.

“Sponsors should look at these metrics as features of the plan performance, they’re symptoms of a plan’s health,” he says. “What’s troubling is that, by our account, less than 10% of plan sponsors are currently using replacement income in retirement as a benchmark for plan health. If there’s one number to look at, it’s probably income replacement.”

Unlike the basic participation rate, income replacement ratios can tell the sponsor whether the plan is working for the employer as it should—i.e., whether the plan is allowing participants to retire on time and with sufficient resources. Measuring the participation rate or asset allocations is far less informative, Jenks says, because even if all employees are participating in a plan and have sensible asset allocations, it’s all for naught if they are only deferring 2% of their salary per year.

Chris Augelli, vice president of product marketing and business development for ADP Retirement Services and another panel member, agrees that income replacement ratios are a good way for sponsors to assess outcomes for participants. But sponsors should be very careful when looking at things like the “average income replacement ratio.”

“Be careful of the averages as you’re assessing ROI, very careful,” Augelli warns. “The average account balance and deferral rates can lie. They’re so easily skewed by the outliers. You want to see the mean and the median for all these calculation points.”

The good news, Augelli says, is that plan providers are ready, willing and able to share more informative participant data. They are also well-equipped to help sponsors assess the ROI on retirement benefits spending, he says.

“In the end, that's what we're here for as advice and service providers,” Augelli says. “If you find an area of deficiency, it becomes a conversation with the adviser and the providers to build a fix. The sponsor should not be facing these questions alone.”

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