A Retirement Plan Wake-Up Call From COVID-19

Effects of the COVID-19 pandemic may drive major changes in how employer-sponsored retirement plans are designed and how information to retirement plan participants is delivered.

Professor John Forlines III, J.D., chief investment officer (CIO), W.E. Donoghue, noted during a COVID-19 roundtable moderated by Denise Diana, senior vice president, director of enterprise consulting for Envestnet, that many participants react emotionally when it comes to investment decisions during market swings. He also said they undersave and that becomes worse in crises, they lack access to trusted advisers and they need nudges to behave rationally.

“Massive education to consumers about behavioral finance is misplaced. It should be given to sponsors, advisers and providers so they can innovate and adopt solutions,” Forlines said.

“The government has woefully underinvested in the U.S. retirement scheme and should be pushing more resources into the private sector for this,” Forlines added. The government can also help by making suggestions for larger default deferral rates, he said.

While behavioral finance has already been used to create important plan design features—automatic enrollment, automatic deferral escalation and target-date funds (TDFs)—more can be done. Paul Neuner, managing director and founding partner of NEXT Retirement Solutions, said he is still surprised by the level at which plan sponsors default participant deferrals when they are automatically enrolled—still most commonly 3%. “This is not enough, but employees leave their deferral at that level because they think since that’s what the company decided, it must be the right number,” he said. Neuner pointed out that experience has shown that the opt-out rate when employee deferrals are defaulted at higher rates isn’t greater. He added that some plan sponsors may not adopt a higher deferral rate because it would mean they would have to contribute higher employer matches. “Plan sponsors should consider this and they may want to change their match formula. They should be concerned about plan design,” he says.

Neuner said he thinks innovation will take place because of COVID-19, but what innovation is adopted will be determined by the size of employers. For example, he said, when the owner of a small taco shop wants to go back to making tacos, he will have the desire to outsource retirement plan administrative duties and investment decision-making. “I think we will see a move to outsourcing these things and more discretion given to advisers and providers,” he said.

“We have been woefully passive with [participant] investment acumen,” said Tom Zgainer, founder and president of sales, America’s Best 401k. He said his firm introduced one-on-one advice on demand in 2016. “The days of group meetings are over. In our model, a participant sends an email and that same day or the next an adviser will reach out. We see participants—many who are accidental investors and unsure about or don’t know what they’re doing—will open up about their financial situation,” he said. “And now they have a fiduciary in their pocket to look out for their best interest.”

Zgainer proffered that without these one-on-ones, more participants would have made rash decisions than the number who did during the market crash caused by COVID-19. He added that participants have not only called about what to do with their retirement assets but have been asking about more general financial resources.

Forlines is also an executive in residence in the Department of Economics at Duke University, where he teaches classes in behavioral finance, decision-making and private investing. Forlines told attendees of the roundtable that students in all his classes are seniors, and one assignment he gives is to have them create a personal budget for the year after they graduate. He said he is shocked that so many people don’t know what a budget is. “We have to promote activities like that as an industry,” he said.

Going forward, Neuner said he believes what is likely to happen is a change in the distribution of information to participants. “From a plan sponsor perspective, there will be a change in how they value and pay for information distribution, and participants are going to receive and move on information differently. Participants would prefer someone do things for them, and they are willing to pay for advice,” he said.

In the current work-from-home environment, the move to digital communications has been even greater than before and is affecting how the retirement plan industry considers communicating to participants. “Digital communications have even moved from emails to text messages, and data shows participants are more likely to read a text and act upon it [than an email],” Neuner said. He added that there are different ways to communicate to different demographics and communications should be simple as most participants are not experts. For example, retirement savings should be translated into monthly income. “We do too much to confuse people with too much information. We need to be more thoughtful in communicating,” Neuner suggested.

Zgainer said it is hard for him to watch financial suffering. He said he hopes people learn to be interested in money and finances such that any other crisis will be an inconvenience rather than devastation.