How Times of Turbulence Can Show What Your Plan Is Really Made Of

Ben Lewis, with TIAA, discusses why it may be a good time for plan sponsors to review their plans and how to do so.

As employers manage increased financial pressures and uncertainty, ensuring the financial well-being of their employees remains a top priority. Retirement plan design is a critical way for employers to improve employee financial well-being, and it’s important for plan sponsors to evaluate their plans to make sure they are meeting their objectives during these difficult times.

It may not feel like an ideal time for plan sponsors to review their retirement plan offerings; however, market stress and current economic hardships may uncover plan design shortfalls, gaps or opportunities. Taking time now to revisit and re-evaluate plan design and its impact on retirement plan health can support employees’ financial well-being and retirement security in this age of uncertainty.

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Setting Plan Goals

Setting the right goals and aligning retirement plans with the most important objective—helping employees generate monthly retirement income they can’t outlive—is critical to preparing employees for a secure retirement. In fact, according to a study conducted by TIAA, 53% of plan sponsors reported that helping employees retire on time and maintain their standard of living was a primary objective of their plan. Ensuring employees can replace their income when they stop working begins with plan design, but also extends to employee engagement through education, advice, digital tools and effective communications programs that reach all employees.

With lifetime income as the primary objective, plan sponsors can look at a variety of metrics and plan data to understand how well their plan is performing. An employer’s retirement provider, consultant or adviser can help with evaluating the plan to determine its health.

Optimizing Retirement Plan Design and Outcomes

Employers can gauge their retirement plan’s overall retirement readiness through the plan’s income replacement ratio—a measure of how much pre-retirement income individuals are expected to replace in retirement. With that as a starting point, plan sponsors can then evaluate how plan design and other plan elements are aligned to improve employees’ financial well-being and, ultimately, lifetime income at retirement.

The following are some key steps to help determine if a retirement plan is performing in line with plan objectives during the current economic downturn.

Understand plan health: As mentioned earlier, a plan’s retirement readiness is a great starting point, but it’s important to dig deeper to evaluate how different employee segments are doing. A deeper plan analysis could include looking at employees based on age, gender, changes in contribution behavior or other criteria. For example, some employees may have reduced or stopped their plan contributions due to financial hardship or to build up their emergency savings. Understanding employees’ unique financial situations and retirement readiness provides opportunities for employers to help them now or re-engage with them once the crisis subsides.

Examine the default investment option: In many plans, default investment options are capturing the majority of new contributions, highlighting the importance of selecting an appropriate and effective default option. Some important considerations include not only how the default performed at the plan level during this time period, but also how it performed for employees at different lifestages. With so many participants remaining in the plan after retirement, it’s also important to consider if the default is meeting the needs of retired employees and providing them with monthly income for life. The passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act has made it easier to include guaranteed options in a retirement plan, and embedding a fixed annuity in a default option can benefit both employees saving for and living in retirement.

Evaluate investment offerings: Remember that an investment menu should offer a diversified portfolio for growth and guaranteed lifetime income to ensure all employees are retirement ready. Recent market volatility may help identify any gaps, overlap or underperformance by asset classes. Plan sponsors may find gaps in conservative investment options such as stable value or fixed annuities or growing demand for sustainable or impact investment options. Plan sponsors should carefully document their analysis and take appropriate action, whether that means taking no action or replacing, adding or removing an investment option.

Revisit education, advice and communications programs: Understanding employees’ retirement readiness levels can help plan sponsors create tailored education and communications programs. Employees that have taken coronavirus-related distributions (CRDs) or loans may need extra help getting back on track financially. And some employee segments may benefit from education about the benefits of diversification. There could also be Baby Boomers approaching retirement without a lifetime income plan or guaranteed income allocations. Knowing who needs help allows plan sponsors to offer employees the support they need through education, objective advice and the many digital tools and resources available to them.

Taking Action

Implementing effective plan design solutions to better prepare employees for lifetime income should also take into consideration the financial challenges facing employers. Raising employer matches or implementing automatic escalation features have helped raise employee total savings rates, but these approaches may not be realistic or feasible at this point in time.

Employers can model the effects of plan design changes under consideration to understand the costs and expected benefits. This approach can help employers evaluate potential changes and create a road map for short- and long-term plan adjustments.

Today, 50% of households are “at risk” of not having enough to maintain their living standards in retirement, according to the Center for Retirement Research at Boston College, and that percentage is likely to increase as participants navigate the financial effects of the coronavirus. Taking time now to re-evaluate plan performance and optimize plan effectiveness is not only an important part of a plan sponsors’ fiduciary obligation, but also puts participants in the best position to be able to meet their retirement savings goals, even in times of uncertainty.

Ben Lewis is senior managing director and head of institutional sales at TIAA Individual & Institutional Services LLC. Lewis has dedicated himself to helping Americans understand why they should save for retirement—and how they can save.

This material is for informational or educational purposes only and does not constitute investment advice under the Employee Retirement Income Security Act (ERISA). This material does not take into account any specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on the investor’s own objectives and circumstances.

This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Institutional Shareholder Services or its affiliates.

Guarantees are subject to the claims-paying ability of the issuing company.

Investment, insurance and annuity products are not FDIC insured, are not bank guaranteed, are not bank deposits, are not insured by any federal government agency, are not a condition to any banking service or activity and may lose value.

TIAA-CREF Individual & Institutional Services, LLC, Member FINRA, distributes securities products.

©2020 Teachers Insurance and Annuity Association of America-College Retirement Equities Fund, 730 Third Avenue, New York, NY 10017

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Roth IRAs Popular Among Younger Retirement Savers

Katie Taylor, with Fidelity Investments, shares the reasons for the appeal and why plan sponsors should tout Roth accounts they offer in their plans.

Young investors continue to turn to Roth IRAs for their savings, according to a new analysis published by Fidelity Investments.

The number of IRA accounts owned by Millennials in the second quarter increased by 23% compared with the second quarter of 2019. There was a 36% increase in the number of Roth IRA accounts held by Millennials, with contributions up a hefty 50%.

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As to why IRAs and Roth IRAs are so appealing to Millennials, as well as members of Generation Z, Katie Taylor, vice president of thought leadership, Fidelity Investments, tells PLANSPONSOR that the accounts give them “an additional opportunity to save outside the 401(k) to secure their future.”

“Investing pre-tax dollars and then getting a tax break is not as important to younger people, because they are early in their career, typically making less money than later on, and, so, their taxes are lower,” Taylor says. “They are more willing to save using after-tax dollars because they expect their taxes will go up.”

In addition to this, there are income limits on Roth IRA investments that prevent older, high wage workers from investing in a Roth IRA, Taylor notes. She points out that, for 2020, those limits are $139,000 in annual earnings for single filers and $206,000 for married taxpayers filing jointly.

Taylor says there are a few advantages with Roth IRAs. “The one that is getting the most attention right now is the fact that when people want to access money quickly, with a Roth IRA, you can access your contributions at any time without taxes or penalties.”

Taylor says this can be particularly appealing right now for those who have been laid off or furloughed from their jobs due to the pandemic.

Another advantage with Roth IRAs, Taylor says, is that “if five years have passed since the first contribution was made, the account holder can withdraw their earnings without taxes or penalties if they are older than 59.5, are using the funds to buy a home or have become disabled. That might be attractive to people as well.”

In addition, Roth IRA owners “can withdraw earnings and pay taxes but no penalties if the money is being used either for education or medical expenses,” she says.

Because of the advantages of saving in after-tax accounts, Taylor says she thinks plan sponsors should offer more information about Roth 401(k)s, if they offer one, to plan participants.

Retirement Savings Accounts Rebound

Because retirement investors held steady and the markets rebounded strongly in the second quarter, retail retirement accounts enjoyed a record bounce.

Fidelity attributes strong inflows to the extended 2019 income tax season, which ended July 15. In total, Americans invested a record $82.1 billion into SEP [simplified employee pension], SIMPLE [savings incentive match plan for employees] and rollover individual retirement accounts (IRAs).

The average 401(k) balance increased 14% from the previous quarter, reaching $104,400. This is a remarkable comeback, Fidelity says, but the figure is still down 2% from the second quarter of 2019. The average IRA balance was $111,500, a 13% increase from the first quarter and up slightly from the average balance of $110,400 a year ago. The average 403(b) account balance increased to $91,100, an increase of 17% from the first quarter and up 3% from a year ago.

Fidelity’s data also shows that 76% of workers received a 401(k) match from their employer in the second quarter, with the average employer contribution reaching $1,080. Over the past four quarters, a record 88% of 401(k) savers received an employer contribution, with employers contributing an average of $4,030.

Taylor says Fidelity executives get asked about employers’ staying power with matches during recessions—and now a pandemic—quite a bit.

“It is encouraging that workers are continuing to receive the matches,” Taylor says. “Plan sponsors realize what a coveted benefit this is. Employers that offer a match are really proud of that benefit, because they know that helping employees save for their future is incredibly important and incredibly valued. That is one of the top benefits people are looking for. Eliminating a match is not a decision that employers view lightly. Even those who have removed the match want to reinstate it as soon as possible, which is consistent with what we saw in ’08 and ’09 with the Great Recession.”

As to why 88% of 401(k) participants continued to make contributions to their plan in the second quarter, Taylor says it seems that 401(k) participants have learned how important it is to stay the course. “Provided they are not retiring in the near future, staying the course is the better action,” Taylor says. “It is encouraging to see so many participants do that, particularly as you see their balances go up.”

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