Getting Every Plan "Retirement Fit"
By Tony Mastrogiorgio
Just a few years ago, "retirement readiness" wouldn't have been on the agenda when most DC plan sponsors met with their retirement consultants. It wasn't that plan sponsors didn't care about the ultimate retirement well-being of their participants; it was simply that the concept was outside the scope of DC plans. The focus was on investments, leaving the total retirement picture, including social security and traditional pensions, up to the individual participants to figure out. That limited view is clearly changing.
"There's been a paradigm shift," says Phil J. Fiore, Jr, of the FDG Group at UBS Financial Services. "We've got to move the needle very significantly over the next decade. If all we do is provide five-star rated funds but only 20% of our participants can retire with some minimal income replacement level, I think we will have failed."
Jamie Worrell of GPS Investment Advisors and 401(k) Advisors agrees that plan sponsors increasingly recognize that DC plans need to take a more holistic approach to helping participants get ready for retirement. He sees the role of the retirement financial advisor as helping plan sponsors "close the gap between what is and what should be."
DC Edge asked Worrell and Fiore, along with William D. Byron of NFP-CBA—three of the top retirement specialists in the country—about plan design and retirement readiness. Their answers suggest that financial advisors need to bring a passionate, problem-solving approach to helping their clients create plans that drive retirement readiness.
"There are some companies out there that don't have a strong idea of what they want. They don't know what the plan design options are and how they affect the plan or their population," says Byron. "It's a great opportunity for retirement specialists to differentiate themselves."
Great Plan Design Begins With the Sponsor
When asked to describe their ideal client profile, our three advisors may have unconsciously laid out the first tenet of building retirement readiness: plan sponsors passionately committed to doing the right thing.
Rather than specify plan size or industry preferences, all three alluded to the type of culture exhibited by their ideal clients. "We look for clients that are committed to their employees and are value-driven," says Worrell. "They have a decisive, proactive team that's involved in driving outcomes."
Fiore adds, "Our clients seem to have a common theme, and that is that they care very much about their participants and their retirement needs. They actually want a design that gives participants the best chance for a dignified outcome."
Byron adds a practical observation when it comes to the ideal client. "I really like an engaged and proactive committee that's open to listening and learning. Working with a committee, rather than an individual, is more conducive to a fiduciary process, to helping solve problems and uncovering needs."
Confidence that the plan sponsor has a culture committed to making positive changes and the structure to see them through makes ramp up conversations easier and more valuable. "At the beginning of our engagement with any client we have to have a very lengthy discussion as to what the goals are for the plan," says Fiore. "That conversation by itself will yield some recommendations."
Worrell warns, however, "They're not easy conversations to have necessarily because sometimes it involves change and change isn't always easy." But before plan design recommendations can begin in earnest, all three stress the importance of establishing a baseline understanding of the plan and the participants. "Ultimately, we have to measure how a participant base is doing relative to their goals," adds Fiore. They differ in degree, however, about how to take that baseline measure on which to judge future progress.
Baseline Measures: Metrics and Surveys
"It seems like our industry is so caught up in investment performance and expenses," notes Byron, "that they miss out on other things. What's your average balance per participant, are we moving the needle on participation, what's the loan usage rate? It's important to measure the plan metrics first so the committee can have an understanding of the health of the plan." Byron's team also conducts participant focus groups but suggests that the metrics, as well as the client's philosophy and culture, are more important drivers. The baseline plan metrics become a critical component of the ongoing client conversation.
Fiore's team doesn't reach out to participants directly through surveys. "Participants don't always know what's really good for them and some questions, like how much they will spend in retirement; they really don't know how to answer." His approach is to share industry surveys with the plan sponsor instead.
"I present surveys as to what others are doing in the marketplace. The reason I do this is because I don't want clients to feel that they are out on an island with respect to some of the changes they're considering. I want them to understand, 'Hey, you're not alone. Companies in your industry, your size, with your participant base are doing the same thing.'"
Worrell, on the other hand, has seen the benefits of conducting participant surveys, particularly when it comes to employee education. "I think surveying to find out what's going on at all levels of the organization is very important," says Worrell. "We have implemented plan design and employee education changes as a result of feedback we received in surveys. "
For example, surveys helped his team understand the need to break down information into "bite size pieces." If you tell a participant they need to save thousands more by retirement, their response is that they don't think in those terms. They think in paycheck terms. "They want to know what that means in a paycheck to paycheck basis," says Worrell. Guided by insight from their surveys, Worrell's team will break it down further, pointing out that a few less scratch tickets or visits to the vending machine per week could increase deferrals to an extra $5 per week. "Bring your snacks to work or re-fill your water bottle instead of hitting the vending machine," he says. "There are little things they can do to make big changes overtime."
Simple Changes, Powerful Results
It should come as no surprise that all three of our industry-leading financial advisors recommend auto-enrollment, auto-increases and re-enrollment as plan design changes that increase retirement readiness. The reason it should come as no surprise is that they work. "Auto enrollment and auto escalation by themselves do a tremendous amount in making sure participants get beyond their own lack of action," states Fiore.
Jamie Worrell agrees. "Auto enrollment and auto escalation address the biggest problem, which is that deferral rates are not where they should be." Auto escalation, he believes, is an outstanding tool. "It's based on what we've learned from behavioral economics, which is that someone will agree to do something painful tomorrow, but not today. It gives them a small step, a bite size piece to get them to move toward their goal."
According to Byron, automatic enrollment is an example of how a plan design tool has evolved over the years to help create better retirement outcomes. "We were doing auto-enrollment before a lot of people did, before some record keepers would support it. Even five years ago, plan sponsors didn't want to auto enroll. They thought employees would be mad about it."
Flash forward five years, Byron observes, and auto enrollment is common. "We have data that shows 85% of the people that are automatically enrolled never make a change," he says. "The problem is that everyone's auto enrolling at 3%. Now we're saying 5, 6, or 7%. In fact, the numbers for people staying in their auto enrollment doesn't really start to drop until you reach 10%."
All three have helped plans conduct reenrollments – that is automatically enrolling all participants into a qualified default investment alternatives—and place it high on the list of plan changes worth discussing. "It's one thing to design a plan for the next 100 people we hire," says Fiore, noting how most plan changes only affect new hires. "But what about making changes for the 4,000 people we already have?"
"Let's say we have 65 to 70% enrolled in the plan at whatever fund they selected way back when," he continues. "How is that effective? Are we moving the needle? We need to make sure we get participation in the 90%, and the only way to do that is to go back and reenroll." Byron echoes those numbers: his team recently reenrolled a midwestern manufacturing firm and saw participation rise from 65% to close to 95%."I include reenrollment as a topic for consideration," says Worrell, "but it's tough to recommend it on a blanket basis because there are so many different factors that come into play. But it's absolutely effective." He reports a "stick rate" over 90% for reenrollments his team has worked on.
Driving Outcomes: Going Above and Beyond
What are some plan design changes to increase retirement readiness that are not on most plans' radar? Both Byron and Worrell point to restricting, if not eliminating, 401(k) loans as one potential change. "Loans can put people in a bad position later on," argues Byron. "They're counterproductive and participants definitely don't understand the impact."
Worrell agrees. "Leakage from the plan is a problem. If you allow three loans, people are going to take three loans." Both agree that limiting loans, or at least making them harder to acquire, is a sensible step.
"Maybe now is not the time to limit loans, with the economy struggling, but it makes sense to limit loans at some point," adds Byron. "Some plans allow up to four. Why not one? Or just go with hardship withdrawals. The hardship withdrawal provisions are there for a reason." Loans also expose plan sponsors to unexpected risk, according to Byron. "The IRS has found that many loans are not administered properly, particularly from 403(b) plans."
According to Fiore, another area of holistic retirement plan design that may require a closer look is retirement readiness for higher wage earners. "I'm not talking about the guys and gals making millions," he explains. "I'm talking about the ones making ninety to three hundred thousand a year."
Ironically, he states that lower wage earners, given the current savings caps, are in much better shape. "The higher wage earners are where the gap is more significant. The annual contribution limits are just not getting it done for them." Fiore encourages plan sponsors to consider non-qualified plans so that higher wage earners can put more money away at deferred rates.
Pay Now or Pay Later?
Ultimately, creating greater retirement readiness through plan design changes is not going to be easy. "I think we need to have very tough conversations that a lot of consultants may not want to have," says Fiore. "We may be getting to a place that is going to be uncomfortable, really challenging what has happened over the course of the years." That means getting deferral rates higher, using matching contributions intelligently and reenrolling participant populations—annually if necessary.
"We have two options," says Fiore. "You can get people engaged in their retirement now, when they are in their 20s, 30s or 40s, or you could have a 65 year old who can't come close to retiring. That means continuing to pay him one and a half or two times what you would pay a new guy coming in, plus increased benefits.
Worrell believes tough steps are necessary to closing the gap between defined contributions plans as they are today and what they should be in the future. Although the gap may never completely close, it's a worthwhile goal. "I don't think we'll ever be done," he concludes. "There will always be something to improve.
And always an opportunity for the committed retirement consultant to prove his or her value!"
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