Boosting Plan Participation Without Auto-Enrollment

Automatic enrollment is touted as a must-use feature for defined contribution retirement plan sponsors to increase plan participation, but many plan sponsors cannot use this feature.

Specifically, most 403(b) plans that are not governed by the Employee Retirement Income Security Act (ERISA) cannot use automatic enrollment. John Kevin, vice president for the K-12 market at VALIC in Houston, says most K-12 public school systems’ hands are tied by state anti-garnishment laws which say amounts may not be deducted from employee paychecks without written permission. Ellie Lowder, of TSA Consulting and Training Services in Tucson, Arizona, which provides consulting for PlanMember Securities Corp., the National Tax-Deferred Savings Association (NTSA) and other clients in the industry, points out that for 501(c)(3) tax-exempt entities that want to maintain the non-ERISA status of their 403(b)s, ERISA says they must have limited involvement with the plan, and auto-enrollment would run afoul of the law.

These plan sponsors want to boost employee participation and engagement with their plans to ensure retirement readiness of employees and help employees retire when they want. Lowder adds that helping employees retire when they want is a budget-saver, as salaries and certain benefit costs are lower for new employees than for long-term employees.

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Kevin tells PLANADVISER another reason it is important, especially for public schools, to boost employee participation in their defined contribution (DC) plans—403(b)s and 457s—is the increasing uncertainty of public pension benefits. Many public pensions have funding issues, and many have made changes, such as lengthening service requirements and increasing employee contribution requirements. “Boosting DC plan participation adds diversity to retirement savings options for employees as well as employers,” he says. “If we increase participation in DC plans, it will hedge against more uncertainty in the future for pensions, and for Social Security.”

Lowder says the Internal Revenue Service (IRS) has provided another reason for increased interest in boosting participation in non-ERISA 403(b) plans.  She tells PLANADVISER that in late 2013, she began to receive reports that the IRS started a new focus in audits, specifically in the K-12 public education market. The IRS had begun to check on effective opportunity for employees to enroll and make changes, as required by 403(b) universal availability rules. “They told me when I followed up with them that they were selecting for audit plans with participation rates as low as 15% to 20%,” she says.

So, what is a non-ERISA 403(b) plan sponsor to do to boost participation and engagement without auto-enrollment as a tool?

Lowder says, during a webcast following her conversation with the IRS, an agent told attendees that to comply with effective opportunity, 403(b) plan sponsors must employ year–round strategies; it is not enough to provide an annual notice of the opportunity to participate in the plan. According to the agent, efforts must include year-round education about the plan and financial issues. Lowder says this should include newsletters, workshops and face-to-face meetings with benefits staff and advisers to encourage enrollment.

Kevin adds that employers should not forget tried and true methods DC plans have been using to boost participation—various communications with participants and one-on-one counseling with advisers. “Communication tactics are already well-developed,” he says, suggesting plan sponsors use a multi-tiered approach, using do-it-yourself calculators, websites, call centers and meetings, to reach a broader set of the employee population. “Ultimately, it’s just a matter of getting participants more engaged and helping them recognize the value of these plans in the face of future uncertainty.”

According to Lowder, plan vendors or providers will need to bring to the attention of employers the need to increase 403(b) plan participation and how to do so because employers do not have expertise in these plans. For example, she notes that K-12 plan sponsors are school business officials; they’re not experts in supplemental retirement plans.

Most K-12 plans, and many other 403(b)s have multiple vendors or providers. Lowder says vendors are approaching plan sponsors about providing more financial education opportunities for employees, but the plan sponsors are questioning how other vendors will react if the plan sponsor allows one to provide financial literacy workshops. She says this can be done, without slighting vendors, if the presenting vendor brings to every workshop a list of all vendors and their contact information and is not allowed to tout itself during workshops. “I’ve seen this, and participation increased for all providers in the plan following the workshops,” she notes.

Lowder adds that the message to employees is important, and education should include workshops about the basics—such as what is an annuity and what is a mutual fund—as well as an offer to help employees calculate the gap between what they will need in retirement and what other benefits and Social Security will provide them. “The call to action is to identify this gap,” she says.

Adult Kids May Be Elbowing Parents’ Retirement

Baby Boomers who have cut the apron strings for their adult kids are twice as likely to be retired than ones who haven’t, a survey finds.

The extent to which grown kids lean on their parents for financial support plays a big part in people’s ability to retire, says Hearts & Wallets in a new study. In fact, parents of financially independent children are more than twice as likely to be retired as those parents whose kids still look to them for support.

“Dissecting the Baby Boomers: How a Parental and Financial Support Status Segmentation Reveals Key Differences in Finances, Attitudes and Behaviors” underscores the importance of segmentation, which uncovers the diverse financial goals and needs of this market for financial services products and advice. Parental support is a major factor in the ability to retire. Overall, 35% of Boomers are retired from full-time work. Only 21% of Boomers who support adult children are fully retired. More than half of Boomer households (52%) who have children but don’t support them (or others, such as extended family) are retired.

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Only 17% of Boomers who support minor children or adult children are fully retired. In contrast, Boomers with financially independent adult children who don’t support anyone else are three times more likely to be retired. Parental support trends have been consistent over the past five years and continue to have a major impact for many Baby Boomers. Gen X may experience similar effects as more children from parents in that generation reach age 18.

Boomers who support adult children juggle more than just a full house. They are 25% more likely to have heightened financial anxiety than their peers. This segment is also the most concerned about saving enough for retirement of all Boomer segments in the study.

Boomers who support someone financially have very different concerns than those who don’t, says Chris J. Brown, Hearts & Wallets partner and co-founder. Goals also differ for parents who support adult kids versus those with minor children. Parents supporting adult children wonder when—or if—their kids will ever become independent. They worry about saving enough to have freedom to enjoy life as they age. Boomer parents of kids who are minors are more upbeat about managing money; this segment is the most receptive to working with financial professionals and the most technologically savvy.

Boomers Are Diverse

Nearly two-thirds (65%) of all Boomers have children. Nearly one-third still support children (adults as well as minors). Boomers supporting adult children total nearly 8 million households with almost $4 trillion in assets, representing a sixth of the $23.4 trillion in total assets of the 47.4 million households in the Boomer generation. Those who provide financial support to someone control about one-third of all the Boomer assets.

Five distinct segments of Baby Boomers are examined in the survey:

  • Still supporting adult children, but not minor children (17%);
  • Supporting minor children (13%);
  • Supporting extended family or others, but not children (4%);
  • Not supporting anyone else, with financially independent adult children (32%); and
  • Not supporting anyone else (35%).

Boomers who support adult children have different concerns than the other Boomer segments. Outliving their money is among the top five concerns for four of the five segments—but it doesn’t crack the top five for Boomers whose adult children still lean on them financially.

Those Boomers supporting grown-up children have more immediate financial concerns, and the top concern—51% rank it as extremely concerning—is saving enough for retirement. This segment is 25% more likely to report financial anxiety that is high to moderate than other Boomer segments. Members of this slice of the Boomer generation are the least likely to use a financial professional for advice (24%).

Says Laura Varas, Hearts & Wallets partner and co-founder, “Being a parent and supporting others affect what people worry about and their savings and investment goals. For those supporting others, it’s important to focus on their own needs as well as everyone else.”

Boomers who don’t provide financial support to others—both those without children and those with financially independent adult children—are likelier to plan to spend their money while alive. More than three-quarters (78%) of Boomers without children and 64% of Boomers who do not support adult children or anyone else agree or strongly agree with the statement, “I expect to spend most of my money on myself rather than passing it on to heirs or charities.” Only 51% of Boomers who support adult children agreed with this statement.

Higher Anxiety

Since the financial spigot didn’t shut off when the kids turned 18, it’s understandable Boomers supporting adult kids have higher levels of anxiety over finances than other Boomer segments and lower investment risk tolerances. About half (53%) are somewhat or very uncomfortable “taking risks with investments by accepting volatility in the hope of getting a higher return.”

Boomers with minor children, in contrast, enjoy thinking about finances and are 45% more likely to agree, “my financial adviser is a partner to me.”  Their anxiety levels are much lower: only 32% say they have moderate to high anxiety. Their risk tolerance is higher, with only 44% reporting they were very or somewhat uncomfortable.

Many Boomers—at least a quarter of each segment—express concern about age discrimination. The highest levels are among those supporting family members or others, where 55% agree or strongly agree with the statement, “age discrimination prevents me (or my partner) from working as much as I/we would like.” 

“Segmenting on attributes such as financial support are crucial to understanding the diverse needs of American households, particularly with a group as large as the Baby Boomers,” Brown says. “Providing financial support to anyone, but especially to an adult child, can have tremendous consequences for retirement and estate planning. Financial services firms would be wise to examine their client bases for this trait and adjust product and service offerings to meet the needs of the nearly 4 million Boomer households.”

Hearts & Wallets’ latest topic brief, “Dissecting the Baby Boomers: How a Parental and Financial Support Status Segmentation Reveals Key Differences in Finances, Attitudes and Behaviors,” is drawn from the firm’s Investor Quant (IQ) Database. The IQ database platform serves as the engine for Hearts & Wallets annual reports as well as emerging trend analysis and consists annually of more than 2 million data points from 85 families of savings and investment questions asked during 40-minute interviews of 5,500 U.S. households. The integrated database engine consists of more than 30,000 U.S. households over five years.

More information about Hearts & Wallets and the study is here.

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