Data & Research June 4, 2014

PSNC 2014: Financial Wellness in the Workplace

When it comes to financial matters, employers should assume procrastination, inertia and a real lack of knowledge from employees, according to Janet Ganong, a financial consultant at the Kieckhefer Group.
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Incorporating automatic features into retirement plan design sets participants on a better path for financial security in retirement and frees plan sponsors and advisers up to talk about other subjects to help improve overall financial success for employees, Ganong said, speaking to attendees of the 2014 PLANSPONSOR National Conference in Chicago. “Financially successful employees are happier and more productive,” she added.

Matt Gulseth, a partner at Channel Financial, added that employees want someone to do it for them, and plan sponsors must accept they will have an uphill battle with education. “If you are not doing auto features to the max, you’re wasting time on financial wellness,” he contended.  He suggested plan sponsors use plan design to “legislate” good outcomes before they consider a financial wellness program.

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Gulseth added that when it comes to financial wellness education, plan sponsors should think about what they remember from high school biology—it’s probably not much. They should determine how to deliver “just-in-time” messages—for example, a seminar about mortgages for participants who are ready to get a mortgage. Messages should be in easy, “rules-of-thumb” formats, he recommended.

“Financial wellness covers all the other stuff outside of the retirement plan—estate planning, insurance, etc.” he said. “Meet folks on the decision points they face in their lives.”

Gulseth also contended that part of a workplace financial wellness program is deciding whether you want to transition employees into an income solution. “If you don’t help with those very complicated choices, they’ll be spinning in the wind,” he said, adding that CEOs want employees who want to work for them, not employees who work for them because they have to or need to. They need engaged employees, and if employees have other things on their minds, they will be less productive.

According to Ganong, one of the big benefits of a financial wellness program to plan sponsors is that helping employees retire will keep health care costs down. In addition, it allows employee mobility within the firm—there’s no stagnation of younger folks’ careers or ideas.

One point made by Gulseth: There’s only so many people whose behavior you can change. “When does education become brow-beating?” he queried, adding that plan sponsors should see financial education not as a behavioral change mechanism, but as an issue-addressing mechanism.

Data & Research June 4, 2014

PSNC 2014: Plan Health and Retirement Readiness

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 “PSNC2014: 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, but it’s all for naught if they are only deferring, say, 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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