Data & Research July 28, 2015

Match Contributions Help Boost Savings and Engagement

Retirement plan advisers can help their plan sponsor clients fully understand the power of the match and how it can boost engagement in the plan, says a Hearts & Wallets study.
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An employer-sponsored retirement plan match contribution can more than double average annual plan participant savings, especially for moderate-income households, according to a Hearts & Wallets study.

In addition, when it comes to retirement income, older investors have an exploding but unmet need, up 27% in two years, for help managing their retirement resources, the study found.

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One key part of the retirement puzzle is helping savers accumulate better nest eggs; the other is helping older investors tap into their resources in more effective ways, Hearts & Wallets says. The study report, “Retirement Income Programs & Employer-Sponsored Retirement Plan Engagement,” examines trends in employer-sponsored retirement plans, and presents Hearts & Wallets’ biannual benchmarks on retirement income programs, most desired plan components and industry leaders.

The top takeaway for plan sponsors, says Laura H. Varas, principal of Hearts & Wallets, is that the plans they offer are vital to their employees’ financial well-being. “They are one of the best available vehicles for accumulating savings,” she tells PLANSPONSOR. All the more reason, then, Varas emphasizes, for plan sponsors to address the recent dip in participation and eligibility, though it is relatively small.

According to Hearts & Wallets’ data, the past year saw average annual household savings increase almost a full percentage point to 5.5%, up from 4.6% in 2013. But this rise in savings did not find its way into employer-sponsored retirement plan savings, which dropped 7 percentage points in one year: Retirement plan savings dipped, from 29% in 2013, to 22% in 2014. Eligible and participating households fell, from 60% in 2013, to 56% in 2014.

Varas contends that a jump start to employer-sponsored retirement plans is sorely needed to reverse declining savings and participation rates in workplace plans, since they are a substantial source of retirement funding for many Americans.

NEXT: Matches vary by employer, but all can motivate savings.

Plan sponsors need to understand the power of the match and plan messaging. Although average rates by motivations for participating make it look like all motivations are about the same, those averages are misleading, because employer matching policies are so varied, Varas points out.

Nationally, about 10% of savers eligible for a workplace plan say their employer offers a match of 6% or more; 33% say the match is 4% to 6%; 33% say it’s up to 3%; and 24% say there is no match. The average national saver will defer $1,200. “If the importance of getting the match can be grown from one to 10, that increases the average saving rate by $1,400—to $2,600,” Varas explains. 

Participation and eligibility, a function of regulation and of cost, should be addressed, Varas says. “The average household nationally sent 22% of their savings to their workplace retirement plan, combining both participants and non-participants,” she says, “down from 29% the prior year.”

A couple of reasons, such as competing financial goals, are responsible, for the dip in contributions. “Nationally, the top most popular goal was to build up an emergency fund,” Varas explains, “rising from 37% of all households to 45% last year. This goal was very popular with younger savers. Having liquid reserves to draw on if needed is the bedrock of solid financial behavior, so it makes sense for households to make sure they have this covered before they start to save for distant futures.”

A decline in eligibility, from 60% down to 56% nationally, was another factor, especially for younger American savers. “The biggest decline was in emerging life-stage investors,” Varas says, “those ages 21 to 27, where the decline was from 64% to 41%. This is possibly because fewer young people are in jobs that offer employer-sponsored plans. Most households who are eligible do participate, so the bigger problem is getting more households eligible.”

She emphasizes that it is not Hearts & Wallets’ place to determine the best way for a company to compensate its workforce or the mix—but the match is a great way to encourage savings and also to give a portion of compensation in the form of that match.

“With low interest rates in recent years, there has been such a penalty on savings,” Varas says. “Match becomes such a silver lining.

More information about the study is on Hearts & Wallets’ website.

Data & Research July 27, 2015

TDF Customization Adds Considerable Complexity

We’ve all been told time and again: just because we can do something doesn’t mean we should. It’s a lesson worth particular emphasis for plan sponsors considering custom TDFs.
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A white paper from J.P. Morgan suggests custom target-date strategies can add real value to retirement plans, but the complexity of customization can quickly overwhelm the upside.

Penned by Daniel Oldroyd, head of target-date strategies and multi-asset solutions for J.P. Morgan Asset Management, the report warns plan sponsors and financial advisers not to shoulder more than they can carry when implementing a custom target-date fund (TDF) series. Especially in the small plan market segment, the significant resources and expertise needed to effectively manage custom investment options can seriously strain plan fiduciaries.

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“Plan sponsors and advisers need to balance the benefits that custom strategies might offer with the required expertise, time and costs,” Oldroyd explains, “which can be significant.”

The report finds the word “custom” is loosely used to describe a wide range of offerings, but the general pros and cons of customization are clear. Perhaps the most important benefit, custom strategies allow sponsors to create TDFs that account for their unique employee demographics in building out the asset allocation glide path. For example, if a plan sponsor has a very generous match or a profit sharing component complementing the standard 401(k) account, the plan sponsor could implement a glide path that takes this into account.

Oldroyd says another common reason to go custom arises when a plan population has a mandatory retirement date that is earlier than the “normal” age range of 65 or 67. This population could benefit from a glide path that is somewhat more aggressive than the standard proprietary option, which will be tailored to fit the generalized investing needs of much larger groups of investors.

NEXT: Custom challenges

As Oldroyd explains, target-date funds are complex pieces of financial machinery with myriad moving parts. The three components used in constructing any target-date strategy include the glide path and asset allocation; the manager selection; and the implementation, including cash flow management and tactical asset allocation.

“In an off-the-shelf target-date strategy, an asset manager oversees all three components,” Oldroyd says. “But, in a custom strategy, the components can be disaggregated. When this occurs, there must be complete clarity about the roles and responsibilities of the plan sponsor, the glide path manager, the asset manager, and the party responsible for implementation—usually the recordkeeper or the custodian of the plan.”

Much of the busy work can be outsourced to a consultant or adviser, but this may prove to be prohibitively expensive for smaller plans, Oldroyd warns. And even when professional help is brought in, a sponsor using custom funds must be absolutely vigilant that all the moving pieces are turning together.

“Whenever a plan sponsor adopts a target-date strategy, whether it is off-the-shelf or custom, it constitutes a fiduciary act,” Oldroyd continues. “The plan sponsor’s fiduciary obligation is in no way diminished, whether the choice is custom or off-the-shelf. A plan sponsor must always act prudently in the selection and monitoring of plan asset investment options.”

Because of this, effective communications are critical when implementing a custom strategy. “While participants in an off-the-shelf target date strategy can access relevant information about their strategy’s funds on fund company websites, participants in a custom strategy may have only one source of information about their retirement funds,” Oldroyd says, “the communications they receive from their plan sponsor.”

NEXT: Building steam, but slowly

According to Cerulli Associates’ Retirement Markets 2014, target-date funds accounted for 13% of all defined contribution plan assets and 38% of contributions heading into 2014. Cerulli projects that those percentages will rise to 34% and 88%, respectively, by 2019.

While overall TDF growth is quite strong, Cerulli finds that less than 10% of all TDF assets are currently in custom offerings. This is due in large part to the complexity constraints outlined in the J.P. Morgan white paper. Oldroyd says customization has been somewhat concentrated among plans with $500 million or more in assets—generally because these plans have greater internal resources and expertise to take on the added complexity of customization.

“Often, plan sponsors lean toward a custom target-date strategy over an off-the-shelf offering because they think a tailor-made approach would better address specific characteristics of their plan, such as the demographic profile of their participants,” Oldroyd concludes. “But even after they identify those specific participant profiles, plan sponsors may be able to find an off-the-shelf target-date strategy that can accommodate them.”

The key, as in so many other areas of retirement plan design, is to devise, follow and document a reasonable assessment process that factors in both the price and value delivered through customization. Some plans will find customization makes sense, while others will not. In either case, backing up the decision with clear documentation is paramount.

The full paper, including a helpful assessment for plan sponsors to rate the potential utility of going custom, is available for download here.

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