Client Service June 4, 2015

PSNC 2015: Retirement Readiness Benchmarks

A panel of experts at PSNC 2015 urged plan sponsors and advisers to ask, what comes after “funds, fees and fiduciary?”
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As a plan sponsor, both Sections 408(b)2 and 404(a)5 of the Employee Retirement Income Security Act (ERISA) help guide the approach to fees. With these regulations in mind, sponsors have likely formed a formal process to ensure fees are reasonable, and that the services received for those fees represent a good value, noted James Nichols, head of advice and strategy services at Voya Financial, at the 10th Annual PLANSPONSOR National Conference in Chicago.  

But with such a rapidly evolving retirement landscape, how can plan sponsors be sure their fees truly remain reasonable and defensible in the case of a participant lawsuit or a challenge from the Department of Labor (DOL)?

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For the answer, plan sponsors can look again at ERISA, Nichols said, and what that oft-cited acronym is really talking about—retirement income security and true retirement readiness. He pointed out that, as an industry, “we’ve spent decades looking at the accumulation side, but equally important is what participants do with those savings when they finally reach their retirement date.” Getting participants successfully to the retirement date is a core purpose of most, if not all, retirement plans, so surely retirement readiness metrics will inform the fee reasonableness conversation.

Historically, the majority of plan sponsors, if asked, would report that the goal of their plan was getting participants to a “secure retirement.” Until recently, though, few had measures of retirement readiness in place to determine how many of their participants were on track to reach the secure retirement target, noted Laura McKinnon, a managing director at BlackRock. Without these insights, it’s much harder to say for certain that fees are reasonable and defensible.

NEXT: Influencing participant behavior

When it comes to influencing participant behavior and developing the patterns of habitual saving required for plan success, Nichols said, it can be particularly difficult to bring about change if you do not have a meaningful communications strategy in place.

To him, retirement success means being on track to have the confidence and resources you need to fund your lifestyle in retirement. “On track” depends on more than the size of one’s 401(k) balance, he noted, and comprehensive financial wellness is necessary to support an individual’s confidence. Support could touch on topics such as debt, savings and other wealth management concerns that all affect retirement security. To boost participants’ confidence and willingness to participate wholeheartedly in a plan, sponsors must make them aware of their options and of the tools at their disposal as they approach their retirement date.

McKinnon agreed, saying that a first step is to emphasize for participants that the plan is truly a benefit.

Beyond the participation and deferral rates, she suggested benchmarking retirement engagement is also critical. Equally important: How much annualized income can participants expect at retirement? Does an employee’s tenure factor into his individualized projections? If not, sponsors may want to reconsider what variables they use in success calculations, and what participants need to hear to make that data meaningful to them. Breaking it all down into participant-level data to see what risks participants are really facing can drive engagement, she said, and can help inform which proprietary or customize solutions can meet participant needs.

NEXT: What savings mean to participants

Nichols said his firm has found success boosting engagement by highlighting each individual participant’s projected retirement income on the home page of its participant website. Plan sponsors have to educate participants about what that number really represents, he warns, and they should also periodically rethink how they approach those calculations. “What variables—age, gender, position, outside savings—do you account for?” he asked, “and does your plan design start in the right place to meet the obstacles and opportunities unique to each?”

For instance, McKinnon noted, target-date funds (TDFs) are having success getting Millennial investors engaged in the retirement system post-Pension Protection Act (PPA). Baby Boomers benefit from these funds, too, she said, but many are also supported by pension plans in addition to a defined contribution (DC) option. This implies a simple age-based determination of risk tolerance for Boomers that does not factor in assets from outside the DC plan could leave Boomers with sub-optimal risk exposure.

Gen Xers are the “middle child” of the retirement savings world, McKinnon said. There is a dip in the level of preparedness she sees among 40-somethings, in part because Gen Xers were enrolled when default deferral rates, if they were in place, fell far short of what is standard today. This means Gen Xers may need more risk taking than a simple age-based calculation would imply.

“Six is the new three,” she added, referring to common automatic participant contribution rates. To jumpstart deferrals, she said, sponsors should find out what their participants need to hear today to justify budgeting for their future selves. The best results come when sponsors adopt the full spectrum of automatic features, Nichols said. “We need 100% personal financial engagement,” he added.

Finally support from your CEO and chief financial officer (CFO) is critical to implementing retirement readiness solutions, McKinnon said, adding that “CFOs and CEOs are going to be very numbers-oriented.” Quantify the impact your plan can expect from adding the new features, and use data to get them on board. “The numbers are astounding, because it’s all compounded and it’s all over time.”

Products June 4, 2015

PSNC 2015: Plan Decumulation Strategies and Products

Income products are a hot topic for the retirement plan industry.
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Only 12% of retirement plans sponsors polled at the PLANSPONSOR National Conference in Chicago on Wednesday offer a retirement income product. 401(k) plans are generally not annuitized at this time so it’s mostly up to workers to figure out how to try to make their money last through their lifetime.

Shale W. Latter, retirement plan consultant for CapTrust Advisors, says, “By comparison, old-fashioned defined benefit [DB] pension plans, which fewer workers have today, guarantee lifetime payouts, and the default payout is a joint and survivor annuity.”

But with DB plans “flat lining” and the first major wave of Baby Boomers retiring, the industry overall needs to figure out how to help defined contribution (DC) participants go through the transition from a salary to the decumulation phase of their retirement savings.

What options can be offered to defined contribution plans besides lump sums, which all plan sponsors offer? According to Latter, the first step is to identify which of three different camps plan sponsors are in.

  1. The plan sponsor wants no involvement with participant’s retirement decumulation. For these sponsors, Latter says, it would still be relatively simple to add a feature offering systematic periodic withdrawals. 
  2. The plan sponsor wants to help, but not within the plan. For these sponsors, Latter says, adding a non-guaranteed managed payout fund would make sense. This is an out-of-plan annuity option but the sponsor can be the catalyst to educate participants, and participants can receive institutional pricing. 
  3. The plan sponsor is interested in helping their participants. They can offer a guaranteed income product within the plan. There are many options available. 

Next: The conversation on income products gains traction. 

 

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Gordon Tewell, principal of Innovest Portfolio Solutions, says although some solutions are available, “the evolution of these products still has a long way to go—this is a hot topic in the industry.” 

Glenn Dial, head of retirement strategy at Allianz Global Investors, suggests that with DB plans, participants know their projected numbers can be counted on. Many DC plans now offer income projections on participant statements, but these numbers are only 80% reliable.” 

The importance of having a participant’s target date fund (TDF) or qualified default investment alternative (QDIA) aligned with their retirement income solution is important. “Make sure your mathematical glide path matches your human glide path,” Dial says.

A participant can buy an annuity outside the plan, but as participants go through the retirement transition phase they will most likely want to use an adviser. “It’s a lifetime of money, so having a sit-down is very important,” Dial says.

Dial stresses the importance of the industry getting its arms around retirement income products. “What you want to give participants is optionality,” he says. “We don’t know what they want. You want to give them optionality to buy whatever income units they want to buy.”

“Cost is a big hurdle plus most guaranteed products have portability issues. We still haven’t seen the evolution of products that plan sponsors are ready to adopt,” Tewell says. 

What will it take to make these products more acceptable?

Tewell says, “For one thing, it would be nice to see how you can buy a product and get the money they say you will get. A lot of participants are uncertain and therefore are working into their 70s. They aren’t retired because they don’t know how much to spend. The quicker we can get people into products, the better.”

Another reason plan sponsors avoid these products is that they are unsure of their fiduciary responsibilities. The IRS and the DOL issued a notice in 2014 enabling qualified DC plans to provide lifetime income by offering a series of TDFs that include deferred annuities, but existing products do not fit into place with this rule. 

Plan sponsors and providers are looking for a safe harbor for guaranteed products. They are asking for more clarification from the IRS and the DOL so that they can feel more comfortable defaulting participants into these products.

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