Barings Adds to Global Emerging Markets Equities Team
Staffan Lindfeldt was named head of global emerging market
equities and Isabelle Alexander, investment manager of global emerging market
equities at Barings Asset Management.
Lindfeldt is responsible for leading and managing the
global emerging market (GEMs) equities team and will be the lead investment
manager on several of the GEMs portfolios, including mutual funds and
segregated portfolios, subject to regulatory approval. Lindfeldt has more than
13 years’ investment experience in global emerging market equities. He joins
Barings from Handelsbanken Asset Management in Stockholm, where, since 2006, he
has been chief portfolio manager for global emerging markets.
Lindfeldt starts Monday, and is based in London. He reports to Tim Scholefield,
head of equities.
Alexander will be an investment manager assisting with the
management of the GEMs portfolios, alongside William Palmer. She has seven
years’ investment experience and was previously portfolio manager at Pictet
Asset Management in the global emerging markets team. Alexander starts
Wednesday and is based in London. She will report to Lindfeldt.
Over the years, defined contribution (DC) plan sponsors have
collectively put in tremendous energy and resources to advance participants’
retirement readiness.
These
efforts often encompass a significant educational program, aimed at improving
participation rates, deferral rates, and asset allocation. This education has
been designed to empower participants to make decisions regarding their
financial future. Despite this concerted effort, media reports continue to
describe how the vast majority of plan participants remain unprepared for
retirement. As a result, plan sponsors are starting to move away from
concentrating on participant education, and toward effecting successful retirement
outcomes among their employee population.
Behavioral
finance expert, Shlomo Benartzi, a professor at UCLA Anderson School of
Management, advocates that plan sponsors strive to achieve 90-10-90 target
rates: 90% participation rate, 10% deferral rate, 90% of contributions
allocated towards professionally managed investments, such as target-date
funds. If plans as a whole can reach these input targets, individual plan
participants will be more likely to achieve outcomes that will allow them to
maintain their standard of living in retirement.
One
of the ways that plan sponsors are working to enhance retirement readiness is
through plan design optimization. Providing education can help foster
participant decision-making, but cannot guarantee that the best decisions will
be made; therefore, plan sponsors are re-engineering the internal mechanisms of
the plans to directly impact participation and savings rates. This
restructuring greatly enhances the potential for participants’ successful retirement
outcomes. Here are some of the ways plan sponsors are trying to optimize their
plan designs.
Shift
in Employer Contributions
Many plan sponsors
offer their participants an employer base contribution in the retirement plan.
This type of benefit does not require participants to do anything in order to
receive the contribution, other than work for the organization for a specified
length of time. But even the most generous employer base contribution is
unlikely to fund a participant’s entire retirement needs. Given the frequency
with which workers change jobs, and the inevitable difference in retirement benefits
offered from one job to the next, it is imperative that employees undertake
some saving for retirement out of their own paycheck.
An
employer base contribution does not encourage participants to contribute individually.
Yet an employer matching contribution does require that participants engage
through salary deferral, in order to receive the employer benefit. Tying the
receipt of the employer benefit to an employee’s contribution leads to higher
plan participation rates.
Most
plan sponsors are aware of this concept. Many have already added a matching
contribution component, and/or shifted base contribution dollars into the
matching contribution formula as a way to increase participation. Nevertheless,
the combination of the employee contribution, plus the employer match, still
may not be enough to meet future retirement needs.
The
most common matching plan formula is a $0.50 match for every $1.00 of
participant salary deferral, up to 6% of compensation. While this formula is
often successful in encouraging participants to contribute up to 6% of pay,
many participants will need to contribute more than 6% (plus the 3% employer
matching contribution), to accumulate enough in their accounts to maintain
their standard of living in retirement. This concern has led some plan sponsors
to adjust their matching formula.
One
way to adjust this formula is to implement a $0.25 match per $1.00 contribution
up to 12% of pay. Accordingly, participants are encouraged to double their
contribution in order to receive the maximum match from the employer. Making
this change adds no cost to plan sponsors’ retirement budgets—the maximum
possible employer contribution is still 3% of compensation for all eligible
employees.
Automatic
Enrollment
Some plan sponsors
have chosen an alternative plan design change to increase contributions. Rather
than have employees opt in to elect salary deferral contributions, the plan
sponsor automatically deducts salary deferrals unless employees opt out. By
implementing automatic enrollment, plan sponsors help employees overcome
inertia, which is one of the biggest impediments to participation.
Plan
sponsors may resist automatic enrollment for two main reasons. The first relates
to cost. Any plan sponsor offering a matching contribution that implements automatic
enrollment will experience an increase in the cost of the employer match with
the higher participation rate. Depending on the level of current participation,
this cost increase could be significant. However, either by adjusting the
matching formula (per the above), modifying the vesting schedule, or both, plan
sponsors can alter their current plan design so that the cost of the greater
participation rate still falls within budget.
Plan
sponsors also commonly resist automatic enrollment because they do not want to
impose the contribution without employees’ affirmative election. As mentioned
above, employees do have the opportunity to opt out of the automatic enrollment
provision, and affirmatively elect not to participate, or to participate at a
different deferral rate. Nevertheless, the overwhelming majority of employees
do not do this, which reflects their desire to contribute to a retirement
savings vehicle.
Industry
studies have shown that when plans automatically enroll employees, the
participation rate typically exceeds 80%, and often 90%. These results apply to
plans that use anywhere up to 5% as the automatic deferral amount. According to
a 2011 Fidelity study, the opt-out rates for plans that defer participants at a
rate of 5%, versus as low as 1%, are no higher. In addition, the plan sponsors
that have had the most success in attaining high rates of participation have
undertaken automatic enrollment for both new and existing employees. These plan
sponsors conduct an annual enrollment, whereby the non-participants must elect
to opt out each year. By using these methods, plan sponsors are able to capture
employees who want to participate, but who have been unable to overcome inertia
and actively enroll.
Automatic
Escalation
Automatic
enrollment offers many positive features for encouraging participants to save.
One drawback, however, is that when their salary deferrals begin automatically,
participants often take a hands-off approach to saving for retirement. Rather
than considering how much they need to save, or which investment option(s) to
select, participants may just accept the automatically provided features and
never make any change. So while the plan sponsor succeeds in raising the
participation rate, the average deferral rate for the plan can actually
decline, as these new participants do not adjust their contribution amount
upwards over time to save enough for retirement.
A
solution to this problem is to implement an automatic deferral escalation feature
in conjunction with automatic enrollment. The plan sponsor adjusts the plan
design to include an automatic 1% or 2% increase annually to each participant’s
contribution rate. For instance, an employee originally enrolled at a 6% salary
deferral rate could be contributing 8% after completing one year, and 10% after
two years. These automatic escalation features typically have a maximum salary
deferral rate at which contributions are capped; the plan sponsor usually sets
this cap somewhere between 10% and 12% of compensation.
Plan sponsors achieve
the best results when they set the salary deferral increases to coincide with
the timing for compensation increases. In this way, participants take home a
higher salary amount and save a greater portion for retirement at the same
time. Alternatively, plan sponsors often design for the increases to occur on
January 1 of each year.
Investment
Allocations
By
implementing automatic enrollment and automatic escalation, plan sponsors have
a much greater chance of achieving the 90% participation rate and the 10%
salary deferral rate. But they will likely still need to take action to get 90%
of contributions allocated towards professionally managed funds, such as target-date
funds.
As
mentioned above, when using automatic enrollment, plan sponsors must select the
investment option into which those salary deferrals will be allocated. In 2006,
the Department of Labor (DOL) passed the Pension Protection Act which
identified Qualified Default Investment Alternatives (QDIAs), of which target-date
funds are the most popular. By passing this regulation, the DOL signaled its
approval for granting plan sponsors fiduciary protection if a QDIA is used as
the default option. As a result, the usage of target-date funds in DC plans has
risen dramatically over the past six years.
According
to a Morningstar study from May 2012, target-date fund assets in defined
contribution plans increased by 500% from the end of 2005 to the end of 2011.
Nevertheless, participant elections, combined with automatic enrollment
defaults, are still unlikely to shift the plan as a whole to the 90% allocation
target.
In
view of this, some plan sponsors have implemented re-enrollment of investment
allocation. Participants, who are not using the target-date funds, or some
other professionally managed investment allocation, are asked to reelect their
investment choices. Those participants who are truly committed to their
investment allocation will likely re-enroll using the same funds, or a similar
allocation. It is likely, however, that others will either enroll in the
target-date funds, or not re-enroll at all. Once again, plan sponsors can help overcome
participant inertia by automatically moving participants to the target-date
fund that most closely matches the year the participant will reach age 65, if
the participant does not re-elect investment options. Some plan sponsors do so
on a recurring basis when they have open enrollment for health benefit
elections. This re-enrollment, coupled with the default investment selection,
can bring plans much closer to the 90% target allocation.
Conclusion
With
all of these automatic features, at any time participants have the ability to
change salary deferral contribution amounts, opt out of the automatic escalation
feature, change the investment selection, or to stop contributing altogether.
Moreover, these design optimization steps are not intended to replace plan
education. It is still important for plan participants to receive regular communication
about the plan and its features, so that they can understand their options and
take control of their financial future beyond the set default mechanisms.
However,
by implementing changes to plan designs, plan sponsors can help solve the
problem of inertia and promote greater savings for the participants. While a
plan may not achieve the 90-10-90 target benchmarks, taking steps to alter the
plan design can help foster growth in the participation rate, deferral rate and
rate of allocation to professionally managed investments. These design changes
should help enable those participants who never take control of their retirement
account to accumulate a retirement balance, and still have a better chance of
maintaining their standard of living in retirement.
Earle W. Allen, vice president of Retirement
at Cammack LaRhette Consulting
NOTE: This feature is to provide general
information only, does not constitute legal advice, and cannot be used or
substituted for legal or tax advice.