The Markets April 25, 2014

Benefit Adequacy Hottest Retirement Benefits Issue

The hottest issue for those in the retirement benefits industry right now is benefit adequacy, according to Fred Reish.
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Reish, partner and chair of the Financial Services Employee Retirement Income Security Act (ERISA) team at the law firm of Drinker, Biddle & Reath LLP, noted the focus in the industry has traditionally been savings accumulation, but now the industry is asking, will workers have enough, and how will they withdraw their money so as not to exhaust accounts before they die? “I think the decumulation period will be more difficult [than the accumulation period],” Reish told attendees of the Retirement & Benefits Management Seminar, hosted by the University of South Carolina Darla Moore School of Business, and co-sponsored by PLANSPONSOR.

During the decumulation phase, participants will no longer have centralized education and support from their employer-sponsored retirement plan, and the move to retail support means more possible conflicts of interest and higher fees, Reish said. He contended that is what the anticipated regulations redefining the definition of fiduciary are really all about—individual retirement accounts (IRAs). “There’s lots of money involved expected to be rolled over from defined contribution plans,” he said, adding that he expects more regulations about IRAs in the coming years, providing protections such as individuals get in employer-sponsored plans.

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One thing the Department of Labor is working to address the benefit adequacy issue and concerns about the decumulation phase for retirement plan participants is lifetime income projections on participant statements (see “Income Projections: Showing Participants A Better Way”). Reish says he believes there will be final regulations about this within two years and it will mandate plan sponsors or providers put projections on statements. “This is the rule that will have the biggest impact on participants, even though the fiduciary rule and fee disclosures have gotten more press,” he noted.

Reish asked attendees to think about employees getting this projection on their statements every quarter for 10 years, not just as a one-time thing they can ignore. “It will be like drip torture; after years of seeing it, it will make a difference,” he contended. He told attendees they do not have to wait for the government mandate to offer this to participants, as many recordkeepers have the capability now, and some are already doing it.

Reish said the impact on benefit adequacy comes from projecting the results of current behavior, providing a reasonable benchmark for comparing to typical needs, and providing guidance for helping to close the gap. The projection of the results of current behavior is all that will be required on statements; the other two may be offered by providers or are an opportunity for advisers to do participant education or offer to their retail business, he added.

Two risks to benefit adequacy are longevity of participants and withdrawal rates. Reish noted half of today’s 65-year-old men are expected to live to age 85, and half of today’s 65-year-old women are expected to live to age 88. He showed an example from the Congressional Research Service of how a 4% withdrawal rate could give some participants a 94% chance their money will last for 30 years, but moving the withdrawal rate up to 5% drops the chance to 77%, and moving it to 6% drops the chance to 48.5%.

Reish conceded that it is not a plan sponsor’s job to educate participants about this, “but, if not plan sponsors, who will?” he queried. “It’s inefficient to leave folks on their own.”

Reish pointed out that, for decades, 403(b) plan sponsors have successfully been using in-plan annuities, which could be a model for other defined contribution (DC) plans (see “What 401(k)s Can Learn from 403(b)s”). There are a number of available products plan sponsors may use to address the risks to benefit adequacy: traditional annuities, guaranteed minimum withdrawal benefits (GMWBs), longevity insurance, managed payout and retirement income mutual funds, and managed retirement income accounts.

Why should plan sponsors offer such products? Because of the success rate for participants, Reish said. He noted that more participants use in-plan products than rollover into or purchase such products during the 60-day window for rollovers at plan termination. In addition, in-plan products are institutionally priced and cost much less for participants than retail products.

There is another benefit for having a pre-arranged distribution methodology for participants, according to Reish; it helps address the risk of diminished cognitive abilities on the decumulation phase. “There’s something to be said for getting your financial future in order before your cognitive abilities diminish,” he said. “It will be helpful to participants’ families too.”

One topic Reish wanted to make a point about that is brought up with the issue of benefit adequacy is the focus on plan and investment fees. “The mantra now is that plan sponsors need to make plans as cheap as possible,” he said, “but, the best plans I’ve seen are high-cost.” This is because of better services, he noted.

According to Reish, the single most expensive thing plan sponsors can do is also of most value to participants—one-on-one advice. Reish admitted he was an advocate early on about fiduciaries watching plan costs, but now he feels the industry is in a death spiral. “Focus on providing the best services for participants,” he told seminar attendees.

In Practice April 25, 2014

Wellness Programs Benefit the Plan as Well as Participant

Helping employees attain financial wellness isn’t just another part of the benefits program—it can be downright healthy for a company’s bottom line.
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The point of financial wellness is that it helps reduce financial stress, Matt Iverson, founder of Boulevard R, a retirement plan services provider, said in a recent webinar. Employees who are stressed financially tend to have higher health care expenses—about $300 per employee per year stemming from anxiety, insomnia, headaches and depression, Iverson says.

This means pointing a plan sponsor toward financial wellness programs can absolutely be a value-add for an adviser, Iverson tells PLANADVISER. “It shows the adviser is up to date on what’s happening today and paying attention to trends in retirement readiness,” he says. “Even if the adviser isn’t offering a wellness program directly and is just trying to make sure the client knows what is going on and drive more satisfaction across the benefits plan, it’s still a positive. We’re seeing more advisers and broker/dealers focus on that, because their customers are asking about it.”

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When employees can’t afford to retire, there is a real cost to the firm, Iverson says. An older workforce that delays retirement in order to accumulate sufficient assets can cost the employer about $10,000 in insurance premiums per employee per year, assuming employees in their mid-sixties, compared with employees in their 40s.

A quality financial wellness program has several components, according to Matt Gnabasik, managing director of Blue Prairie Group, an advisory firm that focuses on Employee Retirement Income Security Act (ERISA) issues. “It includes retirement, but it’s bigger than retirement,” he says.

The problem of lagging financial illiteracy is widespread throughout the U.S., Gnabasik says, and it can directly impact workplace productivity. “There are clear, compelling, causal relationships between people who are financially stressed leading to higher costs in the workplace,” he says, “more than if they weren’t financially stressed.”

For millions of Americans, Gnabasik says, six months of income in reserve is a pipe dream. “Most of us are not anywhere near to being on track for retirement, using 80% of pre-retirement income as a benchmark,” he says. The increasingly complex nature of paying for health care costs only adds to the problem.

An effective financial wellness program has several key points, Gnabasik says, including information on holistic spending and budgeting, debt management and retirement planning. Instead of simply taking a scattered approach to benefit programs, using financial wellness can bring everything together if it is delivered well.

The program should provide access democratically to everyone in a workforce. It’s not a C-Suite benefit, Gnabasik says, but serves those individuals without liquid assets. Individuals should receive customized, actionable information delivered across multiple media platforms. Activities can be measured and tracked, and the results reported back to clients.

Financial wellness is not about selling products, and there should be no real or perceived conflicts of interest. While the Web may be the easiest way to reach out to participants, Gnabasik says, in-person channels should be provided as well.

No matter how strong a company’s retirement plan, Gnabasik says, workers often don’t bother to figure out the best way to participate or take advantage of it. The problem is made worse when plan sponsors take the attitude that it’s up to the participants to educate themselves. “The employer has a huge economic incentive to help participants figure it out,” he says. “You can make a strong, rational economic argument that it is good business for the plan sponsor to put together a financial wellness program.”

Iverson agrees, pointing out that even a small amount of marketing effort about the plan and its benefits can boost employee enthusiasm for a company’s benefits package. “If possible, communicate or benchmark the plan to industry averages,” Iverson says. “It puts the plan it in perspective for them. They may not necessarily know how it compares to other plans.”

Another important step, Iverson says, is to remind employers the biggest line item expenses besides payroll are often health care and running, maintaining and matching the retirement plan. It’s a significant investment, he says, so why not highlight how valuable it is?

The average cost to implement a financial wellness program depends on the features and services. Iverson says an average program for 10,000 participants would cost about $50,000, but could be less, depending on the relationship of the adviser to the plan. It doesn’t always add a lot of cost, he says.

Several online calculators can help assess the return on investment (ROI) for implementing a financial wellness program, including the Personal Financial Wellness (PFW) scale available from the Personal Finance Foundation, and Boulevard R’s own Retiremap.

Iverson admits that implementing financial wellness programs can have a downside for some organizations. Famously, he notes, MacDonald’s put together a financial wellness program that highlighted budget issues, which had the unfortunate effect of underscoring the financial challenges their employees face. “Big-box retail operations with high turnover, low tenure and low wages can be a challenge,” he says. “The investment you make in helping employees improve their financial habits, it’s hard to justify that cost in these cases. You might not get that ROI.”

Financial wellness and better plan engagement seem to go hand in hand. As employees become more financially fit, they tend to increase savings and deferral rates. “You don’t have to make the match formula any richer if you can do a better job of engaging employees around the retirement plan as a benefit,” Iverson notes. “You can dramatically improve their overall engagement in the plan and overall satisfaction with the plan and their benefits.”

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