Retirement plan advisers should be ready to answer this question for potential and existing clients, says Brodie Wood, senior vice president in not for profit markets at Transamerica Retirement Solutions. In fact, that question often serves as the launch-point for a new engagement in today’s shifting world of employee benefits.
“I think retirement plans are in an evolutionary phase,” agrees adviser Kathleen Kelly, managing partner at Compass Financial Partners. “Our clients are constantly looking at their plans, evaluating whether changes that have been made have had the desired outcome and, if not, what needs to be tweaked and improved to get participants to a place where they can retire with dignity.”
True retirement specialists know refining a plan is not a “one and done” operation. “Plans are always being looked at,” Kelly adds, “and plan sponsors and advisers are focused on constant improvement.”
“Constant improvement” will have a different meaning for plan sponsor clients in different regions and industries, adds Margaret McKenna, executive vice preside of the workplace investing relationship management team at Fidelity Investments. While benefits packages seem to be improving across the board, she notes certain industries will always be more paternalistic. It may be more natural for these clients to engage closely with a retirement specialist adviser—but there is also opportunity in segments of the market with higher employee turnover or other complicating factors.
“The most competitive benefits we see most often are from industries that have very heated competition for human capital,” Kelly explains. “Their benefits programs are truly a way to recruit, retain, and ultimately reward employees.”
The technology field is a classic example. “A lot of clients are vying for top talent in areas that are very saturated with top employers,” Kelly says, “and they have to put in broad and rich benefits programs, not just retirement benefits.”
Wood finds that “a lot of the same structural shifts that we’ve seen in the corporate space are bleeding over to the not-for-profit space,” making benefits in this space more competitive and opening up opportunity for retirement plan advisers. Data from the 2015 PLANSPONSOR Defined Contribution (DC) Survey, to be released next month, support this belief. According to the survey, nonprofit health care and higher education are nearly tied for most likely to offer immediate eligibility in the retirement plan, at 71.3% and 71.2%, respectively.
NEXT: Leading industries
In general, Kelly says, “higher education—colleges and universities—tends to have very strong benefits; tech has very strong benefits; and financial services typically have very strong benefits as a whole.”
This is also generally borne out by the latest PLANSPONSOR DC Survey data. Higher education was the most likely to have 100% immediate vesting (62.7%) and to provide a contribution that equals more than 6% of participants’ salary (58.3%).
Automatic enrollment, though, is still more common in the corporate market. According to the DC Survey, the industries likeliest to have this plan feature are Fortune 1000 (66.5%); utilities (60.3%); and automotive manufacturing and parts (59.6%).
“When clients offer auto-enrollment into a 401(k), they dramatically impact participation in those plans,” McKenna notes. “On a case-by-case basis, you can see companies taking different tactics in terms of their plan design to encourage participation. Auto-enrollment has become a very important feature, especially in 401(k) plans. We have seen wide adoption in a number of industries,” she says, the exception being industries that experience a high rate of turnover among workers.
Another widespread addition to the retirement plan has been Roth features. McKenna finds these are predominant in the professional services industries—law firms, consulting firms, medical practices, engineering firms, etc. “We also see it in professional services fields, such as pharma, engineering and legal firms, as opposed to the construction industry, where the numbers are significantly less.” And it’s not just for new employees, she says, but longer-tenured workers as well.
The PLANSPONSOR DC Survey confirms her experience: The industries likeliest to offer Roth deferrals are financial services (76.7%); accounting/certified public accountant (CPA)/financial planning (75%); consulting (72.7%); and law firms (69.8%).
NEXT: What drives plan design?
“As we look at our client base, it’s all over the board in terms of drivers for plan design. The benefits package often depends on the size and scale of the organization,” says Kelly. “If it’s privately owned, single family or multigenerational, we often see very paternalistic approaches to benefits. Those owners may see their employees around town and tend to have long-tenured employees. This is very geographically based, if you’re the only employer in town, it may impact the generosity of benefits offered.”
The degree of progressive plan design that’s implemented also varies, she adds.
“The companies that are the most generous are looking at company contributions and what dollars are going to the sole benefit of the participants, but also are reviewing their vesting schedules and eligibility periods, and may reduce those to attract employees and talent across the board,” she says.
The culture of companies in different parts of the country will also affect how benefits are organized.
“Silicon Valley has a very different mindset around benefits than the East Coast,” McKenna says. Tech firms are generally more focused on including equity compensation; more traditional benefits programs likely still offer a defined benefit (DB) plan. “Companies like utilities have more traditional benefit plans—a 401(k), a pension and a large amount of health and welfare benefits—those are the more traditional benefit offerings,” she notes.
“When we look at who’s participating in plans,” McKenna says, “we see the highest participation rate in utilities, followed very closely by financial services, insurance and also manufacturing companies, as opposed to food service and accommodation or hotel services.”
Indeed, the PLANSPONSOR DC Survey found utilities to be in the top two for “most likely to use automatic deferral increase—40.3%, after Fortune 1000’s 56.8%—and most likely to set the automatic deferral rate at 6% or higher—41.5%, versus 50.0% at pharmaceutical companies.
This is likely due to the nature of the work. “Utilities jobs are very physical,” McKenna says. “These companies need to be certain that people are retiring at reasonable ages, and they want to make sure there’s a steady inflow of new talent.” She advises employers to understand the longevity of the average worker when designing the benefit program. “Do people come in and stay with us, or are these short-stint employment opportunities?”
NEXT: Keeping aged employees
“At the other end of the spectrum,” Kelly says, “some of our clients set up a program to keep aging employees employed. They build out the benefits program to adapt to a work force that maintains so much intellectual capital that they want those people to stay. The flip side to that discussion, however, is how plan sponsors improve outcomes for the aging work force?”
The reality for many people is that when they reach the typical retirement age, even if they do not have the financial wherewithal to retire comfortably, health and employability issues can push them from the workforce anyway.”
“But until that point, this segment of the population can be more expensive for the employer,” Kelly warns. “Better programs help people to save and generate an income replacement that is satisfactory and ready on time.” Advisers have to ask sponsors: “Does the program align with your intention to have workers be able to retire with dignity, if they take full advantage of the program offering?”
Teaching positions can have a little more leeway when it comes to faculty fitness. Still, “in higher education, there’s a disproportionate number of faculty members who don’t retire at normal retirement age,” Wood says. “Professors generally start saving later because they’re in school for so long, and people who gravitate toward teaching or not-for-profit work are generally more risk-averse. This translates into a more conservative approach to investing,” which he says can really drag on where they end up.
When it comes to extended benefits, Wood says, “a lot of nonprofits invest in in-person education, more so than in the corporate market, which can be a huge benefit for the staff who are not saving enough and don’t have a financial background.”
NEXT: Financial fitness.
Kelly says that the rise of financial wellness programs can be a major differentiator for employers, no matter what the industry: “Even if you have the best-designed plan with auto-enrollment and -escalation and a great match, it’s hard [for participants] to get the most out of it if you don’t have a good handle on personal concerns.”
“People today come into the work force not thinking about saving for retirement,” McKenna adds. Rather, they are more focused on immediate concerns, such as paying off student loan debt, buying a home and saving for their own children’s college tuition costs. Plan advisers can help sponsors and employers to be more conscious of how workers’ outside assets, or lack thereof, can have a direct impact on performance and productivity.
More firms are also looking at improving the quality of life and work/life balance of their employees. For example, McKenna says, companies are offering maternity and paternity leave to employees for an extended period of time, much more than what’s required by law. “We see widespread adoption of clients looking at their health and insurance benefits and taking a wellness focus to help people get healthy. Those benefits are becoming more of a focal point.”
“To build out a best in class retirement plan, capitalize on automatic features,” Kelly concludes. “We think auto-enrolling at a higher default percentage makes a lot of sense for most industries, and auto-increase also is very important. Otherwise participants will think the default rate is the advisable rate.”
“The tighter the job market and competition is for that human capital,” he says, “the more the benefits become a differentiator. Recognize that there’s room for improvement—always.”
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