The Markets April 16, 2015

Documenting a TDF Selection Process Is Key

Plan fiduciaries need a complete grasp of the vulnerabilities of their target-date strategies, and sources recommend tools and a documented process.
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The rapid adoption of target-date investment strategies by plan sponsors over the last few years took placed in a risk-on, low volatility environment, says Josh Anderson, a financial adviser with Raymond James. “When the dust settles, it will be important for plan sponsors to have a documented process that supports their selection rationale,” he tells PLANADVISER.

The top factor for plan sponsors to have in place is a process to support the decision-making process of evaluating and choosing a target-date fund (TDF), Anderson says. 

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Plan sponsors often struggle with the process, Anderson notes. “Like anything else, benefits decisions are often trumped by business priorities,” he says, citing the 2013 fact sheet of tips for ERISA plan fiduciaries from the Department of Labor (DOL). “The top tip is establishing a process to compare, select, conduct due diligence and education to deliver this effectively.”

Data is key, according to Russ Shipman, senior vice president of the retirement strategy group at Janus Capital Group. Plan sponsors need to consider both psychographics and demographics of the employee population. “Does the work force have access to a defined benefit (DB) plan as well as the defined contribution (DC) plan?” he asks. “A younger tech company will have a different profile from what Shipman terms an old-line manufacturing company with a DB plan. Depending on the circumstances, a balanced fund could be better than a TDF.”

Anderson recommends examining plan behavior and practices. Is re-enrollment being considered? How many actives versus terminated participants are in the plan? Other factors include: the sophistication level of participants; plan goals; and investment philosophy. All can affect the type of solution that is right for the plan, he says.

Participant outcomes are a critical factor. “What does the retirement base look like?” Shipman asks. “In a qualified trust, and as fiduciary to that trust, the plan sponsor should think about those people and their readiness.” It may seem obvious, but plan sponsors need to look at the people they serve.

Glide Path Factors

According to Shipman, one provider uses a method that plots all plan participants for each plan client on an investment allocation graph. The “y” axis represents “Participant Allocation to Equities” and the “x” axis is “Participant Age.” Next, they superimpose a highlighted glide path band based on their in-house TDF product series’ allocation to equities. 

The method is not perfect, Shipman says, since it doesn’t account for other investments an individual or family may have, or other extenuating inputs to their financial picture. “However, it provides a count and percentage of in-plan participants that fall in their perceived ideal equity exposure range, given age,” he says. “The plan sponsor can then work to educate around any real or perceived shortcomings of the asset allocations of the employee base.”

Diagnostics are also important, says Nathan Voris, large market practice leader of Morningstar Investment Management. “We take a broad total wealth approach,” he says. Morningstar tests the glide path to assess income replacement rates, and they use a range of benchmarks.

“There has to be a way to say this is the right glide path,” Voris says. The consultant or adviser can test for wealth creation, or income replacement based on the design of the glide path — Voris recommends using the industry’s experts, either a project consultant or a consultant on retainer, as long as the provider has thorough knowledge of TDFs. Since this is conceivably the most important investment option in the plan, selection is critical.

Younger, more vulnerable participants are being put into these vehicles, Shipman cautions, noting that for a time the industry seemed comfortable about any downside, but that complacency seems to be disappearing. “I applaud the industry for embracing the process and duty,” he says.

Data & Research April 16, 2015

Employee Financial Wellness Programs the New Normal

More companies are adding or considering financial wellness programs for their participants, according to Bank of America Merrill Lynch's Workplace Benefits Report.
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“Today’s plan sponsor must look beyond 401(k) enrollment and participation,” says David Tyrie, head of retirement and personal wealth solutions for Bank of America Merrill Lynch. “As the survey underscores, there is a growing need for companies to consider their benefits offering more holistically and provide more comprehensive financial education and solutions that can address today’s challenges, such as managing rising health care costs.”

Most companies (83%) report feeling responsible for their employees’ financial wellness, and an equal number of plan sponsors believe access to one-on-one guidance from a financial professional can have a positive impact on the amount of money employees save for retirement.

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This may affect the benefits, education and other resources employers provide. Survey respondents predict large companies, with $100 million or more in 401(k) plan assets, will lead the charge in adopting financial wellness programs. In the past year, the survey found, the number of large companies providing information on budgeting, planning for health care costs and managing debt, among other topics, has significantly increased. Roughly half (48%) of large firms have a financial wellness program in place, up from 35% in 2013.

Overall, 70% of plan sponsors offer resources and educational tools about saving for retirement to their employees. Among large companies, nearly two-thirds (64%) support planning for health care expenses. The number providing information on managing debt and budgeting have roughly doubled since 2013—from 22% and 21%, respectively, to 43% and 40% this year.

While fewer than one in four plan sponsors currently have a strategy in place to improve employees’ financial wellness, more intend to add one in the next two years. Nearly three-quarters of respondents expect that, within 10 years, financial wellness programs will be standard in benefits packages. Doing so makes sense for an employer to remain competitive, the survey found, as employees who use the programs become more satisfied (78%), loyal (70%), engaged (68%) and productive (57%).

“More personalized guidance and education about an individual’s entire financial picture, including savings and health care costs, can have a meaningful impact on a person’s long-term financial health,” said Kim Kasin, managing director, financial guidance executive at Bank of America Merrill Lynch. “Helping employees with their financial life management can be positive for both employees and employers. For employees, it helps to reduce financial stress; and for companies, it makes good business sense because it helps employees be more focused and productive at work.”

Use of incentives to get participants in these programs is less common, however. Just one out of seven employers indicated they have or are considering adding incentives to employees to enroll in these offerings.

Eighty-three percent of employers have experienced a rise in health care costs over the past two years, on average by 11%. Rather than pass the expense on to employees, eight in 10 employers chose to absorb half, if not all, of those cost increases. Unfortunately, to accommodate this, 55% reduced benefits spending—often in the retirement plan. The most common areas to cut spending were: 401(k) plans and pension plans, 56%; employee education, 40%; equity compensation, 36%; and non-qualified deferred compensation (NQDC), 34%.

Still, other employers are adding health spending accounts (HSAs), a tax-advantaged medical savings account that can be paired with a high-deductible health plan (HDHP). However, HSAs are not being leveraged to their fullest potential. Eight in 10 report that they believe their employees view the accounts mainly as near-term spending accounts rather than long-term retirement savings vehicles. 

Roughly half of employees (49%) utilize online tools to see their full financial picture, while 46% favor to work individually with a financial adviser, and 45% reported using relevant research or literature to inform their investment decisions.

Total rewards, or an integrated benefits management portal for employees, are offered by nearly 40% of plan sponsors. However, roughly three quarters are uncertain whether employees’ overall engagement with their benefits has increased since implementation, and nearly three in 10 of those do not believe employees understand how that information works to maximize the value of their integrated benefits.

While half (52%) of plan sponsors with younger employees believe Millennials view benefits differently than other generations, just one in 10 plan sponsors (12%) with Millennial workers have made an effort to use different technologies to motivate these individuals to become more engaged with their benefits. Among those trying out different technologies, texting (49%), LinkedIn (41%) and Facebook (38%) are the most popular channels to communicate with younger workers. Among all employers, smartphones are the preferred technology. Fifty-four percent of employers with Millennial employees report that their human resources (HR) or benefits website is accessible via smartphone.

Unsurprisingly, three quarters (74%) of plan sponsors report feeling that, to do their job effectively, they must cultivate expertise in health care and retirement issues. Six in 10 sponsors will spend more time on health care, while approximately one-third will focus more on the 401(k) plan, hiring and firing, and employee education.

Boston Research Technologies completed the nationwide survey of 1,020 sponsors from companies of all sizes between October 14 and December 4, 2014, on behalf of Bank of America Merrill Lynch. Further information about the Bank of America Merrill Lynch Workplace Benefits Report is available here. 

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