The focus on plan outcomes is an important perspective for plan advisers, says Christine Marcks, president of Prudential Retirement. “In the past, a lot of what the adviser was focused on was investments,” she tells PLANADVISER. “But now plan advisers that are well schooled in plan design, in investments in these retirement income options, can bring a lot of value to the plan sponsors they’re working with.”
A great starting point to take up with a plan sponsor is plan design, Marcks says. The adviser needs to spend time working with the plan sponsor on a plan that reflects the employer’s objectives for work force management and their budget,” Marcks says.
When it comes to contribution rates, Marcks says the usual 3% to 6% rates just don’t cut it. Auto features play a big part in helping improve savings rates. “Employees really need to be saving 10% to 15% of pay to have a sufficient nest egg for retirement,” she points out.”Our recommendation is help employees get started with auto enrollment and then use auto increases when they receive salary increases.”
Plan sponsors that believe their workforce can handle an initial enrollment of more than 3% of salary should consider starting employees at 6%. Marcks is reassuring on the issue of whether workers will balk at a higher deferral rate. “Research shows that employees will continue on that contribution path,” she says. Six percent as opposed to 3% will move them closer to that goal of 10% to 15%, another point advisers can raise with their plan sponsors to encourage them to turn up deferral rates.
The plan adviser is an important player, and should be tapped to select a default investment option that is simple and reflects an employee’s risk tolerance and years to retirement. Target-date funds (TDFs) and asset-allocation solutions are both appropriate.
Employees should know what their retirement savings will produce when they start using it for retirement income, Marcks says. She recommends working with a provider that can give participants a projection. “We know that making that translation between retirement savings and retirement income drives higher and better savings behaviors,” she says.
Show, Don’t Tell
Actual income in retirement is a key consideration. Employers that do not offer a defined benefit plan should strongly consider adding an option to the plan that offers guaranteed income—something that allows the employee to construct a personal pension plan. On average, Marcks says, when plans include a guaranteed withdrawal benefit and illustrate what that would translate to in retirement, “participants contribute 38% more because they can see the impact on their retirement income.”
According to the Center for Retirement Research at Boston College’s 2012 National Retirement Risk Index, the number of workers at risk of being unable to maintain their pre-retirement standard of living once they retire has risen over 20%, from 44% in 2007, to 53% in 2010.
Scary figures about insufficient retirement savings do not seem to resonate with plan participants, Marcks says. Instead, show them how the assets they have accumulated translate into actual retirement income. “That’s when they realize how much they need to have saved to be ready for retirement. That’s a real wakeup call,” Marcks says.
When they go through retirement income calculation. 20% of participants increase the amount they contribute by five percentage points, from 4% to 9%. Turning up the deferral rate at age 32 or 33 can have a profound impact. “That’s the powerful moment of truth for them,” Marcks says.
Prudential Retirement is a business unit of Prudential Financial Inc. Established in 2007, America Saves Week is an annual week-long event coordinated by the America Savings Education Council and the Consumer Federation of America during which more than 2,000 organizations across the U.S. work together to promote good savings behavior.
More America Saves coverage is here.