Some weeks ago, Mel Hooker, director of relationship management at Wells Fargo Institutional Retirement and Trust, sat down with PLANADVISER to offer an inside take on the results of the firm’s new “Driving Plan Health” report.
The first part of the conversation focused on the subject of “inertia,” and how this theme impacts the retirement plan industry in pervasive and pernicious ways. As Hooker pointed out, inertia is commonly thought of and talked about as a participant problem, but in her view, it is equally problematic within the plan sponsor community.
Hooker also took time to talk about the fact that the set of “high influence” plans identified in the report are actually quite a diverse bunch in terms of the specific plan design features and overall philosophies they embrace. The plans are sponsored by employers across all industries and geographic regions, the report shows. According to Hooker, the plans even look different from one another in terms of the plan design features they embrace. Instead, what unites them is a sense of purpose and an ability for the employer to see the strategic importance of providing quality retirement benefits.
“If there is one thing these plans generally have in common, it is making sure automatic enrollment and automatic deferral increases are in place, so that individuals can get to adequate savings levels as quickly as possible,” Hooker said. “I hasten to add, however, that we have also identified high influence plans that do not have automatic features and instead rely on traditional enrollment methods. Some even skip auto-enrollment but use automatic escalation.”
Hooker said the research clearly shows there are not enough high influence plan sponsors out there.
“Overall, fewer than 30% of Millennials right now are contributing at least 10% of their annual salary to a defined contribution plan,” Hooker said. “This is troubling, because these early dollars going into the 401(k) plan have the most opportunity to benefit from compounding. Even modest amounts saved today can really add up over the 40 or 50 year time spans we are talking about.”
Helping plan sponsors think strategically
Hooker said the challenge of learning to think strategically impacts plans of all sizes. Even large plan sponsors with ample resources to devote to managing the retirement plan can have trouble setting goals and knowing how to pursue them.
“These days we are helping many of these large plan sponsors step back and build a proper strategy,” Hooker said, noting that recordkeepers are in a good position to offer this assistance due to their bird’s eye view of the retirement planning landscape. “It starts with helping them to understand, first, what they are trying to accomplish with their plan, and second, how we might build an action plan to achieve these results more effectively and efficiently.”
Part of the challenge here, Hooker said, is that plan providers, sponsors and advisers don’t have much collective agreement about how to approach plan design decisions in an optimal way.
“I contrast this with the way the industry has embraced investment policy statements as a way to formalize and improve decisions with respect to the fund menu,” Hooker said. “We don’t have an equivalent instrument on the plan design side, and I think that often makes it hard for plan sponsors to know how to define their goals for the plan, beyond meeting their fiduciary duties and ensuring the funds are doing well over time. We may consider using the investment policy statement almost as a model for approaching plan design.”
To this end, Hooker said Wells Fargo staff spends a lot of time helping plan sponsor clients create a more objective framework for assessing plan design goals and decisions.
“It is important to point out that this is a conversation going beyond just the fiduciary governance of the plans and which extends into the settlor functions of the employer,” Hooker said. “We so often see within our client’s plan committees that there are different points of view and different vantage points at the table. We try to encourage all the perspectives to come together, and we can see a clear benefit to plans and participants when an organization is able to create a healthy and rational relationship between its business goals and the design of its benefits and compensation.”
Readiness questions now include health care
Hooker went on to point out additional survey findings that show near-retirees are growing more engaged in the topic of how they are going to pay for health care costs in retirement. As a result, participants are hoping and expecting their employers will grow more active on the topic as well.
“When we look at those over age 50 who have consistently participated in DC plans, even this group is going to have trouble meeting the medical costs they will face in retirement,” Hooker said. “This is a challenge that the entire industry and the broader economy is going to have to confront—we are already seeing the challenge as more Baby Boomers retire every day.”
According to Hooker, the retirement industry has an important role to play in helping plan participants feel more confident about future health care expenses.
“We are all trying to come up with answers to this challenge—obviously the most direct solution from our perspective is to make sure individuals generate a big-enough nest egg by starting to save at the required level early enough in their career,” Hooker said. “We see that people only really feel confident about meeting future medical care costs once they reach this point of say 80% or even 85% income replacement.”
From this perspective, Hooker said, even when one looks at the most highly influential plans, they can make improvements.
“They have to keep making improvements in fact, because even participants in the high influence plan group on average are only at 64% income replacement,” Hooker said. “Notably, these plans have an average participant age of 43 years, so over time we hope to see the figure close in on 80%. What I am excited about is that our research shows that employers are really in the driver seat and they can really influence and empower the retirement outcomes of their workforce.”