Data & Research September 24, 2013

PANC 2013: Changing the Focus

Fees may no longer be the loudest voice in retirement plan discussions, said panelists at the PLANADVISER National Conference in Orlando, Florida.
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The focus is increasingly moving from fees to outcomes and helping plan sponsors determine benchmarks for their retirement programs, said Stace Hillibrant, managing director of 401K Advisors LLC. Since 1981, when 401(k) plans were meant just to supplement defined benefit (DB) plans, meeting after meeting has taken place, but everyone agrees that we haven’t raised the bar, Hillibrant said. “We’re at the precipice of some major changes in this industry,” he added.

Participants need help understanding how to better prepare for retirement, Hillibrant said, and plan sponsors need help deciding which benchmarks to use. But the details of indexes and funds are not the keys. The question is, how will plan sponsors determine whether their plans are successful? “How do we get from where we’ve been to where we need to be?” Hillibrant asked.

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The industry has undergone slow but logical change, said Chris Augelli, vice president of product marketing and business development at ADP Retirement Services. “It took time for people to understand the DC [defined contribution] world,” Augelli said. Moving from the DB to the DC world was a monumental shift that has changed the industry’s focus from the employer to the employee level of retirement readiness and outcomes.

Investments, fees and fiduciary management are still key issues, said Paul Temple, vice president, director and national sales manager of DCIO (defined contribution investment only) at OppenheimerFunds Inc. “You can have the best of the best and still be failing with contribution and participation rates,” Temple said.

Plans are viewed more holistically now. Temple offered the example of issues with savings rates and designing a plan mitigate problems, perhaps by stretching an employer match by matching 50% of the first 4% of contributions. “We’ve always talked about participants leaving money on the table,” Temple said. “Plan design can be used to help them increase their contribution rate to 8% or 10%.”

Fees and investment reviews receive less emphasis, said Steven Geisert, vice president of the defined contribution practice at PIMCO. Plan sponsors are revisiting the entire structure of plans, asking how to raise contribution rates and weighing auto features. Sponsors who do not want auto-enroll are examining whether education or different investment lineups can help plans.

“Look at the history of the DC core menu,” Geisert said. From its original one investment option, it grew to hold three, then six, 12 and up to 20 options or more. But more plan sponsors are examining investment offerings to discuss eliminating some options, since a higher number of funds correlates with a lower participation rate.

Behavior and Engagement

Behavioral finance is increasingly used to study participant behaviors and methods of engagement. Citing Shlomo Benartzi’s “Save More Tomorrow,” Hillibrant pointed out that people in their 20s—the iPad and iPhone generation—are among participants with the highest plan “stickiness,” possibly because they saw how poorly prepared their parents were, or are, for a comfortable retirement.

Benchmarking has helped sharpen the focus on outcomes, Temple said. “Firms receive feeds of data from recordkeepers and get great details about plan participants,” he said.

DC plans will undergo increasing “DB-ification,” Geisert said. Pension plans, without the same litigation and communication issues of DC plans, outperform DC plans, in part because they can invest in options sometimes unavailable in the DC space. “The other side of equation is that the pension was built for building income,” Geisert said, and DC plan sponsors also want to generate income.

The ideal 401(k) plan, Geisert said, would be a more holistic retirement benefit plan, designed to generate income, and with strong use of auto features.

Adoption is stronger in the larger plans, according to Augelli, and auto features need to be optimized at higher rates among all plan sizes. “Participants need to understand what it is they are saving for,” he said. “We are not yet talking sufficiently about outcomes, making sure participants have the information about health care costs, how to balance paying for children’s education and other goals with saving for retirement.”

According to Hillibrant, advisers and plan sponsors have to connect the dots. “People will stay in those higher deferral rates and participate at higher levels if there is a payoff,” he said, adding that if participants are not made aware of the need to prepare for retirement, contributions simply become one more paycheck deduction.

After PBS’ Frontline aired a documentary about retirement plan fees, Hillibrant said he received dozens of calls. (See “Documentary Critics: Inaccurate Portrayal of Fees.”) “Thousands of things were written about how terrible the program was,” he said, “but it got people talking about retirement readiness.”

Data & Research September 24, 2013

Most Women Hand Financial Reins to Men

Women are making progress when it comes to greater engagement in the family finances beyond simply budgeting for daily household expenses, according to Fidelity Investments’ fourth “Couples Retirement Study.”
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The number of women claiming primary responsibility for day-to-day financial decisions jumped to 24% in this year’s study (up from 15% in 2011), and those claiming primary status for long-term retirement decisions more than doubled to 19% from 9% in 2011.

However, the findings also reveal many women are still less confident when it comes to investing, and routinely defer to their partners on important financial decisions. While couples overwhelmingly believe they are in agreement about finances—nine in 10 couples (92%) agree they communicate well, and eight in 10 (81%) describe themselves as “one financial entity”—when asked to assess their confidence level in taking full financial responsibility of retirement decisions from a spouse if necessary, many women are more confident in their partners’ ability than their own.

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In addition, men are more likely than women to be very confident in their own ability (53% vs. 45% of women). Women, in turn, are more likely to be confident their “other half” could assume this role (52% vs. 43% of men). Surprisingly, younger women tend to be the most deferential of all.

“While a lot of progress has been made, it’s critical for women to empower themselves by becoming equal partners managing the family finances and in long-term financial planning conversations,” said Kathleen Murphy, president of Personal Investing at Fidelity.

According to the study, working women reported earning average salaries of $77,000 a year. Despite their advancements in the workplace and increasing income levels, it’s not always translating into greater engagement, and lack of confidence may be a contributing factor. For example, the study showed that among couples who work with an adviser, when asked why their partner is the primary contact, women are likely to say because they trusted their partner and perceived him as being “better with numbers.” Other factors might include that couples are dividing household tasks based upon perceived strengths or interests, or perhaps repeating behaviors and habits they observed in their own parents.

Ironically, research shows that women are often more disciplined investors and tend to stay the course once a financial plan is crafted. They also tend to be more consistent, conservative, and risk-averse investors. For example, the women in this year’s survey are much less likely than the men to be willing to invest a substantial portion of money to achieve potentially higher returns, even if it means possibly losing some or all of initial investment (4% vs. 15% of men).

The 2013 "Couples Retirement Study" also examines the behaviors of Gen X (born 1967 to 1978) and Gen Y (born 1979 to 1988) couples. Surprisingly, even though more than three-quarters of these younger women are working, they appear to be playing a more passive role than older women. While one in four Boomer (born 1946 to 1966) women (24%) identify themselves as the primary decision maker for day-to-day financial decisions, only 12% of Gen Y women feel the same way. Only 45% of Gen Y women say they are a joint decisionmaker when it comes to retirement savings decisions, compared with 58% of Boomer and Gen X women.

The 2013 Fidelity Investments “Couples Retirement Study” analyzed retirement and financial expectations, and preparedness among 808 couples (1,616 individuals). More information about the study is here.

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