PANC 2014: Plan Design and Behavioral Finance

Retirement specialist advisers used to sell the idea of getting participants engaged, getting them to allocate their savings appropriately—but today advisers must take a different approach.

That was the main conclusion of industry executives on the “Plan Design and Behavior Finance” panel, which convened on the second day of the 2014 PLANADVISER National Conference in Orlando. Today’s successful adviser is more likely to convince hesitant plan sponsors and client executives to implement innovative plan design strategies and to benchmark capabilities that can help plan participants overcome bad behaviors.

Panelist Matt Gulseth, a partner at independent retirement plan consulting firm Channel Financial, suggested advisers would do well to follow industry leaders who are integrating the principals of behavioral finance into their efforts to best serve plan sponsor and participant clients. He added that more effective client service strategies, perhaps counterintuitively, do not necessarily involve more frequent education and training meetings for plan participants.

“As an industry, we used to work under a paradigm that the participant needs to take action, so our efforts were about giving them the education needed to do that,” Gulseth said. “But now with the PPA [Pension Protection Act] and all the new regulations expanding ‘auto’ features and default investments, it’s much more about getting the right plan design in place and taking advantage of participants’ inertia, rather than working against it.”

Gulseth and other panelists said this approach clearly conflicts with older styles of thinking in the retirement planning industry, which tended to hold participant education meetings above all else in terms of what could be expected to move the needle on retirement readiness. And while it may threaten some advisers’ current value propositions, the shift away from education and towards smarter plan design “fits much more with the reality of the defined contribution [DC] system,” Gulseth said.

George Revoir, another panelist and senior vice president for distribution at John Hancock Financial Services, was quick to remind attending advisers that not all auto features are equal.

“We’re finally starting to admit that the investment menu and the diversification decisions, while important, are not going to matter very much if the participants aren’t saving enough,” Revoir said. “So in this sense, auto-enrolling the plan population at 3% of salary is not a solution to the retirement readiness problem, at least not without aggressive auto-escalation tied in.”

Pressed by an audience question, Revoir suggested that a “perfect” defined contribution plan would “auto-enroll above 10% and get the participants into an automatically balanced account through the qualified default investment alternative [QDIA].”

Although he said that his firm does “have some clients who are innovators and who really care about their employees’ retirement readiness, … this type of plan design often takes a big amount of convincing on the part of the adviser.”

This is where advanced benchmarking and articulate goal-setting become critical for successful advisers, said panelist Derek Wallen, senior vice president for defined contribution investment only (DCIO) at Fidelity Investments. It sounds obvious, he explained, but advisers that are willing to do a little number-crunching in setting the level of auto-enrollment and auto-escalation can create powerful plans for their clients. They can also build a compelling case to bring to client executives who may be skeptical about the importance or the possibility of improving retirement plan outcomes. 

“When you look across plans in the Fidelity database, and you look at the retirement readiness of people leaving those plans, it’s the plans that have made an effort to structure the plan design to give people a better chance of succeeding statistically that produce the best outcomes,” Wallen said.

So, step one is for the adviser to work with a client’s plan committee and executives to identify how much income replacement the plan is trying to achieve, he explained. 

“Whether it is 25%, 50% or 75%, this type of a goal is absolutely necessary to do quality plan design,” Wallen said. “At Fidelity, we think it’s got to be at least 50%, and 75% is probably better. But the point is that you need this type of goal to decide at what level you’ll auto-enroll the population and how significant the auto-escalation will be. If you go with auto-features but they aren’t going to meet your end goal, then what’s the point?”

Of course, convincing many clients to spend more on the retirement plan via more aggressive auto features will be a challenge at companies less concerned with their workers’ retirement readiness. In these cases the adviser can push approaches such as stretching the match, which involves lowering the rate at which the employer matches employee contributions to the retirement plan, while simultaneously increasing the percent of salary to which the employer match will apply. So instead of matching 50% of the first 6% of salary, the adviser can arrange a 25% match to 12% of salary.

“The bottom line is that, to be a successful adviser, you need to be empowered to aggressively address and push your clients on these things,” said Gulseth. “Lead them, don’t manage them, because they will be resistant to change based on fear of the unknown, fear that employees will revolt. But all the data we have suggests remarkably few people opt out of the auto features once they’re placed in the plan.”