Aggressive Plan Design

Specialist retirement plan advisers know full well what a robust plan looks like—it leverages the basic principles of behavioral finance and choice architecture to turn participants’ inertia into a tool for their own benefit. At minimum, a robust plan automatically enrolls most, if not all, employees at a meaningful deferral rate, well above 3%; automatically escalates their contributions by 1% or 2% a year up to a cap of 10% or 15%; automatically diversifies and rebalances their portfolio; and limits the number and total value of loans that may be drawn against their account balance.

While the formula is fairly simple, some plan sponsors resist discussions about aggressive plan design, due to misconceptions. Their arguments are likely familiar to any experienced defined contribution (DC) plan adviser and include unease about the potential to over-control employees’ finances and, among other concerns, about the increased cost of matching larger contributions.

One of the most powerful messages to deliver to timid plan sponsors, according to Joe Ready, head of Wells Fargo Institutional Retirement and Trust in Charlotte, North Carolina, is that they “can’t afford to not invest in their employees’ retirement.” The extent to which an employer is able to smoothly transition workers into retirement directly affects a company’s bottom line, through various pathways such as health care premiums and the development of the next generation of talent, to name only two critical factors.

Data provided by Prudential Financial underscores this point. In its report “Why Employers Should Care About the Cost of Delayed Retirements,” Prudential found that, for each individual unable to retire at the traditional age, the additional cost to the employer averages $50,000 a year—primarily the difference between an older worker’s salary at retirement age and what a younger person stepping up to replace him would earn. It goes without saying that older workers generally are more experienced and mature than their younger counterparts, potentially justifying their greater salaries, but, Prudential’s survey data reveals, the annual excess cost of salaries and benefits across a work force is an additional 1.0% to 1.5% a year.

Prudential’s analysis considers a company with 3,000 employees and work force costs of $200 million. A one-year delay in the average retirement age would cost the firm between $2 million and $3 million. A two-year delay would average an additional 2.2% in work force costs, and a three-year delay, 3%. In addition, health care costs for a 65-year-old are twice those for a worker between the ages of 45 and 54, Prudential says.

Arguments Against a Laissez-Faire Approach

Among those, for instance, is the worry that auto-enrolled employees could subsequently lose compensation in a market correction. While the Department of Labor (DOL) has a safe harbor already in place to protect plan sponsors from legal liability in this exact situation, some plan sponsors are hypersensitive to the prospect of any portion of employees’ salaries—or their own benefits spend—evaporating in the markets when those employees had made no direct decision to invest in the first place.

But this is the wrong way to look at the issue, Ready argues. He points to data taken from the 2017 Wells Fargo Retirement Survey, which describes a theoretical example of a plan participant who had been auto-enrolled into a target-date fund (TDF) and had built up a respectable balance of $50,000 prior to the market crash of 2008 through 2009.

“If we look at this participant, we see that he may, in fact, have lost money for the first year or two after the market crash, but since that time he has benefited from one of the longest and most stable bull markets in American history,” Ready observes. “If we make some very reasonable assumptions about deferral rates for this individual, say 7.5% of salary deferred per year going into [his] retirement account, the ending balance today would be north of $180,000.”

Ready says the conclusions that can be derived from these figures should reassure plan sponsors concerned about auto-enrolled participants suffering periods of loss in their retirement accounts. For those with any significant time left before retirement—and for older folks with a long-term retirement ahead of them, equally as well—it is simply better to be invested than to stay on the sidelines out of fear of loss.

“Even if you’ve been through the downturn of 2008 through ’09, so long as you were willing to stay the course and did not abandon your plan at the midpoint, you still have really benefited quite strongly from being invested over the last decade,” Ready says. “Plan sponsors and participants should constantly be reminded of the long-term nature of retirement investing and that staying the course and maintaining discipline will almost certainly lead to positive outcomes in the end.”

Ruminating on this complex set of issues, Bob Reynolds, president and CEO of Great-West Financial and Putnam Investments in Boston, suggests advisers can take another approach—fight to create “a new sense of a true ‘people’s capitalism.’”

What he means by advocating for a people’s capitalism is the idea that too few Americans have access to or even understand the basics of the financial markets. Particularly when it comes to tax-advantaged workplace retirement savings plans, which Reynolds sees as the most promising opportunity for most Americans to build real wealth and financial independence, access and knowledge are far too limited.

“Employers should be proud of and excited about the opportunity hey have to improve the financial lives of the people who work for them—and the economic health of the nation at large,” Reynolds says. “We know that the more savings you have in a society, the faster the growth rate of the overall economy. This seems counterintuitive because the invested retirement dollars are not going straight to consumption, but the growth comes because the money is injected right into the capital markets, and this, in turn, spurs on the economy.”

For Reynolds, talking about people’s capitalism means helping plan sponsors and participants alike “see this direct link from the retirement planning conversation to the growth and stability of the economy as a whole.” As described in Reynolds’ new book, “From Here to Security – How Workplace Savings Can Keep America’s Promise,” there is ample evidence to show that, should providing at least basic access to tax-advantaged workplace retirement savings be mandated for all employers, there could be some $5.5 trillion in additional savings injected into the U.S. capital markets over just the next decade.

“I don’t have to explain that such a large amount of additional investing would be a tremendous impetus for boosting GDP [gross domestic product] growth to levels we have not seen for some time,” Reynolds says. “This is why I am fully in support of things like open multiple employer plans [MEPs], as well as universal access in the workplace to payroll deduction individual retirement accounts [IRAs].”

The Role for Advisers Is Clear

“When there is a skilled plan adviser in place, we very reliably see participation levels go up, contribution rates go up and annual returns go up,” Reynolds continues. “And so, we know that the role of advisers in the business, working in close concert with providers and plan sponsors, has been greatly successful—and we need to continue this.

Reynolds further urges advisers to stay in contact with their elected representatives and stress the importance of protecting tax-advantaged retirement investing. Many industry insiders believe the less generous that the tax benefits associated with workplace retirement savings become, the fewer the people who will be attracted into the system. While there are analyses showing after-tax retirement investing can still be very powerful for long-term wealth generation, “just as important are the optics and the messages being sent by legislators,” Reynolds says.

Further highlighting the important role of advisers in this conversation, Jordan Burgess, head of specialist field sales overseeing defined contribution investment only (DCIO) sales at Fidelity Institutional Asset Management, in Boston, points to results of the firm’s eighth annual Plan Sponsor Attitudes survey, which revealed that a sizable majority of plan sponsors (65%) are highly satisfied with their plan advisers.

However, similar to the last several editions of the survey, Fidelity reports that a record number of sponsors are actively looking to switch their plan advisers—nearly four in 10 (38%), up from 30% last year. Many of them say they are looking for advisers who can speak about and help implement more aggressive plan designs.

Even with the strong marks they received from plan sponsor clients, Burgess warns, this is not the time for advisers to lie back and rest on their accomplishments. “While most plan sponsors remain satisfied with their adviser, they are raising their expectations,” he explains. “For some advisers, this could put their business at risk. For others, it could be an opportunity to win new clients.”

Burgess says the data is clear: “Successful plan advisers are those who are aware of their dual mandate to help plan participants achieve their retirement outcomes and to support plan sponsors with the challenges associated with offering a defined contribution plan and other employee benefits.

“Our study shows that plan sponsors are making more plan design changes than ever before and are eagerly engaging with advisers to do so,” he concludes. “Plan design reform activity continues to increase and reached a new high at 92%, with plan advisers seen as the primary influencer of these changes. Importantly, 79% of plan sponsors reported that participants were satisfied with the changes made recently to their plan.”

KEY TAKEAWAYS:

• Perhaps the most impactfulpowerful argument an adviser can make to a plan sponsor to adopt aggressive plan design is the flip side of not doing so: having a work force that cannot afford to retire.
• For sponsors worried aboutthat automatically enrolling participants into a plan beforeduring a market downturn, advisers should help them realize the buoyancy of markets over time.
• A Fidelity survey of plan sponsors found that they are beginning to expect their advisers to recommend more assertive plan design, and, if he fails tothey don’t, they are strongly considering replacing him.