Closing the Gap

America is about to see, for the first time, a generation of workers whose majority is without pension plans and that has much of its savings in 401(k)s. Although many people rely on their 401(k) plans, unfortunately, too few believe they will meet their retirement savings goals—and that disconnect is problematic for many in the retirement plan industry. PLANADVISER spoke with John Guido, division vice president at ADP Retirement Services, about how he believes plan sponsors, advisers and providers can work together to change that equation.

PA: How and why has “retirement readiness” become such an industry buzzword? 

Guido: I think simply because multiple research studies clearly indicate that there is a delta between what Americans have saved for retirement and the dollars they indicate they will need. One statistic from the Society for Human Resource Managers indicates that nearly 70% of people say they’ll rely on their 401(k) in retirement, while according to a survey conducted by AARP only about 13% feel they’re ready to meet those retirement savings goals.

So, Americans understand the importance that their 401(k) plans have in saving for retirement, but there remains a significant gap in believing their accounts are adequately funded to meet their retirement objectives. Therefore, plan sponsors, financial advisers and providers need to arm participants with the information and tools necessary to help them understand the dollars they will in need in retirement, how much they have saved in their 401(k) account, to highlight savings gaps and outline steps to help them close the delta.

ADP Retirement Services is recognizing that challenge and creating some new tools for our sponsors and advisers to use, not only to assess where the plan is but where individual participants stand in relation to their retirement savings goal and what actions to take to begin to close any existing gaps.

PA: What are some of the inputs, if you will, into this gap analysis? In other words, how are we as an industry determining whether people have enough savings? 

Guido: I think there are some key components: an individual’s current age, salary, and savings rate—plus assumptions like replacement income amount retirement age, life expectancy and whether he is maximizing his retirement plan. That last component includes questions such as: Is he maximizing contribution amounts into the plan? Is he taking full advantage of a company match, if offered by the plan? And is he well-diversified across the investment spectrum and evaluating that investment selection on a regular basis relative to his age and risk tolerance?

When evaluating the maximization of plan design, we ask a few questions: Is the participant aware of how much he can defer? Is he knowledgeable about the relatively small impact incremental increases in saving have on his current take-home pay but the significant positive influence it has on savings over the long-term? Is the participant diversified in the context of his risk tolerance?

Over the last several years, we’ve seen the emergence of target-date funds and the benefit they have in helping participants to diversify. But we continue—certainly here at ADP—to have multilayered education programs available so that plan maximization stays at the forefront of the participant’s mind, as opposed to just setting it and forgetting it.

PA: How do you as a recordkeeper consider these factors to help plan sponsors evaluate their retirement plans?  

Guido: We do not take a one-size-fits-all approach. At the plan sponsor level, we’ve developed a Plan Health Report. Plan health is about getting the plan sponsor to evaluate the health of their plan relative to their peers. This report allows plan sponsors to evaluate their plan relative to industry benchmarks such as savings rates and deferral rates in their industry and size peers.

If improvements are needed, the report provides an action plan that indicates specific steps the plan sponsor can take. And then, at the participant level, there’s a specific gap analysis report to identify where the problem might lie and specific steps for how to act on those deltas.

Where ADP identifies disparities in current plan performance versus what we think the plan’s performance could be, we offer clear actions the plan sponsor can take to make improvements. In some cases, those improvements are related to plan design—for example, a plan that currently does not have an auto-enroll feature might benefit from auto-enrolling participants. In other cases, it’s education of participants, around items such as auto-escalation, so that every time a participant receives a salary increase, he pays that into his 401(k).

The second component of our overall plan evaluation is a gap analysis, which is done on a plan and a participant level. Across a plan, the gap analysis focuses on projecting savings needs and savings gaps based on an assumed retirement age and replacement income amount. That level of benchmarking can clearly indicate to the plan sponsor whether there’s a delta and where that is—such as across the board for the plan or in particular demographics of the company—so that we can be selective in actions to take.

At the participant level, there’s an aggressive push to show individuals where they are today and where they need to be at the normal or expected retirement age in simple terms, like a monthly amount. The personalized communication—which may indicate future expectations, based on a participant’s current salary, deferral rate and the company match—can encourage a participant to maximize his deferral or consider other options like working longer or using available retirement planning tools and resources.

PA: When are you going to make these reports available?  

Guido: Our new reports will be available to clients in the fall, when most calendar-year plans are conducting year-end planning.

We expect our plan health report to facilitate meaningful conversations with our clients and with our adviser partners. Because our report communicates relative and useful information, we believe our clients will have a better understanding of the plan improvements that can be made that put participants on the path toward retirement readiness.

Where improvements might be made at the participant level, we’re going to take a similar approach. Without any one plan or participant in mind, we feel the best way to get people to take action is to take action ourselves. So, we’re going to get these reports to participants on a regular basis, with the idea that the more familiar and comfortable they are with the estimates of how much they may have to live on in retirement based on their current savings rate, the more likely they will take action.

PA: What is the role of the adviser in helping plan sponsors improve their retirement programs?  

Guido: We consider the financial advisers that we work with and that work with our plan sponsors as a true extension of the service delivery chain—a true collaboration.

The goal is to make the plan the healthiest it can be and to make it as easy as possible for the participants to maximize the benefits. So to that end, at the plan sponsor level, we work hand in hand with the adviser in the best interest of the client and participant to—where applicable—take action where we can lighten the burden of the client.