Reconsidering the Status Quo

The passage of the Pension Protection Act of 2006 (PPA) ushered in a new era of automatic plan design features. Many plans—and many advisers—embraced the plan design, and it seemed poised to be the new normal.

However, while large and mega plans use automatic enrollment at levels of 61.7% and 63.7%, respectively, just 41.1% of plans overall auto-enroll their employees, according to the 2016 PLANSPONSOR Defined Contribution (DC) Survey. Further, advisers, as well as the rest of the industry, have discovered that, although auto-enrollment has gone a long way toward convincing people otherwise uninterested in joining the plan, to save, the feature is not the ultimate solution some had hoped it would be. Most plans—the PLANSPONSOR survey indicates 45.0%—still default participants at a paltry 3% deferral rate. That, coupled with the inertia that keeps participants from adjusting their accounts—and a low take-up of automatic escalation by plan sponsors (17.5%)—keeps savings rates low.

Thus, forward-thinking advisers now recognize the need to actively engage with their plan sponsor clients, have them show participants the importance of their plan, which may mean talking to them about more than just retirement.

Auto-enrollment and -escalation “have created good outcomes, or at least better outcomes,” says Ed Farrington, executive vice president and head of retirement at Natixis Global Asset Management in Boston. “But there is some danger in thinking they are the panacea. When we look at people who are automatically enrolled and fast forward a few years, 67% of them never change their investment election, and it is possible that not all of them were put into the right investment or deferral rate.”

Farrington says another issue is the transactional nature of the plans. Natixis research found that 33% of people have tapped into their 401(k) “to use it as if it were a checking account, either through a loan provision or by taking a lump-sum withdrawal” when switching jobs.

Jeb Graham, retirement plan consultant and partner with CapTrust, Tampa, Florida, says the conventional wisdom about plan design and participant education has continued to evolve. In the 1990s, advisers tried to educate participants about investments, and, since 2000, the focus has moved to automatic features and to saving vs. investing.

Today, plan sponsors are becoming more interested in getting their participants engaged in their plan and motivating them to care about preparing for retirement, Graham says. “More plan sponsors are willing to take on the responsibility for their employees’ retirement,” he says. “One of the reasons for that is [sponsors’] perceived fiduciary responsibility and another is the fact that many of the retirement committee members themselves are Baby Boomers approaching retirement.”

One topic under discussion is how to help plan participants make decisions, and whether automatic plan features should be replaced with active choice, or enhanced active choice (EAC), elements. Punam Keller, Ph.D., Charles Henry Jones third century professor of management, Tuck School of Business at Dartmouth College, says the problem with automatic plan features is they fail to teach the participant about the connections between their decisions and taking responsibility. EAC can make participants accountable for future decisions and prompt them to save more, she says.

She notes that active choice mandates that a participant make a decision about whether or not to participate, much like what happens with health plan enrollment at companies. With EAC, the enrollment choices are augmented beyond “yes” and “no,” to, for instance, “Yes, I want to enroll, knowing it will help me enjoy a comfortable retirement,” and “No, I don’t want to enroll, even though this could help keep me from living a lifestyle of poverty in retirement.”

First Things First
Still, people will be unable to adequately save for retirement unless they get their financial house in order first, says Kent Allison, a partner in PcW’s private company services practice in New York City. He points to the increased interest in financial wellness initiatives and programs. “The whole movement around financial wellness is the recognition that if you don’t focus on other financial issues besides saving for retirement, you could be undermining the plan, because there are issues with leakage out of the plan,” Allison says. “Advisers can’t just speak to retirement. In order to get participants to participate in the process, advisers need to help them get their spending under control.”

In fact, the PwC 2017 Employee Financial Wellness Survey found that 53% of employees feel financially stressed, he says. Asked what financial wellness means to them, 20% of respondents said it is equally being unanxious about their finances, being debt-free and having enough savings to cover unexpected expenses. Sixteen percent said it means meeting day-to-day expenses. Only 4% said it is being able to retire when they want to.

One-quarter of those surveyed are not currently saving for retirement. Of that group, 65% blame this on having too many other expenses, and 50% blame it on being in debt.

Advisers need to help sponsors realize that these financial stress points have a direct impact on their bottom line, Allison says, because 48% of employees who are worried about their finances say these issues distract them at work, and 43% are planning to postpone their retirement. In this way, financial wellness has a definite return on investment (ROI), he says.

It does appear that sponsors are beginning to get the message. Eighty-two percent of financial executives believe their company will benefit from having a financially secure work force, and 78% think they should assist employees with achieving financial wellness, according to a survey by CFO Research and Prudential Investments.

Tackling Financial Wellness
The interest in financial wellness has led to a new marketplace and area of growth in the industry. An Aon Hewitt survey found that 7% of employers already have a financial wellness program, and 16% plan to add one this year. The interest has also led to much confusion about what  “financial wellness” actually means and the best approaches to achieving it, according to sources.

To develop a robust financial wellness program, “the first step is to understand the needs, constraints and underlying demographics of the employee base,” says Joshua Ulmer, corporate retirement director at Morgan Stanley in Portland, Oregon. “Once the employer and its service providers are armed with this information, they can shape an employee engagement or financial wellness campaign in a much more customized fashion.”

The campaign should embrace just a few key tenets, Ulmer says. Generally, it should be relevant to life stages and financial situations, and be comprehensive but simple.

Topics that a financial wellness campaign should include, he says, are “credit and debt management, with an emphasis on credit cards and student loans; saving and creating a budget; different savings vehicles, such as a traditional vs. a Roth 401(k); investments; homeownership; risk management; education planning; retirement planning; retirement income and distribution planning; Social Security; and health care.”

Thirdly, Ulmer continues, it should stress how employees benefit from working with the program, and it should keep them engaged. Lastly, it “should be delivered in a flexible manner across several media, such as web, email and paper,” as different individuals want to receive information in different ways.

Another approach, according to Brian Hamilton, vice president of financial wellness at SmartDollar in Nashville, Tennessee, is that financial wellness programs should start by first addressing debt. “Forty-seven percent of Americans could not come up with $400 to pay for [an] emergency without having to borrow from their 401(k) or another source,” Hamilton says. “This is why companies are picking up on financial wellness. They are starting to connect the dots—that broke people don’t leave their problems at home and they aren’t retiring on time. Businesses are looking for financially healthier employees because it impacts their bottom line.”

The online SmartDollar program, based on the Ramsey Solutions program, is paid for by the sponsor, the adviser or the recordkeeper and is personalized for the individual, based on demographic questions and 10 personal questions, such as the person’s top financial goals, Hamilton says.

SmartDollar has found that participants “waste 24% of their take-home pay on debt,” Hamilton says. The SmartDollar program aims to help people get rid of that debt quickly and create a $10,000 to $15,000 emergency fund. “Then, it is very easy to save 15% for retirement,” he says. “Now you have a qualified participant, whereas, for the past 30 years, we had been asking broke people to save for retirement. These unqualified participants are the reason why automatic enrollment and escalation didn’t move the needle.”

Beyond financial wellness programs, one-on-one meetings with participants are essential and can also address some of the same challenges in a personalized manner, says Brian Catanella, first vice president and institutional consultant with UBS Wealth Management in Philadelphia. “We are all for individual conversations,” he says. “We want to take into account personal aspects that automatic enrollment can, in no way, factor in. There are so many components that, if you don’t factor them in, you are taking a broad shot rather than a sniper shot,” he says.

These one-on-one meetings are the perfect time to present participants with their projected retirement income and gap analysis, Catanella says. “Engaging with the participant on retirement readiness is of huge importance. People don’t stay at the same job, so you want to ask them about their other savings or retirement holdings.” And, if they see there will be a shortfall, “there is a shock value” that inevitably will prompt them to up their savings, he says. “This is a great opening to a discussion about saving more.”

Advisers can also prompt sponsors to conduct email campaigns highlighting the importance of planning properly for retirement. “Employers play such a critical role in helping their employees prepare for retirement that any small action on their part can make a difference,” says Catherine Collinson, president of the Transamerica Center for Retirement Studies, in Los Angeles.

“Advisers also need to ensure that the plan sponsor is taking advantage of all of the tools and communications programs available from its provider, and to lean on the provider to do some of the heavy lifting to engage employees,” she says.

Other Areas of Engagement
Another approach that has proven effective at getting participants to engage in their plan and save more is to show them how increasing their deferral rate affects their paycheck, says Edward Dressel, president of Retire Ready Solutions, producer of the gap-analysis tool TRAK—The Retirement analysis Kit— in Dallas, Oregon.

People can be pleasantly surprised by how much a small increase in deferrals can improve their savings, agrees Diana Jordan, director of client experience at Unified Trust Co. in Lexington, Kentucky. A person earning $40,000 a year who increases his deferral by 1% would see only an $11 decrease in take-home pay per paycheck, Jordan says. “For someone age 35 who continues that saving through age 67, that would add up to $11,000,” she says. Underscoring the value of the company match is another way to get participants to appreciate their 401(k) plan, Jordan adds.

Managed accounts are yet another means by which advisers can engage participants in their plan, because the accounts are built on specifics the investment manager asks about the person, such as his risk levels, the age at which he wants to retire, and the percentage of his income he wants replaced in retirement, Jordan says. “The more information we have about a person, the better job we are going to do,” she says.

Natixis Global Asset Management believes that participants could be inspired to save more and be more engaged in their plan if it includes environmental, social and governance (ESG) or socially responsible investing (SRI) funds, says Ed Farrington of that firm. He cites a participant survey that found 78% said such a plan is a positive thing to improve the world while growing their investments and that 62% said they would be more apt to increase their 401(k) contributions if they knew their investments did social good.

Emphasizing other benefits, such as health savings accounts (HSAs), is one way that Dan Peluse, director of retirement plan services at Wintrust Wealth Management in Chicago tries to attract the attention of the participants he serves. “HSAs have become a little bit more of a hot topic, and we are working to help participants understand their value and how they can work in conjunction with the 401(k),” Peluse says.

All of these strategies can be successful in inspiring participants to take notice of their retirement plan, understand its importance and increase their savings, says Joshua Ulmer of Morgan Stanley. Ultimately, he says, “a more engaged employee base translates into more retirement-ready employees, which means the employer stands to benefit by way of lower health care costs, reduced absenteeism and unclogged career paths.”

For more on how to discourage plan loans, click here.

Art by Yuko Shimizu