The Great Divide
When retirement plan advisers and plan sponsors benchmark a 401(k) plan, they often examine very different factors. “There is a major disconnect between how they measure a 401(k) plan’s success,” says Bruce Gsell, managing director, wealth management, and senior financial adviser at Merrill Lynch in Edison, New Jersey.
“Many sponsors will talk about what their participation rate is, whether their highly compensated executives can contribute all that they want to, and sometimes they will talk about diversified portfolios,” Gsell says. Investment performance and fees are also foremost concerns of many sponsors, advisers say. “But,” Gsell continues, “if I ask them how many of their participants are financially well and on track for an 80% or 90% retirement income replacement ratio, most of the time they cannot tell me. It is our job to educate sponsors on participant wellness.”
Indeed, the 2012 PLANSPONSOR Defined Contribution (DC) Survey found that nearly one-third of plan sponsors (28.0%) have no process in place to measure the success of their plans. For those sponsors that go to the trouble of benchmarking, the vast majority fail to go the full distance when it comes to determining whether their employee base will be adequately prepared for retirement. The most common gauge of their plan’s success is the participation rate, cited by 43.5% of sponsors. That is followed by the comparison of the deferral rate of highly compensated and non-highly compensated employees (28.4%), the percentage of employees who save at least as much as the company match (19.8%) and how their plans measure up against plans of similar sizes and industries (19.7%).
Only 11.3% of plan sponsors in the 2012 DC Survey were concerned as to whether employees’ portfolios had appropriately diversified asset allocations; a mere 8.8% cared whether their employees took advantage of advice; and just 8.6% checked to see if employees had increased their deferral rates in the past 12 months. Factors that retirement plan advisers increasingly agree are the most critical measurements of plan success are at the very bottom of the totem pole for plan sponsors: participants’ projected retirement income ratio, cited by just 4.9% of plan sponsors, and projected monthly income, a factor that only 3.3% of plan sponsors consider.
As for advisers, 83.4% consider participation rates, and 66.3% review deferral rates, according to preliminary results from the 2013 PLANADVISER Adviser Experience Survey. Nearly half (44.5%) examine the percentage of participants with appropriate asset allocations; 40.3% look at participants’ projected retirement income replacement ratio, and just a little more than a quarter (26.0%) observe participants’ projected monthly income. More than a third (36.8%) look at how a retirement plan’s design benchmarks against similar plans; 29.3% gauge the percentage of participants who have increased their deferral rates in the past 12 months; 27.9% are concerned about employees’ satisfaction with the plan; and 18.3% assess the percentage of participants who use advice tools or take advantage of seminars offered through the plan.
Boosting auto-enrollment and auto-escalation rates to reach contributions of at least 10%—or even as high as 15%—of income is emerging as an important method of helping participants meet their retirement goals. Providing participants with a hard-dollar projected monthly retirement income figure along with a percentage of the salary they are on track to replace in retirement is another way to help participants visualize their progress. Advisers increasingly agree that these are the most meaningful ways to measure a plan’s success since, after all, the point of a 401(k) plan for participants is to equip them with enough savings for a dignified retirement.
“Five years ago, plan consultants began talking about plan benchmarking,” says Mary Moglia-Cannon, senior analyst and portfolio strategist at Manning & Napier in Rochester, New York. “Three years ago, a few plan sponsors began talking about plan benchmarking.” Now it is up to plan advisers to help plan sponsors fully—and meaningfully—benchmark their plans and their individual participants’ retirement readiness, she says. “There is so much more that plan advisers can do to help plan sponsors achieve total plan success,” Moglia-Cannon says. “It means convincing plan sponsors that the objective of the 401(k) plan is to secure adequate, inflation-adjusted savings for each plan participant. We have a long way to go.”
The good news, says Harry Dalessio, senior vice president and head of strategic relationships for Prudential Retirement in Hartford, Connecticut, is that “there is a lot of opportunity for advisers to engage their clients and drive stronger outcomes.” Top retirement plan advisers are already “first movers” on guiding their plan sponsor clients to a more meaningful assessment of their plans and improved retirement readiness, Dalessio says.
Advisers are beginning to really analyze the participant base to increase savings rates and provide better retirement security, he says. “We also see more advisers not just focusing on the accumulation phase but on the decumulation phase and retirement income, as well as providing non-qualified options for executives and, in general, taking a holistic approach for better outcomes,” Dalessio says. “We expect the conversation—ultimately focused on outcomes—to broaden and become a far greater, more imperative conversation in the industry in the next few years, with advisers providing additional value to prepare American workers for retirement. That is the biggest trend that we see.”
So how can advisers motivate their plan sponsor clients to run their 401(k) plans more proactively, with improved outcomes for their employees in mind?
Sponsor Buy-In
The first thing is to get the sponsor to realize how preparing its employee base for retirement can dramatically impact productivity and morale, as well as the company’s bottom line, says Susan Conrad, vice president at Plancorp Retirement Plan Advisors in St. Louis. “A financially distressed or older employee can cost $2,000 a year in increased health care costs and lower productivity, not to mention increased time off and workers’ compensation,” Conrad says. “When employees are engaged in the 401(k) plan and feel they are in charge of their financial lives, there is a direct benefit back to the corporate bucket in real dollars.”
By showing plan sponsors how prepared their labor force is for retirement and revealing how their 401(k) plans benchmark against plans of similar sizes and industries, advisers can help “plan sponsors recognize the value a 401(k) plan can bring to their corporate structure,” Conrad says. “Besides fees, it is time for advisers to talk about the health of the plan and employees, and how a well-run plan can positively affect their corporation.”
The next step is convincing the sponsor to employ automatic enrollment, automatic escalation and re-enrollment—and to do so at meaningful levels that will get employees’ savings up to 10%, 15% or more, says Prudential Retirement’s Dalessio. “Advisers need to get sponsors to help their employees optimize their 401(k) plan through higher savings rates, diversified asset allocation and adequate retirement income replacement ratios,” Dalessio says. “They need to bring a macro focus on optimizing the plan, bringing many of the best attributes of a defined benefit [DB] approach.”
Kathleen Connelly, executive vice president of client service at Ascensus, a recordkeeping and plan administrative company based in Dresher, Pennsylvania, agrees: “In the not too distant past, the primary criteria for determining a plan’s success was investment returns and participation. Today, there is a much better realization among advisers that you can have a very high participation rate, but if everyone in the plan is saving 2% or 3%, it really doesn’t matter. You have to look at the whole picture and get sponsors to ask whether their participants in the plan are setting themselves up to meet their future goals, and that means employing a combination of higher participation and deferral rates, examining their allocations, looking to see whether they are heavily invested in stable value or properly allocated so that inflation isn’t going to win from the beginning.”
This means that besides working with the plan’s investment committee, administrative committee and human resources (HR) department, advisers need to work closely with the finance department’s chief financial officer (CFO) or treasurer, Moglia-Cannon says. For those sponsors concerned that higher participation in the plan and boosting automatic enrollment and automatic escalation will cost the company more, advisers can help them stretch their company matches, she says. Advisers can also discuss the sponsor’s total benefits budget, including health care, and reconfigure how the dollars are spent or potentially shift to a high-deductible health care plan paired with a health savings account (HSA), she says.
“There are people in the finance department and the C-suite who are aware of the value to the company of offering robust benefits,” Moglia-Cannon says. “It’s up to advisers to get them to think more broadly.”
But changing sponsors’ mindset toward their 401(k) plans is not easy, says Keith Kotfica, principal of retirement with Buck Consultants in New York. It requires a concerted effort by retirement plan advisers. “Retirement readiness is growing in importance, but getting sponsors to invest is still a challenge,” he says. “What can plan advisers do to get plan sponsors to up the ante? They can present thorough analysis of the costs of different plan designs and matching schemes that optimize employee participation. They can create service level agreements between sponsors and recordkeepers that incent outcomes that are aligned with improved retirement readiness.”
In fact, recordkeepers increasingly offer calculators and tools that show sponsors and participants their replacement income figures and percentages, says Paul Hendrickson, director of retirement services at First Western Trust in Denver.
“Plan sponsors historically looked only at participation rates as a measure of success, with a goal of driving that up close to 90%,” Hendrickson says. “More recently, sponsors have begun looking not only at participation levels but at average deferral percentages as an indicator of retirement readiness. Many recordkeepers can project replacement income, incorporating Social Security and other accounts, and if you can get deferrals to 10% or higher, participants will be able to replace a sufficient amount of income in retirement.”
In May, for instance, ADP released the ADP Plan Health Review tool, which enables plan sponsor clients to measure the retirement readiness of their employees and to easily take action to improve outcomes by looking at participation rates, deferral rates, investments and use of loans and withdrawals. To improve outcomes, the tool suggests steps such as adjusting the plan design, changing investment options or further educating employees about how maximizing contributions can dramatically improve their retirement readiness.
Showing plan sponsors how their plans benchmark against those of similar sizes and industries, particularly how many of their employees will be prepared for retirement, equips plan advisers with the rationale to get plan sponsors to dramatically improve their plan designs, says Connelly. For example, Ascensus has a license agreement with Fiduciary Benchmarks Inc. to measure hundreds of plans, allowing “advisers to these plans to step up and measure [them] meaningfully against others in the marketplace—not just costs, but also plan complexity, features, design and outcomes. Benchmarking is a tremendous way for an adviser to deliver value.”
Finally, advisers should go a step beyond robust plan design and automatic features to offer education, advice and seminars to get participants actively engaged in their plans and concerned about their retirement future, Gsell says. “The most successful plans offer seminars and independent third-party advice through one-on-one meetings along with websites and call centers,” he says. Some plan sponsors may resist investing company and employee time in these educational efforts, Gsell says, but the “results are fantastic”—and it’s the adviser’s job to demonstrate this by talking about other plan sponsor success stories.