Trendspotting
Health and Wealth
Employers are linking retirement and health benefits
“Health and wealth are converging,” says Shelby George, practice leader, benefits solutions at Manning & Napier, as both health and retirement plans have moved to more of a defined contribution (DC) approach. Employers are capping their contributions to the plans, and in turn employees are bearing responsibility for funding a larger portion of both their health care expenses and retirement income, according to a white paper by the firm, “Helping Employers and Employees Navigate the Health/Wealth Convergence.”
One telling example of the growing connection between health and wealth decisions is the impact of current health care costs on participants’ ability to save for retirement. As employers have shifted more of the costs for health insurance to employees, the latter have found it more difficult to sustain or increase their retirement plan contributions.
According to Bank of America Merrill Lynch’s “2012 Workplace Benefit Report,” when asked what would encourage them to save more in their 401(k), 73% of employees said more affordable health care. This was second only to increasing the company match. The growth in consumer-driven health plans suggests that, for many participants, as well as employers, deciding how to allocate savings dollars between retirement accounts and health savings accounts will be an important consideration going forward, the white paper said.
The Patient Protection and Affordable Care Act (PPACA) offers a chance for plan sponsors to evaluate their objectives both for their health care and retirement plans, according to George. The year 2015 will change the way employers approach benefits, and retirement and health regulations will travel on a parallel path. As health care reform takes shape, the retirement industry will have a responsibility to help plan sponsors understand the retirement plan implications to health decisions, she says.
The PPACA will bring many changes, among them a new benchmark with a lower baseline that may prompt companies to provide “less rich benefits,” George says. These changes will call for a holistic look at benefits that includes health care considerations and their implications for retirement plans.
If a company elects to provide “less rich” health care benefits, for instance, will employees perceive this as a cutback? The plan sponsor may then want to consider enhancements to the retirement plan offering to offset the health changes, George says. The PPACA may also prompt employers to move workers from full-time to part-time status, which, George stresses, would have immediate retirement implications.
Another intersection between health and wealth is the impact on employers of an aging work force compelled to keep working due to inadequate savings and/or the need to retain employer-provided health care insurance. Employers should be aware of rising costs related to an aging work force. Medical claim costs generally rise with employee age, and, for employees ages 60 to 64, average per-employee costs are more than double those for employees 35 to 39.
—Corie Russell
Agreeing to 1%
A majority of participants like a modest automatic escalation
Seventy-one percent of employees surveyed by State Street Global Advisors (SSgA) indicated that automatic deferral increases of 1% each year would help them save more. Seventy-four percent want employers to provide them with clear examples of how what they save today will pay off in the future.
“In many cases, employees think it’s a joint responsibility between them and plan sponsors to get them to adequate retirement savings,” says Frederik Axsater, global head of defined contribution (DC) at SSgA in San Francisco. He notes that 30% of survey respondents, including 37% of those ages 18 to 25, feel determining how much to save is a shared responsibility with their employer.
“Having an understanding of employees’ mindsets and priorities is the core of this business,” Axsater says. One of the key findings is that participants have high aspirations; they want to thrive, not just survive, in retirement.” To enable that, he says, the top three things employees want from employers are guidelines for how to invest, ideas about how to save and information on how to reduce spending.
Axsater also stresses the importance of making it easier for employees to enter and exit plans. Only 45% said enrollment forms were well-designed and easy to read, and just 32% said guidance from human resources was helpful. A mere 44% found it easy to transition savings when they changed jobs.
He notes that younger participant segments have unique attributes. Among this cohort, 27% cashed out their retirement savings when they changed employers—more than twice the percentage of the general population that did so. Very clear stats and work sheets about the effect of cashing out are particularly important for younger workers; employers need to show them other options when exiting the plan, including the power of compounding, Axsater says.
About one-third of survey respondents suggested they were 10 years or less away from retirement, and these employees also want guidance. More than half said their employers should engage with them more frequently as they approach retirement by sponsoring seminars, newsletters and webinars that focus on investing strategies for near-retirees.
According to Axsater, 48% of survey respondents approaching retirement would like help managing investments, 47% want information about events and circumstances that may affect retirement, and 46% admit they do not understand Social Security. He suggests that employers hold seminars to discuss retirement planning and other benefits, such as Social Security and Medicare, and provide work sheets and booklets that are easy to understand.
Plan sponsors can also create a community with social media for those closer to retirement. Axsater says plan sponsors should select the type of media—video, Facebook, etc.—best suited to the company, plan and participants.
“One key takeaway [from the survey] is plan sponsors are incredibly powerful in helping participants make the right decisions to achieve retirement readiness, and the survey shows that participants want sponsors’ help with saving and investing appropriately,” Axsater says.
—PA
529s and Student Debt
Making the case for higher 529 savings
Currently, as a solution for parents who want to avoid having their children take out college loans, 529 plans are not solving the problem—76% of 529 users also have student loans, notes Paul Curley, director of college savings research at Strategic Insight in New York. The average 529 balance is $16,000, which means that many parents with children headed for higher education will be fighting an uphill battle, since, over the past 10 years, tuition inflation has averaged 6.6% per year for public and 4.9% for private colleges, Curley says.
“The fact that parents use 529 plans and student loans means that they are not saving enough for college,” Curley says. “Advisers can help their clients realize that 529 plans are tax-advantaged vehicles that can help them save for college, avoid student loan debt—and not derail their own retirement planning.”
As 529 plans have been in existence for only 16 years, he says, “it’s up to advisers to educate clients on student loan debt, tuition inflation and 529 advantages.”
—Lee Barney
Relationships Key to Rollovers
Providers and advisers can benefit from good participant rapport
According to a LIMRA study, “Asset Retention: Keys to Success in the Rollover Market,” each year, more than $350 billion becomes available for rollovers as retirees and preretiree workers leave their employers. The challenge for plan service providers is to find ways for their company to keep plan participants’ money under their management.
“We found that nearly 40% of participants make the decision to stay with their current plan provider, either through a retail or institutional relationship,” says Matthew Drinkwater, associate managing director, LIMRA Retirement Research in Windsor, Connecticut. “It’s important for plan service providers to proactively reach out to participants. Those who have strong relationships and satisfaction levels with their plan provider are more likely to stay with them.”
The study found that several sets of circumstances influenced participants to stay with their plan:
- Preretiree terminations and retirees who were contacted by their plan provider when they left their employer were much more likely to keep their money with the provider;
- Personalized investment guidance and discussion of postretirement needs, in the years leading up to retirement, led many participants to keep their funds in the plan; and
- Individuals whose decisions to switch companies were influenced by provider-affiliated professionals were three times as likely to stay with the plan provider as those influenced by nonaffiliated professionals.
On the other hand, the study found that nearly half of retirees and preretirees have made no affirmative decision to keep their money in their current plan. Among those who rolled over assets with another company, many cited consolidation of assets as the reason. Similar to past LIMRA rollover studies, the “three Cs” of consolidation, control and convenience appear to be the top reasons for switching plan providers.
With rollovers to individual retirement accounts (IRAs) projected to grow to $575 billion, Drinkwater notes that it is worthwhile for providers to pursue assets. “An in-person visit or a phone call is more personal than an email or direct mail and works better in building a positive relationship,” he says.
Conducted in 2012, the LIMRA study surveyed 2,131 recent retirees and preretirees (ages 55 to 70) who terminated with their employer in the last three years, were involved in making financial decisions for the household and had at least $10,000 in their defined contribution (DC) plan at the time of retirement or termination.
—Kevin McGuinness
Making It Top of Mind
Getting participants to view retirement savings as a priority
Mortgage payments, credit card debt, college tuition—they all can get in the way of retirement saving, despite employees’ best intentions.
According to research from the Deloitte Center for Financial Services, “Meeting the Retirement Challenge: New Approaches and Solutions for the Financial Services Industry,” most Americans consider retirement their most important financial priority, but 40% of those surveyed said they are unable to save for it because of other financial obligations.
Next to retirement, the second most important financial priority—especially among older participants—is putting aside money for health care. This is not surprising, considering 70% of those surveyed said they expect their medical expenses to increase during retirement. Respondents said they were also concerned about long-term care expenses.
Plan sponsors and advisers cannot ignore these conflicting financial priorities, says Val Srinivas, research leader, banking and securities at Deloitte. “So it’s [about] understanding your own audience and … understanding their concerns,” he says. “The way I feel is, it’s minor tweaks and adjustments, not a wholesale change in the way employers communicate with their employees.”
Srinivas suggests that employers provide incentives for employees to attend financial education meetings; for instance, employers could offer free lunch or a monetary reward for attending. In addition, he says, plan sponsors and advisers can work to target different audiences and address their specific financial needs—a young employee might be worried about paying off student loans, whereas an older one might be concerned about health care.
—Corie Russell
Automation on the Upswing
More than half of sponsors use automation
Mesirow Financial Retirement Plan Advisory practice’s 2013 Retirement Plan Survey found that automatic solutions continue to play a key role in plan design, as approximately 55% of plan sponsors surveyed offer automatic enrollment features—a 5% increase from last year. Interest in step-up deferral rate solutions continues to rise, as 44% of respondents offer this as an option.
The rapid growth of target-date funds (TDFs) continues, as more than 85% of plan sponsors report using this type of solution—up 13 percentage points from last year.
In addition, the survey found that fee disclosure is top of mind: Nearly 88% of plan sponsors reviewed implicit and explicit plan fees in the past six months. However, participant interest in fee disclosure is surprisingly low, with more than 83% of plan sponsors indicating employees had few questions after receiving 404(a) participant fee disclosures.
“Plan sponsors continue to work diligently to provide the information and tools needed to help participants overcome the inertia and challenges of saving for retirement,” says Chris Reagan, senior managing director and practice leader at Mesirow Financial in Chicago. “However, in the end, each participant must take ownership of his future, and the reality is that many participants need assistance through custom guidance or a more paternalistic, automated solution.”
—Rebecca Moore
Engaging Everyone
Both engaged and disengaged employees need proactive communication
While employers typically focus on engaging nonactive and new employees, it is equally important to communicate with those already enrolled, according to Manning & Napier’s white paper “Increased Savings: The Best Risk Management Tool in the Retirement Readiness Equation.”
Participants who proactively enroll in their employer’s retirement savings plan likely recognize the importance of saving, the paper said, and engaging with them gives employers the opportunity to pass along valuable information to encourage them to increase their savings rates.
But it is easy for participants to delay increasing their savings rates in favor of what they consider more urgent responsibilities, such as paying for housing, food and student loans. This is probably why average contribution rates to defined contribution (DC) plans have remained low—ranging from 4.2% to 5.6%—among non-highly compensated participants over the past 20 years, the paper said.
Plan sponsors should target different age groups instead of using a blanket communication tactic, says Mary Moglia-Cannon, senior analyst and portfolio strategist at Manning & Napier in Rochester, New York. In addition, plan sponsors may want to consider basing communications around life events, such as getting married, buying a first home or paying for a child’s college tuition.
“We think plan sponsors are thinking about [communicating with employees] more than they ever have,” Moglia-Cannon says. When it comes to communicating with engaged participants, plan sponsors can also:
- Promote the use of voluntary automatic escalation features. Even highly engaged participants may set their initial contribution rate and fail to revisit the decision often enough as the demands of daily life get in the way, the white paper said. Features that make it easier for participants to automatically increase their contribution rates when they receive salary raises or bonuses can, in turn, improve savings rates.
- Alter employee match provisions to encourage higher savings rates. Participants commonly contribute only the minimum amount necessary to receive the full employer matching contribution. Because the employer match is a key motivator for participants to contribute to a retirement savings plan, employers should consider stretching the match to a higher percentage of pay. For example, the typical match of 50 cents on the dollar up to 6% could be restructured to 25 cents per dollar up to 12% of a participant’s salary, at no additional cost to the employer. It is becoming increasingly common to restructure the match, Moglia-Cannon says.
- Provide employees with helpful tools and tips. Arming participants with tools that help them gauge where they are on the path to retirement success can be useful in changing participant behavior and improving retirement outcomes, the white paper said.
- Provide holistic assessments of participants’ financial wellness. Plan sponsors are recognizing that participants need help with overall financial planning, not just guidance with their 401(k) account, the paper said. Plan sponsors should consider offering employees a broad range of educational products and services, from introducing basic finance-related concepts to help them make better decisions—such as to maintain a good credit rating—to supplying more personalized solutions, such as insurance and estate planning.
—Corie Russell