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Best Use of TDFs

Only half of plan sponsors use target-date funds as the default.

The third biannual survey of plan sponsors by AllianceBernstein found that more than half of them offer target-date funds (TDFs) but not as a qualified default investment alternative (QDIA). The funds provide safe harbor protection for sponsors and often offer better asset allocation for participants than they might get if constructing their allocation on their own.

Of the 50% of sponsors offering a target-date fund but not using it as the default, 83% have no default or still use a stable value fund, an equity fund or a bond fund—none of which are QDIAs—as the default.

The survey also found that the majority of midsize- and large-plan sponsors fail to leverage their assets to provide more specialized or customized target-date funds:

• 22% of large-plan sponsors (having $250 million or more in assets) and 21% of midsize-plan sponsors (having $1 million to less than $250 million in assets) reported that they have adopted customized TDFs;

• 36% of large-plan sponsors said they have neglected to adopt customized target-date funds because they were unaware of the benefits of improved structure.

Struggling

“Even in the wake of a continuing decline of Social Security and defined benefit [DB] plans as primary sources for retirement income, our recent research shows that many plan sponsors are still struggling to find the best way to structure their DC [defined contribution] plans,” says Joe Healy, head of AllianceBernstein’s Defined Contribution Client Experience. “While more and more sponsors recognize the benefits of offering an age-based, asset-allocation investment solution to their participants, they fail to realize valuable fiduciary protections by not designating these funds as their plan’s default.”

According to the survey, the size of plan assets directly affects sponsors’ goals for target-date funds. More than half (54%) of sponsors of large plans and 43% of sponsors of midsize plans said the goal of their TDF is to ensure that savings last through participants’ retirement years—a goal expressed by just 32% of small-plan sponsors. Forty-one percent of small-plan sponsors said the goal of their TDF is to ensure a minimum acceptable level of savings at retirement.

More than one-third (37%) of midsize-plan sponsors were concerned about improving participation, while only 28% of sponsors of small or $500 million-plus large plans were concerned. Small plans have the lowest participation rates (30% or less) while large plans have the highest participation rates (86% or more).

AllianceBernstein’s plan sponsor survey was conducted among 1,018 respondents nationwide, representing small plans (with assets of less than $1 million), midsize plans and large plans.

—Kristen Heinzinger    

Getting Younger

More than half of participants are from Gen X and Y.

Generations X and Y account for 55% of participants in defined contribution (DC) plans administered by MassMutual, according to third-quarter 2012 data. Only 41% of the participants in these plans were Baby Boomers; however, Boomers still control the most assets (61%). Gen X and Gen Y hold 31% of defined contribution plan assets on MassMutual’s platform.

The data analysis also found that the percentage of MassMutual’s total participant assets in age-based and risk-based options reached an all-time high during the third quarter of 2012, accounting for 26.6% of total defined contribution plan assets under management. Gen Y participants (born between 1982 and 1995) held 49.8% of those assets, versus 29.8% held by Gen X (born between 1965 and 1981) and 22.6% held by Boomers.

Gen X participants had the highest allocations in equities (45.6%) for the quarter ended September 30, compared with Gen Y (32.2%) and Baby Boomers (38.4%).

Women continued to favor age-based investments far more than risk-based options, at 72% and 28%, respectively. Men remained more divided, with approximately 52% in age-based versus 48% in risk-based investments. Average account balances for women grew 3.92% for the quarter, compared with 4.17% for men. Average account balances for women were behind those of men by 38.4%, an improvement from 40.5% in late 2010.

“Not surprisingly, Gen Y savers are taking full advantage of asset-allocation investment options,” says Elaine Sarsynski, executive vice president of MassMutual’s Retirement Services Division and chairman and CEO of MassMutual International LLC. “We are so pleased to see that younger generations appear to understand the importance of starting early to save for retirement.” 

—Kristen Heinzinger 

DEAD IN THEIR TRACKS

The two biggest obstacles to retirement saving are the economy and ineffective education.

“Times are tough, and many Americans are struggling to make ends meet,” says Chris Augelli, vice president of product marketing and business development at ADP Retirement Services. “And the list of demands on their financial resources is long: paying the mortgage, health care expenses, month-to-month bills, keeping up with rising energy costs, child care and saving for your child’s education. The list goes on and on.”

As a result of competing financial goals and obligations, a seemingly distant event such as retirement can easily end up as the last priority.

The second barrier to retirement saving is ineffective communication and education. Americans understand they need to save more but frequently are unclear how to go about doing that. “Engaging employees in meaningful conversations about their retirement readiness is critical in spurring them to take the appropriate actions to improve their personal retirement outcomes, which also achieves the reciprocal goal of creating more satisfied and productive employees in the workplace,” Augelli says.

In 2011, ADP commissioned Chatham Partners to conduct a follow-up study about employee education, which found that plan participation increased sharply following an employee education enrollment meeting. The results indicated, on average, a 19% boost in participation rates for plans that held a meeting after moving their 401(k) program to ADP.

For most plan sponsors, it is challenging to find useful content, and then the time teach it. The key to overcoming these barriers is leveraging the expertise and resources of their retirement provider and their financial adviser, Augelli says.

Education should not be approached as a one-size-fits-all solution. Plan sponsors and advisers should keep in mind that people learn in different ways, and what may be effective for one person could be ineffective for someone else.

The effectiveness of education also depends on the generation of the audience being addressed, Augelli adds. Research from the Enterprise Council on Small Business (ECSB) found that people in Generations X and Y prefer online or mobile access to interactive educational tools. Older employees, on the other hand, prefer to receive information more directly, from mail, email or in-person meetings.

“At the end of the day, the effectiveness comes down to the key to any successful presentation—know your audience,” Augelli says. 

—Corie Russell 

Put it on Paper

Three out of four adults prefer getting retirement plan information in hard-copy form.

Asked if they had to make a choice between receiving retirement plan information on paper or electronically, only 23% would want to get this information via email with a link to an online website, a survey from the AARP found.

Interestingly, the preference for paper was overwhelming for all age groups, even those who use the Internet daily, according to the survey of 1,028 adults ages 25 and older, conducted by Social Science Research Solutions. However, those ages 50 and older are more likely to prefer paper (84%) than those less than 50 (66%).

Of respondents with email addresses, 70% said they would be likelier to read their retirement plan documents if they received them on paper, and another 73% said they would be likelier to save hard-copy reports.

Currently, just 7% of respondents receive retirement plan documents in electronic format only. The majority (62%) get the information on paper only; just over one-quarter (27%) get the information both online and in hard copy.

The AARP said it commissioned the survey in response to pending legislation, including U.S. House of Representatives bill H.R. 4050, which would permit plan sponsors to make electronic delivery of retirement plan documents the default.

“AARP has long had concerns about this approach, and our new survey indicates that the public shares those views,” said Cristina Martin Firvida, director of financial security issues for AARP Government Affairs. “Retirement plan participants of all ages overwhelmingly prefer a policy that requires retirement documents to be delivered in paper form, with an option to choose electronic delivery—rather than the other way around.” 

—Lee Barney 

One-Third Not Saving

Many sit on the retirement savings sidelines.

A survey by Capital One ShareBuilder found 54% of respondents plan to retire by age 65, but 36% have yet to contribute actively to a retirement plan, and more than one-quarter (26%) are unsure how much they need to save.

While confidence in the ability to save for retirement has improved (33% claim to be more confident than they were a year ago), nearly one in four (23%) are concerned they may never save enough to retire.

In addition, 23% of respondents say they plan to never fully retire. One in four (25%) Americans plan to work part-time during their retirement, and that percentage increases closer to retirement age, with 40% of Americans ages 55 to 64 saying they will work part time. One-third (33%) of Americans plan to maintain their current lifestyle, while 17% expect to make sacrifices and 11% to improve their lifestyle; 38% said they are uncertain what lifestyle they will lead.

Among factors preventing Americans from saving for retirement, college tuition (20%) topped respondents’ lists, followed by job loss (10%) and daily household bills (14%). More than one-third (37%) of Americans say nothing has impeded their ability to save for retirement.

The national phone survey was conducted within the U.S. by TNS, on behalf of Capital One ShareBuilder, among 1,000 adults ages 18 and older.

—Kristen Heinzinger 

Effective Retirement Programs

Taking a financial wellness approach.

During a webinar sponsored by Retiremap and Retirement Playbook Inc., Matt Iverson, director of Boulevard R, noted that, if an employer fails to actively help its employees save for retirement, those who linger on the payroll will increase its health care costs—not to mention cost more in terms of higher salaries.

An employer can receive a return on investment of three-to-one with a financial wellness program, according to data from the Personal Finance Employee Education Foundation (PFEEF), said Trisha Brambley, a partner at Retirement Playbook Inc. Helping employees feel financially secure also improves their engagement and productivity and, therefore, can improve a company’s operating income, she said.

Employers should adopt a financial wellness program that goes beyond addressing retirement readiness, said Brambley, adding that financial stress tops the list of anxiety sources for employees and stress is linked to physical illness.

Again citing data from PFEEF, Brambley said the most common behavioral changes in participants in financial wellness programs are that they review the allocation of their assets, decrease their expenses, use more online financial tools, reduce credit card debt and increase deferrals to their retirement plans. Ninety-nine percent of those who participated in a financial wellness program said it is an important employee benefit; 98% said they are better prepared to make financial decisions; and most said they will create a budget and save more for retirement as a result of the program.

According to Iverson, education should engage employees around their goals. However, retirement is not the best hook. Instead of giving them a total savings need, ask what they would like to do in retirement and show them how much of that will be achievable with what they are saving. In addition, Iverson noted, many employees are thinking more about shorter-term savings objectives, such as buying  a home or financing their children’s­ college educations.

Rather than present employees with a dollar amount for what they will need in retirement—a figure that could be discouraging—employer education programs should show them how what they save monthly accrues over time, Iverson said. He pointed out that traditional education methods—using brochures, provider tools and group presentations—have shown little impact on employees’ savings behavior.

The program should have multiple components, Brambley said, such as one-on-one meetings, mailings and online tools, and employers should use incentives or raffles to get employees to participate or should make attendance mandatory.

Iverson’s firm created Retiremap
(retiremaphq.com), which features an online component using email activation links but also comes as an iPad application, employed in 30-minute on-site workshops. Iverson said employers can create a keynote presentation and link it to a provider’s site, download the keynote to iPads and set up iPad kiosks. 

Employers should measure the success of their education program to optimize content and know what topics to cover, he concluded. 

—Rebecca Moore 

DCs Power Back

The 2008 stock market crash wiped out trillions of dollars in DC retirement accounts.

When the stock market eventually bottomed out in the first quarter of 2009, defined contribution (DC) retirement accounts lost about $2.7 trillion—31% of their peak 2007 value—according to a brief from the Urban Institute. Using data from the Federal Reserve’s 2012 Flow of Funds Accounts and the Russell 3000 Index, the organization found that, despite the ongoing turbulence in the stock market, DC account balances have increased since 2009, reaching $9.5 trillion at the end of the third quarter of 2012—9% above their peak value in current dollars but still 1% below their peak when adjusted for inflation.  

The report said individual retirement accounts (IRAs) account for the majority of defined contribution account assets. With the stock market crash, their share increased from 54% to 58% between the start of 2007 and of 2009.  

The impact of the stock market crash was even more dramatic for defined benefit (DB) plans; the report said DB assets declined 37% from their peak 2007 value. In contrast to DC accounts, DB accounts have not fully recovered from the recession. In the third quarter of 2012, their value was still only when $2.3 trillion—15% below their peak 2007 value in current dollars and 23% below value when adjusted for inflation.  

The Urban Institute speculates that defined benefit plan freezes since 2007 contributed to this shortfall. 

—Rebecca Moore 

Metamorphosis

The evolving goals and designs of DC plans.

While having a high participation rate is still viewed as the best indicator of a plan’s success, that significance is decreasing, according to Diversified’s “Report on Retirement Plans 2012: Bridge to Your Retirement Success.”

In 2012, 52% of plan sponsors believed participation rate to be the best indicator of plan success—down from 58% in 2011. During that same period, the number of plan sponsors selecting average deferral rate as the best indicator of plan success climbed to 20%, from 14% in 2011.  

Nearly all large corporate plan sponsors (95%) offered a fixed or discretionary employer contribution. Among those offering a fixed contribution, 84% used a matching formula. The two most common such formulas were: dollar-for-dollar on the first 5% to 6% of pay (which 20% of plans used), up from 11% in 2011, and 50 cents on the dollar on the first 6% of pay (which 17% of plans used), up from 15% in 2011. 

More than half (53%) of all large corporate 401(k) plans offered financial advice, and an additional 33% were considering making this available. The use of automatic enrollment and automatic-deferral increases also was growing. Forty-five percent of large corporate 401(k) plan sponsors had started employing automatic enrollment, and 40% were considering it. 

Automatic deferral increases had been implemented by 30% of plan sponsors, and an additional 43% were debating adding this feature in the future. However, among plans taking advantage of automatic enrollment, 58% enrolled partic­ipants at a default deferral rate of 3% or less—far lower than the 6.7% average deferral rate for self-enrolled participants.

The percentage of employees at large corporations who participated in their employers’ 401(k) plans remained  unchanged since 2011, at 69%, and the average deferral rate dropped sharply from 8.8% in 2011 to 6.7% last year. With deferral rates falling, 56% of plan sponsors reported that motivating employees to save adequately was “extremely” or “very” challenging, surpassing keeping up with regulatory challenges (52%), helping participants invest wisely (43%) and meeting fiduciary responsibilities (38%).

According to Diversified’s report, 95% of all large corporations offered a 401(k) plan, all offered some type of defined contribution (DC) plan, and 80% offered a defined benefit (DB) plan. However, evidence that many sponsors will probably terminate their defined benefit plans was widespread—only 42% of defined benefit plan sponsors stated they probably would continue offering DB plans to all employees over the next five years. Thirty-five percent expected to continue offering DB plans to existing employees but not new employees; 13% were likely to freeze active DB plans; and 10% believed they would terminate active DB plans during this same period.

Thirty percent of all defined benefit plan sponsors indicated that the plan’s impact on company financial statements was their primary concern, narrowly edging out the financial health of the plan, which was singled out by 26% of all sponsors. Other top concerns included the company’s long-term commitment to the plan (15%), investor concerns about the plan (14%) and employee appreciation of the plan (12%).

Other highlights: 

• Nearly half (45%) of all defined benefit plan sponsors had created a DC plan as a DB plan replacement;

• Fifty-three percent of large corporate plan sponsors had used an adviser—a trend likely to grow, as 19% of plan sponsors expected to hire an adviser within the next 12 months;

• On average, large corporate 401(k) plans offered 13 investment options in 2012—up slightly from 12 in 2011;

• Seventy-six percent of large defined contribution plans offered investments that are proprietary to the service provider;

• Among large corporate plan sponsors, the benefits budget for all retirement plans—defined contribution, defined benefit and nonqualified deferred compensation (NQDC)—was nearly equal to the health care budget—34% compared to 32%, respectively; and

• Just 20% of all plan sponsors believed participants understood their plan’s fees “very well.” Forty-six percent stated participants understood fees “somewhat well,” and 34% reported that participants did not understand fees. 

The “Report on Retirement Plans 2012: Bridge to Your Retirement Success” survey was completed in the second quarter of 2012 by more than 270 individuals responsible for the administration of retirement benefits in a company with more than 1,000 employees. 

—Rebecca Moore 

Getting Personal

Explicit investment ­recommendations trump general guidance.

A TIAA-CREF survey found that Americans need individualized advice, with one in five saying that relevant financial counsel is difficult to find. Of those, 51% said they do not know where to look, and 74% said they are unsure which sources they can trust for financial advice.

The survey also found that the desire to seek advice and take action differs based on age, gender and other individualized factors.

Respondents ages 18 to 34, or Generation Y, showed more interest in getting financial advice than any other age group surveyed. Four in 10 said they frequently look for financial advice. Gen Y also was more apt to report making changes after receiving advice, and nearly 60% said they tend to use online tools to make them.

Women respondents were more likely than men to face challenges finding financial advice, the study found. Nearly half of women surveyed believe personalized, objective advice will cost more than they can afford, and more than one-third said they lack the time to search for it. However, women were more likely than men to take action on advice received, with nearly 90% reporting that they do so at least some of the time.

According to the results, Baby Boomers were the most apt to report financial advice very difficult to find. Furthermore, only one in three Boomers stated that they consistently act on the advice when they get it.

“The fact that people are not consistently acting on the advice they receive comes as no great surprise,” says James Nichols, senior managing director of Advice and Planning Services at TIAA-CREF. “People are all too often inundated with information telling them to save more, cut costs and plan for retirement, but how you go about that differs for every person.”

The survey was conducted by KRC Research by phone among a national, random sample of 1,006 adults ages 18 years and older. 

—Kristen Heinzinger 

How Sponsors Choose Advisers

Recommendations are still the name of the game.

According to “Insights on Closing the Sale,” more than half of plan sponsors reviewed at least five advisers in their search to hire one. While 81% of plan sponsors actively sought advisers through recommendations or referrals from colleagues, peer organizations or retirement plan service providers, less than one-quarter of plan sponsors responded to an adviser solicitation.

When asked what criteria they used to initially screen potential advisers, plan sponsors most often cited personal fit/sales process (60%), followed by pricing (53%) and experience/expertise (44%), with previous relationship (5%) least frequently cited.

When selecting an adviser from among those considered as finalists, plan sponsors continued to most frequently cite personal fit/sales process (55%) as an attribute leading to their decision.

Other attributes—most notably pricing—were greater factors when the adviser lost the bid than when he won it.

The study is based on conversations between Chatham Partners and plan sponsors whose plans collectively represent more than $6 billion in assets.

—Kristen Heinzinger 

Passive Fund Assets Soar

Assets nearly doubled between 2008 and the first half of 2012.

According to Matthew Pickering, an analyst at Cerulli, in the aftermath of the 2008 financial crisis, investment managers have increased passive investment options by 95%. “The volatile economy and emergence of ETFs [exchange-traded funds] have both been drivers in the steady increase in passive flows into mutual funds and ETFs,” Pickering says. “In fact, both are growing at a significantly higher rate than active mutual funds over the same period.”

In the “Retail Products and Strategies 2012” report, Cerulli examines how managers feel about the shift toward passive investing, and how this shift will change their product and distribution strategies.

“In an industry in which many of the world’s largest managers have built their brands using an active management strategy, offering passive investment products is likely to cause managers to make major organizational changes,” Pickering says.

“Active mutual funds still account for more than three-quarters of the industry as a whole, so investors are not completely shifting to passive investment options,” he says. “However, passive mutual funds are currently positioned to have their highest inflows ever this year, quickly approaching their highest yearly total of $69 billion in 2007, so there is a strong shift.”

Many of the largest managers in the industry are finding value in providing advisers with both active and passive mutual funds and ETFs, and have constructed their distribution strategies in order to offer a wide array of investment options. 

—Jill Cornfield 

Full-Time Advantage

Access to a retirement plan varies by industry.

Nearly two-thirds of private-industry workers have access to a retirement plan. Access also varies significantly by major occupational group, full- or part-time status, bargaining status and wage category, according to data from the U.S. Bureau of Labor Statistics (BLS). Management, professional and related occupations have nearly twice the access rate and more than three times the participation rate of service ­occupations.

Similarly, full-time workers had nearly twice the access rate and three times the participation rate of part-time workers. Union workers showed very high access (92%) and participation (85%) rates for retirement plans.  

High-wage workers (those in the top 25% of all wage earners, with earnings at or above $24.81 per hour) had significantly higher rates of access and participation in retirement plans than those of low-wage workers (those in the lowest 25% of all wage earners, with earnings at or below $10.69 per hour). High-wage workers had access rates of 85% and participation rates of 75%. In other words, 89% of the high-wage workers who were eligible for retirement benefits participated in the plan (known as the take-up rate), a significantly higher share than the take-up rate of 45% for low-wage workers.   

Workers in large establishments (500 workers or more) had a retirement participation rate that was more than twice that of workers in small establishments (less than 100 workers). In addition, the take-up rate for workers in large establishments was 20 percentage points higher than the rate for workers in small establishments.  

—Rebecca Moore