Thus began Steve Anderson’s keynote speech at the 10th annual PLANSPONSOR National Conference. Anderson, head of Schwab Retirement Plan Services Inc., recounted the State of Nevada’s initiative to open a 529 college savings plan for every kindergartener in the state’s public schools. Research has shown that children with a college savings fund are up to seven times more likely to pursue their degree. Armed with that promising data, plus funding from individual donations, the state was able to put $50 in each account.
Whatever their savings goal, Anderson said, “We need to have those individuals engaged with that process, but we know that can be challenging.” For the Nevada kindergarteners, taking that first step on the path to a college degree shows that someone has confidence in them, a fact that may change the lens through which they view their own prospects.
Participant outcomes and engagement are interrelated, Anderson argued, and adopting a smart plan design can drive engagement, not just supplement it. If participants receive positive feedback about their account, they are more likely to take positive action, and it becomes a virtuous circle.
“We have tremendous opportunity to influence the next generation of retirees,” Anderson said. There is a shift taking place in the retirement industry, and plan sponsors can be at the forefront of the next stage of investment evolution. You may not be able to control participant behavior, he said, but you can control your plan’s design.
NEXT: Investment evolution
Over the past few decades, retirement plans have changed from defined benefit (DB) to defined contribution (DC), have added automatic enrollment, placed participants into target-date funds (TDFs) as their qualified default investment alternative (QDIA), and even annually increased contributions through auto-escalation. Looking ahead, Anderson said, managed accounts, not target-date funds, should be the end goal.
The average participant reduces his equity exposure over time, and the average target-date fund does the same, according to its glide path. That makes sense, Anderson said, until you ask yourself how many of your participants are really “average.” How do plan sponsors decide what glide path is best for their participant population, and how many variations do they typically consider when making that selection? Target-date funds may only really benefit the median plan member, whereas managed accounts can accommodate individuals who would be better served by holding more of their assets in equities for a longer period of time, as well as those who may maintain lower risk even from a comparatively younger age.
A 25-year-old who stays enrolled in a managed account throughout his career can see up to a 40% increase in his income at retirement, Anderson said. Interestingly, at another session, one panelist noted that savers who invest 100% in their target-date fund see a 2% annual benefit over their partial-investor peers.
Target-dates make it easy, Anderson said, but when everyone starts doing the same thing, that may be the best time to think about making a change.
NEXT: Automating advice
More than four in five participants (83%) are interested in receiving professional financial advice, Anderson continued, but when Charles Schwab made advice available in most of its plans, just 4% elected the service proactively. When participants were placed in an advice program, similar to auto-enrollment in the plan, 86% stayed in the solution and received advice automatically.
Advice is one of the main components of plan design, he said, along with approach, investment expenses and financial wellness program. Viewing those factors along a continuum of participant outcome optimization, Anderson sees value in providing a personalized savings and investment strategy. Computer-based modeling can be a cost-effective means of delivering this service, but few participants are benefitting from these sophisticated, yet simple, products. Individuals’ age, gender, health and state taxes all determine how much they will need to fund their lifestyle in retirement. You may not be able to sit every participant down with an adviser, Anderson said, but you can put them in a portfolio that will serve that function.
With managed accounts, “there is certainly cost involved,” he admitted. When considering this option, then, sponsors must ask themselves what trade-offs they currently make and what they are willing to do next to best serve their participants.