“A 360 Degree Approach to Preparing for Retirement,” a report commissioned by Principal Financial Group, brings together a review of all the players that affect a retirement plan and its participants: asset managers, plan sponsors, advisers and the participants themselves. And, according to Julia Lawler, senior vice president at The Principal “all say the exact same thing: Participants aren’t saving enough for retirement.” The report explores products and guidance that address gaps in the U.S. retirement system.
A good retirement outcome is the goal, Lawler told PLANADVISER. To achieve this, “advisers need to spend time with plan sponsors helping them to think through strong plan design. It’s not just picking investment options, it’s how plan design can help participants achieve good retirement outcomes,” Lawler said.
In previous research, The Principal has noted that plans with auto enrollment outperform those without. Those plans that auto enroll with a 6% deferral outperform those with a lower default. Plans that default participants into a target-date fund are more successful in retirement outcomes than those that do not.
Lawler would like to see more education inside the plan. Participants who engage with a financial adviser or professional are likelier to demonstrate positive financial behaviors, and education is the answer, Lawler said, for participants who feel squeezed financially with competing financial needs.
Plan sponsors cannot just hope participants will sign up or actively engage with the plan, Lawler said. “They’re probably not likely to.” While inertia can drive participant behaviors that are positive, such as not opting out of a plan, Lawler said plan sponsors must continue to actively point out to participants how they are doing. “Things change for an individual, and the need someone to show them along the way how they are progressing,” she noted.
Products that Address Outcomes
Next, asset managers must offer innovative products. “Outcome-based solutions are clearly what we need to focus on,” Lawler said. The new focus is adding income features to the decumulation phase. After making it easy for participants to get into a plan and getting them to save more, and using diversified solutions, participants need to think about outcomes. What will they need at retirement? What income do they hope to achieve?
Last is getting participants to take advantage of the plan they’ve been offered and to engage fully.
Factors that keep plan participants from becoming more financially secure and preparing adequately for retirement vary, depending on who is analyzing the reasons. According to financial advisers who participated in the survey, the following are top constraints:
- Not saving enough (74%);
- Not starting to save early enough (70%) (starting to save too late); and
- Living beyond their means (69%).
Plan sponsors answered the same question, identifying the top constraints of plan participants as:
- Not making retirement preparedness a high priority (68%);
- Inadequate education, guidance and support at the workplace (66%); and
- Lack of “retirement readiness checkups” at the workplace (63%).
The report concludes with best practices in plan design, education and retirement planning strategies.
“A key theme throughout the report is how the four distinct stakeholder groups each have clear responsibilities within the retirement value chain, whether in the form of education, planning, product innovation or plan design,” Lawler said. “We’ve had enough information and enough surveys. We need to take action.”
The report is based on a survey of 148 asset managers, plan sponsors and financial advisers with active involvement in the 401(k) space. The respondents had combined assets under management totaling $15 trillion. The survey was followed by 30 interviews with a cross-section of respondents.
The full report is available on The Principal’s website.