Ted Goldman, national retirement leader with Buck Consultants in Washington, D.C., tells PLANADVISER, “We’ve crossed the hurdle of plan sponsors not wanting to force participants to save, but the shortfall [of automatic features] is plan sponsors are putting participants in or increasing their savings at a low level and treating everyone the same.” Goldman says, in today’s world of big data and behavioral economics, the retirement industry knows more about participants and has easy access to information, so it should come up with features that make sense for individuals.
“What if we put people in at their right level for success in achieving the standard of living the want in retirement,” he queried. “Eight percent might be right for one, but 10% for another.” Buck has built a three-feature solution it feels could change the defined contribution (DC) retirement plan landscape going forward.
According to a Buck Blog, the solution:
- calculates an automatic retirement target and contribution schedule;
- determines automatic ongoing adjustments; and
- sets up an automatic payout schedule at retirement.
The technology used is based on a number of tested and proven behavioral economic principles such as status quo bias, choice overload, loss aversion and the endowment effect.
Goldman notes that with defined benefit (DB) plans, employers were able to manage their workforce into how they wanted them to invest and prepare for retirement, but they’ve lost that input as DC plans have become the primary retirement benefit offering. He explains that with Buck Consultants Savings InSight solution, the employer is brought back into the process.
Buck asks employers, at what target retirement age do you want employees to be ready to retire, for how long do you want to target payouts, and with what income replacement rate do you want to define “maintain standard of living?” With these parameters set by the plan sponsor, and knowing the plan formula for match, employee salary and whether the employee has a DB plan balance, Buck can project pay to retirement and investment returns and calculate what a participant needs to save, and for how long, to get to the projected payout.
Savings InSight shows this information to participants, who can let the system adjust their savings automatically or opt out. Goldman says Buck has built in a modeling tool, so if participants want to put in more information and figure out their appropriate savings rate themselves, they can do that. ”They may decide right now they can’t save at that percentage, but when they are in a better financial position, having this information will help them know how to catch up,” he explains.
Goldman says the solution also shows participants a spectrum of what they need to save to have just the basic minimum necessities in retirement up to what they should save to have a better standard of living than before retirement. This lets them know whether they are consciously making the decision to not save enough.
Buck recognized that a lot of the assumptions Savings InSight uses can change, so every year the system updates the calculation, and makes adjustments to participant savings as necessary. If participants are either perfectly on track or ahead of the game, Goldman says the solution will leave their rates alone; if they fall behind, the system will nudge them back on track by increasing their contribution. Again, participants may opt out.
“We are escorting them all the way to their retirement goal, helping people position as they truly understand what they need to do to reach their goals,” he states.
Finally, Goldman notes, once participants get to retirement, most plans just hand them a lump sum of money for them to manage on their own, but Buck has set up parameters to calculate how much to pay participants systematically up to ‘X’ number of years. Savings InSight also monitors the payout to see if it is still affordable for the participant, and adjusts it accordingly. The solution sets aside a cushion of money from the participants own savings from which they can withdraw if they need more at a particular time.
Savings InSight is a brand new solution from Buck, and it works with any kind of DC plan, Goldman says. There is a communication campaign that goes with it, and an online portal where participants can see their own information, use modeling tools and opt out or in to the system.
Goldman adds that on the investment side, Buck was intentionally agnostic. The firm recommends plan sponsors offer a qualified default investment alternative (QDIA) target-date fund series so good decisions are being made on participants’ behalf.
More information about Savings InSight is here.
More information about retirement readiness from Buck Consultants is here.