To Peter Kapinos, head of acquisition and retention marketing at Empower Retirement, the whole point of employer-sponsored retirement plans has to be helping participants reliably replace their income in retirement. Speaking at the 10th annual PLANSPONSOR National Conference, Michael Swann, director of defined contribution (DC) strategies, SEI Investments, said he looks to results—participants being able to retire when they want.
In thinking about how to get them there, Rennie Worsfold, vice president of Financial Engines, noted that many plans target a 10% savings threshold for participants. However, one in four people fail to take full advantage of their employer’s match, he said, and some studies suggest a total contribution rate of 15% to 20% is likelier to meet participant needs.
Understanding that participants probably will not make such large deferrals on their own, what kind of plan design features should sponsors adopt to do it for them?
The guiding principle should be “simplicity above all,” Kapinos said.
Swann broke the retirement process down to four steps for participant success: 1) Contribute early, often, and at a high enough level; 2) invest appropriately; 3) limit leakage from cash-outs and loans; and 4) turn accumulated savings into an income stream.
All three advocated for periodically increasing participants’ contributions, and many participants are open to having this decision made for them, as well. Among participants without auto-escalation in their plan, Kapinos said, nearly three in four reported being somewhat to extremely interested in this feature. When an annual escalation feature would not work for a given population, Worsfold suggests conducting a one-time increase. This is particularly helpful for at-risk groups, so consider alternative options for your plan to find what will most help your participants, he advised.
Once the money is in the plan, there is much debate as to what savings vehicle is best-suited to maximizing the risk-adjusted returns. Sponsors should look at their plan demographics for the answer to that question. For the people who would benefit from a target-date fund (TDF), Swann said they need to invest 100% in that option; total investors see a 2% annual benefit over partial investors. For the people who need something else, he said, it is up to the sponsor to build the best portfolio for them.
There is no silver bullet for all participants, but building a lineup to accommodate the three common tiers of investors—“do it for me,” “do it with me,” “do it myself”—can help, Swann said.
And, for all types of investors, Worsfold added, adviser access is most critical when the stakes are highest, close to retirement. Segment your population to ensure that you are delivering the right services to the right people.
NEXT: Making success the default
The key, Kapinos said, is to make success the default—“What is the path of our employees?” Start workers on the path to retirement as soon as possible, and do not neglect mid-career participants. Life can get in the way of long-term savings goals, and implementing features such as automatic re-enrollment and escalation can help workers get back on track if their savings hit a setback.
Sponsors can reduce leakage by adjusting their plan design, perhaps to allow only one loan outstanding at a time. A related problem is the treatment of account balances when participants leave a plan. Instead of taking a withdrawal or keeping separate accounts, Swann said, how do we make the default for participants switching jobs to transfer their assets between plans? He gave the example of one client whose newly hired employees were all given a roll-in form during a one-on-one meeting. When they left the company, the subject of another meeting was keeping their money in a plan—though, not necessarily that employer’s—instead of cashing out.
“We, as an industry, do not make it easy [to consolidate assets],” Worsfold noted, but new models for plan design could simplify participant moves.
Many providers currently look at catching the roll-in, Kapinos added, but are less focused on assisting with the rollout.
When it is time for participants to take their money out of the plan, sponsors should investigate in-plan annuity options and other draw-down solutions. Until there is a clear regulatory pathway or mandate, Swann said, adoption of these offerings will be slow.
Worsfold agreed that sponsors want guidance on annuities, but in the meantime, non-guaranteed periodic withdrawal products may bridge the gap. These do not require a fiduciary decision, he said, but can still help participants meet their new phase of life.
Finally, review your plan’s success metrics, Swann suggested, reminding the audience, “If you can measure it, you can manage it.”
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