Providers Can Help Improve Retirement Plans
Speakers at the 44th Annual Retirement & Benefits Management Seminar, hosted by the Darla Moore School of Business at the University of South Carolina, and co-sponsored by PLANSPONSOR discussed capabilities retirement plan providers offer for plan design and participant outcome issues selected by the plan sponsor audience.
Stephen J. Smith, vice president, Institutional Markets, Transamerica Retirement Solutions, noted that the industry is moving toward simplification for participants, and plan sponsors want simplicity too. Making sure employees can save and invest easily is the reason qualified default investment alternatives (QDIAs) and target-date funds (TDFs) are so popular, he said. Plan sponsors can simplify investment lineups for themselves and participants by revisiting how many core funds to include.
W. Robert Phillips, senior vice president, Consultant Relations, BNY Mellon Investment Management, said providers are helping plan sponsors with trends such as indexation, moving to custom TDFs, and white labeling investments. He noted that a lot of fee compression activity is concentrated on how to get a cheaper investment menu. One way is through using indexed funds; one way is to use different share classes. But, Phillips warned, plan sponsors should be careful of what the consequences are; choosing investments just to lower fees may not be in the best interest of participants.
He explained, on a high level, that the difference between A shares and R shares is that A shares share more revenue with brokers and fund companies, so they cost more. But, plan sponsors may want an A share because it produces enough revenue-sharing to pay for recordkeeping. In addition, if considering indexed funds, plan sponsors need to determine which indices are best for participants.
Among providers, more traditionally defined benefit plan investments are creeping in to custom TDF solutions, according to Phillips. Non-style box investment options are being used, such as real assets, unconstrained bond, and absolute return. The same is true for white labeled investment solutions. With white labeling, plan sponsors may offer one fund with a generic name, such as ‘Large-Cap Growth,” which uses a multi-manager approach. Phillips noted that this may help plan sponsors replace under-performing managers more quickly and with less disruption to participants.
He warned that even with these simplified choices, plan sponsors still need to monitor investments to help participants succeed. Phillips suggested the industry may need to reconsider quarterly, rather than daily, valuations of participant accounts, to help reduced knee-jerk investment reactions. “Nothing in the law says DC [defined contribution] plans have to be daily valued. They are supposed to be a long-term savings vehicle,” he said.
Trends in Measuring Plan Success
Smith told seminar attendees that plan success measures have moved away from how many employees are in the plan—which is still important—to participation in combination with savings rate. “Ninety-seven percent participation with an average deferral rate of 1.5% is not successful,” he said. But, success is different for every employee, so plan sponsors need to be more proactive in evaluating the retirement readiness of participants, he suggested.
“Tools are out there to measure success; plan sponsors just need to ask their provider if they offer the capability,” said Kevin Kidwell, vice president, National Non-Profit Sales, OneAmerica.
Measuring success can inform plan design. Kidwell suggested looking at the employee base; “If, on average, employees only stay with the company for five years, how should the plan be designed?”
Smith agreed the plan should be designed appropriately for the group of employees. “Should you auto enroll, what should be your QDIA, and what services may or may not help employees, should they get one-on-one advice?” he queried.
Smith told attendees the biggest impact they can have on participant success is to provide financial literacy. And, employers should get Millennials involved. “Retirement isn’t usually talked about at all until someone gets to middle age, and in the defined contribution (DC) plan world, that is way too late,” he contended.
Other factors are affecting retirement savings decisions, added Kidwell. For example, since enactment of the Patient Protection and Affordable Care Act (ACA), more plan sponsors are moving to DC health plan offerings. “Employees can’t decide how much to defer into their retirement plan. Now they are asked to decide that and how much to defer into health savings accounts (HSAs),” he said.
Smith contended that HSAs are going to become part of participants’ overall retirement savings.
“When talking about retirement readiness, we’re talking about a participant’s net worth, not just account balance,” Kidwell said. “Financial wellness helps people with all financial decisions.”
Another trend for which providers are preparing is education at retirement. “It’s a role employers are going to have to begin to take,” said Smith. “They can’t continue to say, ‘The employee left. I have no more obligation.’”
Phillips said there will be more focus on total retirement education, including education about non-traditional ideas like reverse mortgages.
Plan sponsors must find unbiased people to talk to participants about what to do with their assets when they exit the plan, Smith contended. They should offer alternatives that do not benefit the person educating participants. “Older workers cost employers more money, so they need to help employees retire, educate them about their options, push them to retire and offer advice,” he added. “Employees want that type of help; they want to be told what to do.”
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