Effects of Increasing Retirements on Employer Plans

Figures from the Bureau of Labor Statistics show one-fifth of the U.S. work force has either retired or is nearing retirement age (see “Many CFOs Unconcerned About Boomers Retiring”).

When asked about how this decrease in worker population might impact DC plans, possibly reducing economies of scale used to negotiate for products and services, Kristi Mitchem, executive vice president, State Street Global Advisors (SSgA), tells PLANSPONSOR, “Actually, more employees are leaving money in their employer-sponsored retirement plan after they retire. Plan sponsors have found that while only 10% to 15% of employees used to do that, today it’s more like 59% or 60%.”

Given this trend, the San Francisco-based Mitchem believes the decrease in older workers will “be less impactful than anticipated.” However, she says, plan sponsors still need to make sure they effectively communicate with employees to emphasize the benefits of staying in the retirement plan sponsored by the employer.

They also need to make sure their plan design accommodates employees who wish to leave their money in the plan after retiring, she says. This means adjusting the plan’s investment menus to offer options, such as annuities, that will generate post-retirement income for retirees.

Mitchem adds that revisions to current legislation would make required minimum distributions (RMDs) for employees who leave their money in the plan easier, and several proposals concerning such distributions are in fact being reviewed by Congress. In the meantime, she says, plan sponsors should coordinate with their recordkeepers on the logistics of administratively handling employees that want to invest their RMD balances in other financial vehicles. Mitchem says SSgA and other providers offer such distribution products.

As for the effect of increasing employee retirements on DB plans, Mitchem says, “There will probably be more loss of scale in plans offering lump sum distributions than those DB plans that offer options such as annuities.” She adds that the funded status of most DB plans is still at a favorable level, pointing to the increase in the overall funded status of DB plans during 2013 (see “Pension Funding Up Sharply in 2013”).

To address the issue of increasing participant retirements and loss of plan assets, Mitchem says, “DC plan sponsors can add more automatic features, such as automatic enrollment and automatic escalation, to their plan design. They can also be more aggressive when it comes to contributions, perhaps going as high as 6%.”

She says plan sponsors also need to engage near-retirement employees in a conversation about defined contribution plans and individual retirement accounts (IRAs), specifically about the differences in flexibility and fees. For example, if an employee keeps his money in a 401(k), it may only cost him 30 basis points in fees, while an IRA may cost closer to 100 basis points. Employees may not be aware of such differences, says Mitchem, and need to be educated about them.

In general, good communication with participants nearing retirement is important to foster “a higher degree of security” about retirement, according to Mitchem. “Plan sponsors need to use such communication pieces to help employees navigate the choices surrounding their separation from the plan. Plan sponsors need to communicate about topics like retirement planning as employees near this point of departure into retirement.”

The best way to deliver information to employees can be very population dependent, she says. While posters may work for an employee population that is office-based, the same may not be true for someplace like a trucking company, where employees are constantly traveling. Delivery preferences may also depend on the age of employees and their level of comfort with technology.

However, says Mitchem, there are a few common elements when it comes to information delivery that are valid no matter what the makeup is of the employee population. “First, make sure the message is simple. Second, make sure the message is action-oriented, giving the person a goal to achieve. Third, repeat the message on a regular basis. This continual exposure to the message is more likely to have an impact on employees.”