If a plan sponsor offers the ultimate defined contribution plan—one with immediate eligibility, allowing deferrals up to federal limits, matching at least dollar-for-dollar up to 6% of salary, with streamlined, low-cost investments, advice and a guaranteed income option for participants—the plan sponsor might “expect” that employees would join immediately and defer slightly more than 6%, and with investment returns, end up with an account balance of $2.5 million for retirement, explained Virginia Maguire, director of Retirement Product and Strategy at Aon Hewitt. But, that’s not how things happen in reality, and the difference is participant behavior, she told attendees of the 2014 Plan Sponsor Council of America (PSCA) Annual Conference.
When trying to engage participants to maximize the value of the plan for them, plan sponsors must balance participants’ desire to live for today, while planning for tomorrow, Maguire said.
To help them live for today, plan sponsors should provide a financial literacy foundation, address wallet competition, and help participants keep savings on track. Maguire shared a couple of innovative thoughts about providing financial literacy education to employees. She noted that women do not engage in financial literacy for themselves, but are very involved in teaching kids about money, so plan sponsors can use a “teaching your kids about money and investing” session to engage and educate women.
Maguire also suggested offering financial wellness clubs online, helping individuals with similar situations and goals get into a group of people like them. Each group could have a facilitator to prompt discussions. She noted that it could be run like a book club, with members reading an article or book about finances and meeting weekly to discuss.
Addressing wallet competition means prioritizing spending and integrating decisions about spending. Plan sponsors could offer a tool to help participants decide how to spend benefits dollars more wisely, Maguire recommended. “A participant may not really need that platinum health plan, and can put those extra dollars into retirement savings,” she said. She also suggested including retirement plan enrollment in the enrollment period for other benefits.
To help participants keep savings on track, plan sponsors can offer automatic enrollment, deferral increases and investment options; limit leakage from retirement accounts, such as the number of loans or hardship withdrawals; and provide guidance and advice. According to Maguire, limiting leakage may include allowing terminated employees to keep repaying loans or having a rollover counselor speak with a terminating participant. Additionally, she noted that studies show offering participants guidance and advice really helps.
Helping employees plan for tomorrow includes offering robust plan designs, a graceful transition into retirement, and perhaps guidance through retirement. Maguire noted that while automatic enrollment has been successful in getting more employees to save for retirement, it can have a detrimental effect by keeping deferral rates lower. Plan sponsors need to bump up the default deferral rate. Changing the investment lineup to use institutional investments or index funds can also help improve participant outcomes by lowering fees. Maguire said decreasing fees by 25 basis points is roughly equal to increasing the employer match formula by 0.75.
According to Maguire, the number one question people ask benefits staff when retiring is, ‘Do I still get my health benefits, or ‘How do I start my Medicare?’ Having a retirement health care specialist or adviser that can answer these questions is helpful to participants.
Post-retirement, participants are subject to longevity risk, market risk, but also behavioral risk, Maguire noted. “Someone may not be in their right mind to manage money in the future.” Participants may trust their employers and feel more comfortable getting a lifetime income product from the employer than from an outside financial source. Companies are edging toward offering lifetime income products for participants, she said.