The Future of Public DC Programs Includes a Focus on Financial Wellness

The pandemic and new data are highlighting the need for more financial wellness help, as well as assistance with asset allocation and retirement income.

There is a movement among private-sector employers to offer not just a retirement plan, but a program of benefits that addresses all aspects of employees’ finances. But employees in the public sector—including those in public defined contribution (DC) plans—need holistic financial wellness help, too.

Less than half of public-sector employees (43%) feel very/extremely confident making financial decisions on their own, according to the results of a 2019 study by the Center for State and Local Government Excellence (SLGE). Fifty-four percent worry about finances while at work, and only 29% rate themselves as very/extremely knowledgeable about finances in general. SLGE found nearly two-thirds (65%) of public-sector employees believe it is important for their employer to offer a financial literacy program. However, only three in 10 reported being offered one. Seven in 10 said they would participate in one if it was offered.

The Public Retirement Research Lab (PRRL), an industry-sponsored collaborative effort of the National Association of Government Defined Contribution Administrators (NAGDCA) and the Employee Benefit Research Institute (EBRI), formed in 2019, studied the age distribution of workers in the public sector and found the share of those in their 40s is sharply declining. This means the workforce will become significantly younger in five to 10 years, as the large share of workers age 50 or older will be retiring, while the smaller share now in their 40s starts to move into the 50-or-older age group.

“With the younger-than-age-50 cohort making up a larger and larger share of the public-sector workforce going forward, retirement programs are likely going to need to include initiatives that look at the total finances of the workers,” the PRRL says.

“We’re ushering in a new generation in the workforce,” says Carah Brody, vice president, business ops for Nationwide Retirement Solutions. “As employers think about the pressures and challenges employees face and how those differ for each household, benefits have evolved beyond traditional offerings. Employees seek access to benefits at the workplace. And employers care about employees, but there are also business reasons to demonstrate that they care. Showing that they care about employees’ whole financial wellness and providing programs to address that results in more productive employees and helps with recruiting and retention.”

Matt Petersen, executive director of NAGDCA, says he has seen the introduction of financial wellness programs be a bit dispersed among state and local governments. The National Association of State Treasurers (NAST) offers a map of states’ efforts pertaining to financial education and wellness programs. “For a lot of public-sector plan sponsors, they are in the early phases of looking into these programs,” he says.

Elements of Financial Wellness Programs

Brody notes that financial wellness includes budgeting, emergency savings, student loan debt help, retirement savings and income in retirement. But in the public sector, unlike the private sector, most employees are offered a defined benefit (DB) plan. She says this has resulted in some areas of financial wellness not being as well-defined.

Petersen says he has seen public plans offer programs that address various types of financial issues, including health care and personal debt reduction strategies. But there have not been many programs that addresses student loan debt, though he adds that there could be more if the SECURE 2.0 bill—the follow-up legislation to 2019’s Setting Every Community Up for Retirement Enhancement (SECURE) Act—is passed.

Help with student loan debt is on employers’ radar as a younger generation of workers makes up the majority of the workforce, Brody says. She points out that student loan debt is an issue across age groups, but more so for those younger than 30.

“It is one of the biggest inhibitors of saving for retirement,” Brody says. “Either employees don’t have the money to do both or they have stress about paying the debt back.”

Brody says Nationwide is bringing to market a solution employers can use to provide education about refinancing and public-sector loan forgiveness programs or make matching contributions on behalf of employees paying off student loans.

Petersen says many public plan sponsors are looking to providers for solutions, but there are some programs led by governments.

“We have a couple of members that have creative, innovative programs,” he says. “We recognized the city of Milwaukee a few years ago. We also recognized the state of Virginia, which has a well-built financial education program that includes education, budgeting help and help with student loan debt.” NAGDCA has also recognized a program for Johnson County, Kansas, employees.

In the Milwaukee program, participants who attended a wellness session:

  • participate in the Milwaukee Deferred Compensation Plan at a higher rate (93% vs. 84%);
  • save at a higher rate (8.4% vs. 6.8%);
  • were most heavily participants in the third highest salary range (34% of attendees);
  • included Black attendees who realized the highest difference in contribution rate compared to those who do not (38%); and
  • consisted of 44% women, despite women only representing 27% of the participant base.

Brody agrees that most sponsors are turning to providers. “What we’ve seen from our plan sponsor partners is they are looking for options from providers—a full spectrum of solutions, from do-it-myself options, such as calculators; to some assistance, such as through managed accounts; to full, hands-on, detailed guidance, provided by CFPs [certified financial professionals],” she says. “Public-sector programs are definitely growing and evolving to help employees meet short-term needs that might prevent retirement savings all the way to how to turn their savings into income in retirement.”

Brody says plan sponsors need to position their financial wellness offerings in the context of employees’ bigger financial pictures and provide actionable tools and solutions.

Researching Participant Needs and Addressing Retirement Savings

Employers in the public sector need education about financial wellness solutions, Brody says. Plan sponsors should also do research about their employees’ needs.

“We saw with health care that once the headlines and statistics showed that the cost of health care was an inhibitor to retirement savings, plan sponsors looked for solutions and introduced HSAs [health savings accounts],” she says. “Similarly, the pandemic has highlighted the need for emergency savings and student loan debt help. We are seeing more awareness from plan sponsors. And data from the PRRL will help create actionable insights.”

A PRRL study found public-sector Generation X workers have taken more retirement plan loans than any other age group, which has highlighted the need for financial wellness help.

“There were more outstanding loans for participants up into their 40s, and the amount of loans as a percentage of assets was higher for employees approaching retirement,” Petersen says. He explains that for 457 plans, the criteria for taking hardship withdrawals are stringent.

He says public plan sponsors should balance communications about participant loans; they can try to discourage them but should realize there are circumstance for which taking a loan can’t be avoided. “So education and communication about building retirement plan assets and taking advantage of compounding interest instead of pulling money out of accounts would be helpful,” he says.

Petersen also says plan sponsors and providers alike are having conversations about the implementation of emergency savings accounts—and how to help participants have more liquid assets available for emergencies. Providers are discussing solutions, and plan sponsors are discussing how to implement accounts.

Petersen says allowing for automatic enrollment in government DC plans can also help with participants’ overall financial wellness. According to NAGDCA’s website, laws in 25 states currently prevent auto-enrollment in DC plans. “We are working through the PRRL to build some information about the benefits of auto-enrollment. We’re big proponents of it,” he says. “Some public plan sponsors have said they won’t implement it, but we think it should be available to those who want to.”

The PRRL also did a study on public-sector plan participant asset allocation, which it said had takeaways that will inform public plan design going forward. The study examined how the structure of DB pension plans offered to public-sector employees and the demographics of a particular participant population have an impact on how participants are allocating their retirement savings dollars.

“We think it will be helpful for plan sponsors to think about maximizing their plan design for their own demographics,” Petersen says. “If employees have a DB plan, one thought is they can afford to be more aggressive with investing in their DC plan. But another school of thought is that if participants have guaranteed money and are saving on their own, they want to put their money into safe investments to build the security of assets. There is still work to do to determine what would be optimal for participants.”