Newsdash Insight on Plan Design & Investment Strategy from PLANSPONSOR
May 20th, 2014
Editor’s Note
Ways to Improve Participant Outcomes
The April edition of PLANSPONSOR magazine was focused on ways to improve participant outcomes. In today’s NewsDash, we highlight some of that content.
Plan Design
Automate Savings: An August 2013 analysis from Fidelity Investments shows hundreds of dollars can be added to participants’ post-retirement incomes through automatic-enrollment and -deferral escalation features. According to Fidelity, raising a participant’s deferral rate by just 1% annually—or about $33 per month for a younger worker (who has a 30- to 40-year savings horizon) earning $40,000 a year—could result in an additional $200 to $330 per month in retirement income. For an older participant with a $60,000 annual salary (who has roughly 10 years to save), the same increase could result in an additional $180 to $270 in monthly retirement income.
Motivate Them: How much a company matches, and how, are important factors in the participant retirement readiness equation, as the match number often determines deferral rates. Multiple studies, including those from Principal Financial Group and Charles Schwab, reveal that many participants save just enough to get the full match and stop there. Among employers, 68% offered a fixed match in 2013, according to consultant Aon Hewitt’s Trends and Experience in Defined Contribution (DC) Plans survey. Employers are also relaxing participant eligibility requirements for joining the company 401(k) plan; for years, workers had to wait 12 months or more. In 2013, more than 75% of plan sponsors allowed workers to participate and start saving right away, Aon Hewitt reported.
Provide Other Savings Options: Many employers go beyond a basic 401(k) plan to provide their employees with the means to diversify their retirement savings. Three common offerings are health savings accounts (HSAs), a Roth contribution option in the defined contribution (DC) plan, and nonqualified plans.
Participant Education/Advice
Know Your Audience: Demographic data can be useful in helping plan sponsors to understand the financial and savings priorities for different groups. A report from the U.S. Government Accountability Office (GAO) cites the fact that women are documented to live longer than men and will thus spend more time in retirement. Therefore, women need to factor this “extra” time into their financial planning. Plan sponsors can help by ensuring the financial planning materials given to female participants address their potentially longer timeline.
Customize Education: To successfully educate about saving for retirement, it is important to know your audience. Demographic research can help plan sponsors assess the makeup of their participant population and determine the most relevant data and best method of delivery for various segments, as different cohorts have varying needs. Education can be tailored to gender, age or ethnic background, for example, or participant demographics such as employees who neglect to save enough to get the maximum benefit from the employer match or to invest in an appropriate asset allocation.
Enhance Their Understanding: Until recently, the focus of sponsors’ education for their retirement plan participants was limited to enrollment, investments and other plan- or retirement-specific information. Today, more sponsors are embracing holistic financial literacy as a way to help participants develop and manage their budgets—and have funds available to put away for retirement—as well as to assist participants with determining how much savings they will require to meet their retirement needs. “Educating employees about their finances is becoming the No. 1 topic among plan sponsors,” says Jim O’Connor, vice president of business development and retirement plan consulting at AXA, whose advanced markets team provides group sessions on Medicare, Social Security, long-term care and 529 college savings.
Show Them Where They Stand: The vast majority of retirement plan participants have no idea how much money they need to save for retirement, or how what they have saved can be drawn down in a reasonable way. However, when they are shown how much their savings is projected to provide them, in the form of a monthly retirement income paycheck, that number resonates deeply with them—and often prompts them to save more.
Put Numbers in Context: When looking at a participant’s projected income replacement, it is critical to think about additional costs in retirement that may not have previously been a concern. Plan sponsors can help participants put their savings in perspective by educating them about the additional costs and income sources they might encounter in retirement. According to the retiree health care costs estimate calculated by Fidelity Benefits Consulting, a 65-year-old couple who retired in 2013 with traditional Medicare insurance coverage is estimated to need $220,000 to pay for their medical expenses throughout retirement—not including nursing home care.
Keep It Current: As smartphones and tablets expand their role in the work/life balance of most Americans, the retirement plan industry has begun to capitalize on these new capabilities, and plan sponsors may increasingly see social media and other technology as a way to connect with plan participants. For instance, last spring, Mercer launched “Uncover the Numbers,” an educational website to get participants to engage more with their 401(k). The site has been very popular, says Bruce Lee, principal of public relations in New York, because it is grounded in research—the annual Mercer Workplace Survey.
Get Personal: Not a synonym for education or guidance, “financial advice” for retirement plan participants is narrowly defined under the Employee Retirement Income Security Act (ERISA). Those hired  to deliver advice  are considered fiduciaries. In this context, advice means investment recommendations given on a regular basis, under an agreement that this will serve as the primary basis for investment decisions. Advice is individualized to the particular needs of the plan or participant. One-on-one services are the most popular offering when plan sponsors decide to provide participant-level advice, according to David Ray, managing director, head of institutional retirement plan sales at TIAA-CREF.
Market Mirror
Monday, the Dow was up 20.55 points (0.12%) at 16,511.86, the NASDAQ climbed 35.23 points (0.86%) to 4,125.82, and the S&P 500 increased 7.22 points (0.38%) to 1,885.08. The Russell 2000 gained 11.52 points (1.04%) to finish at 1,114.43, and the Wilshire 5000 closed 90.42 points (0.46%) higher at 19,954.38. On the NYSE, 3.2 billion shares traded, with advancing issues outnumbering declining issues nearly 2 to 1. On the NASDAQ, 2.7 billion shares changed hands, with a more than 2 to 1 lead for advancers. The price of the 10-year Treasury note was down 6/32, bringing its yield up to 2.545%. The price of the 30-year Treasury bond fell 23/32, increasing its yield to 3.386%.
Diversify: It’s all about diversification. Including some type of alternative investment as a core menu offering is “widely done” by defined contribution (DC) plan sponsors, says Rod Bare, a Chicago-based defined contribution consultant at Russell Investments. For “do it myself” participants who choose their own allocations, “this is a great diversifier to give them access to,” he says.
Set It and Forget It: There is a great diversity of target-date fund (TDF) products on the market, says Tim McCabe, who heads national sales efforts for Stadion’s retirement group in Athens, Georgia. These vary widely according to expense and strategy, but the most important factor is getting participants into a diversified vehicle that can maintain appropriate asset allocations through time.
Ensure Reasonable Fees: In its preamble to the Employee Retirement Income Security Act (ERISA) Section 408(b)(2) service provider disclosure rules, the Department of Labor (DOL) stated: “Now, more than ever, it is critical for plan sponsors to understand plan fees.” Why? In part because ensuring the most reasonable and fair fees for a plan leads to the best value for participants. In a defined contribution (DC)-dominated, employer-sponsored retirement plan landscape, participants need all the help they can get to boost their retirement savings.
Keep It Steady: Stable value still has a strategic role as a core menu option for 401(k) plans, says Rod Bare, a Chicago-based defined contribution (DC) consultant at Russell Investments. “[It] is filling the role of capital preservation for retirees and other more-tenured workers who need that as they plan to exit the work force,” he says.
Beyond Accumulation
Preserve Their Savings: Preserving retirement savings is simple when participants work for one company year after year and accumulate all assets within one plan. But how can employees keep their savings intact if they leave their present job? Further, what fiduciary role do plan sponsors play in advising the participant, whether a current or former employee, so as to prevent leakage from the plan?
Benchmark Your Participants’ Plan: “The only way to make it to the finish line is to save money,” says adviser Jason Chepenik, managing partner at Chepenik Financial in Winter Park, Florida. Sponsors following best practices increasingly benchmark their participants’ savings progress to gauge whether they put away enough money for retirement. “Participation rate was the focus for the bulk of the past decade or more,” says Steven Dimitriou, managing partner at Mayflower Advisors LLC in Boston. “Everybody is starting to realize, ‘Oh, it’s really about retirement income.’”
Guarantee It: Four out of five retirement plan participants believe that a guaranteed monthly payout benefit is a “must have,” even if it means compromising some access to their retirement savings, according to a survey from    Global Advisors (SSgA), released last year. “There are two guarantees: an amount of monthly income and payments for a lifetime,” says Ed Moslander, senior managing director of institutional client services at TIAA-CREF in New York. “Only annuities can do both.”
Integrate Income: The market for products that generate reliable income in retirement is growing. A survey conducted by Prudential in 2012 shows that participants are interested in such products. However, fewer than half the plan sponsors that responded to the 2013 PLANSPONSOR Defined Contribution (DC) Survey offer any income-oriented products or services. Just 8.6% offer in-plan annuities or income products with a guarantee. A more popular plan design feature allows for regular withdrawals at retirement, either by lump-sum or partial distribution, or participants may schedule a series of recurring payments. More than half of respondents (62%) said they have some form of systematic distribution.
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Small Talk
ON THIS DATE:  In 1830, the fountain pen was patented by H.D. Hyde. In 1862, the Union Congress passed the Homestead Act, allowing an adult older than 21, male or female, to claim 160 acres of land from the public domain. Eligible persons had to cultivate the land and improve it by building a barn or house, and live on the claim for five years, at which time the land became theirs with a $10 filing fee. In 1873, San Francisco businessman Levi Strauss and Reno, Nevada, tailor Jacob Davis were given a patent to create work pants reinforced with metal rivets, marking the birth of blue jeans. In 1927, at 7:52 a.m., American aviator Charles A. Lindbergh took off from Roosevelt Field on Long Island, New York, on the world’s first solo, nonstop flight across the Atlantic Ocean and the first ever nonstop flight between New York to Paris. In 1956, the United States conducted the first airborne test of an improved hydrogen bomb, dropping it from a plane over the tiny island of Namu in the Bikini Atoll in the Pacific Ocean. In 1993, the final episode of “Cheers” was aired on NBC-TV.   TUESDAY TRIVIA: Blue jeans were originally called “waist overalls.”
TRIVIAL PURSUITS: Who’s idea was the Smart Car?
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