Plan Sponsors Moving to Retirement Income Mindset
The Barometer was created by MetLife to assess whether and to what extent a retirement income culture is taking hold among plans sponsors at FORTUNE 1000 companies—the higher the value on the Barometer, the stronger the overall culture of retirement income. While the high score of 89 remains the same from the inaugural study in 2011, the range of scores has narrowed significantly, driven by improvement in the lowest scores, rising from 19 to 30.
Cynthia Mallett, vice president of Industry Strategies and Public Policy in MetLife’s Corporate Funding Division in Boston, explains that a retirement income culture is a set of practices that connect savings to income. “Part of it is communications and the way employers talk about their retirement plans to employees, but it also shows up in plan design and employers’ benefits objectives,” she tells PLANSPONSOR.
This year’s study found a majority of plan sponsors that offer employees only defined contribution (DC) retirement plans communicate to all or most participants across key areas related to retirement income. These communications include the effect of longevity (56%), the importance of establishing target retirement income levels in relation to current pay (56%), and communications about retirement income throughout the participant’s tenure in the plan (52%). More than one-third communicate to all or most participants about strategies for coordinating with Social Security benefits (35%).
This year’s QRPB highlighted the differences in attitudes and practices among companies that offer only DC plans, and those that provide broad coverage defined benefit (DB) plans combined with DC plans. The Barometer score across all plan types was 58 out of a possible 100—companies that offer broad access to DB and DC plans outpace their peers with a Barometer score of 71, indicating a much stronger retirement income culture. Companies that offer broad coverage DB plans and DC plans appear to be more likely to communicate about retirement income during employees’ entire careers, with 72% doing so compared to 52% of their DC-only peers.
In addition, DC-only plan sponsors are more than twice as likely to believe their workers will reach retirement age without adequate savings to generate sufficient retirement income (58%, compared to 28% of those companies offering broad coverage DB plans and DC plans).
However, both plan sponsor groups indicated simplicity is a leading philosophy behind retirement plan design. Eighty-nine percent of companies that offer broad access to defined benefit (DB) and defined contribution (DC) plans and 77% of DC-only plan sponsors say “keep it simple and avoid overcomplication,” when it comes to retirement plan design. Mallett explains that the move to simplicity incorporates the rise in the use of automatic plan features, as well as simplicity in investment options. She says this finding is interesting considering “almost as long as there have been 401(k)s, the philosophy behind plan design decisions has been about providing choice and flexibility.”
The study found more than half (57%) of DC-only plan sponsors that do not include an income annuity have discussed this option with their recordkeepers. More than one-third (34%) have explored lifetime income solutions available in the marketplace, and 11% have already conducted due diligence about the providers of these solutions. Mallett notes plan sponsors that offer broad coverage DB and DC plans are “strikingly” less likely to be looking into lifetime income solutions.
“It has taken a long time to really come full circle,” she says. “DB plans were put in place long ago so employees could leave employment; now, finally, DC plan sponsors are seeing this need to more actively manage their work forces.” Mallett further explains that DB plans, by their nature, are designed to provide retirement income based on a normal retirement age, which helps plan sponsors establish and maintain “norms” around normal retirement age on which managers can generally rely for work force planning purposes. This is why, when asked in the study, 27% of DC-only plan sponsors were unable to say whether retirement ages were increasing, decreasing or staying about the same over the past five years, but all of the plan sponsors that offered DBs were able to answer that question.
“DB plans are very instructive to DC plan success,” Mallett says. “Maybe that will be a legacy from the DB era.”
How can companies establish a stronger retirement income culture? According to Mallett, the most important thing is for companies to shift their retirement benefits philosophy to something that balances savings and income, and moves to the point that the plan has an “income outcome.” She contends plan sponsors are getting signals from regulatory actions that retirement income is important and they should take actions to facilitate better outcomes for participants, citing the proposal from the Department of Labor to include lifetime income projections on participant statements (see “Income Projections: Showing Participants a Better Way”), the effort to encourage rollovers from DC plans to DB plans to take advantage of lifetime income distribution options (see “Proposed Protections for DC to DB Rollovers”), and the effort by the Internal Revenue Service to make plan rollovers easier (see “IRS Guidance Eases Rollover Processing”).
“Flexibility and accumulation is important, but stopping at that is not enough,” Mallett says, adding that plan sponsors should not take away participation and deferral rates as measures of success, but add to those the capacity of the plan to generate a reasonable retirement income at the time participants want to retire. “Once plans sponsors make a shift in thinking, a whole series of actions—changes to plan design, frequency and type of communication, employer involvement and measurements of success— will be taken to help generate better retirement outcomes for participants,” she concludes.
MetLife engaged the services of Greenwald & Associates and Asset International, Inc., publisher of PLANSPONSOR and PLANADVISER magazines, to conduct a survey of FORTUNE 1000 companies. The survey report is available at www.metlife.com/barometer2014.