According to David Gray, vice president of Client Experience at Charles Schwab, there are three main strategies. “For the past 30 years we have spent untold millions of dollars trying to educate accidental investors into individuals who can decide how much to invest, how to invest, how often to reallocate,” he told attendees of the 2014 PLANSPONSOR National Conference. “We would have been better off just giving people the money we spent on education because it didn’t work. Accidental investors don’t want education, they want solutions.”
Gray said to move the needle for participants, plan sponsors need to:
- Drive down investment expenses;
- Give participants investment help – have a professional do it for them using multiple data points to offer a personalized solution; and
- Press the reset button in the plan – put all participants in personalized, professional managed account solution, and let the few that want to do it on their own, do so.
Jeffrey Hemker, national sales director in the Retirement Division at Invesco, added that he thinks plan sponsors should take away loan and in-service withdrawal provisions in addition to using auto features and professional money management.
To the point of using automatic features, Hemker told the story of his brother, whom he calls “the accidental retiree.” When discussing whether his brother was able to retire, he discovered his brother had enough retirement savings to generate a 102% income replacement rate. “What did you do?” he asked his brother. The answer was, basically, “nothing.” His brother’s employer switched from a profit sharing plan in which the company put 7% of each participant’s salary into the plan to a 401(k) in which participants automatically deferred 6%. In addition, the company asked employees if they wanted to invest the money themselves or have it done for them. His brother said, “I figured if they put me in at 6%, that was the right amount.” And he let the company invest for him. With Social Security and a pension, Hemker’s brother was set to get 102% of his final salary in income per year in retirement.
Hemker noted that if his brother’s logic was whatever the company automatically made him save was the “right amount,” then plan sponsors who do not use automatic enrollment are telling employees that saving 0% is fine. He added that employers force employees into a health plan when the employee doesn't choose one on their own, “because we are so concerned about their health care coverage.” He queried: “Why don’t we have the same concern/mindset for employees’ retirement?”
Steven Dorval, managing director of Retirement and Investment Strategy at New York Life Investment Management, contended, “If you don’t combine auto enrollment with auto escalation, inevitably you are going to keep people at the auto enrolled percent.” In the absence of auto enrollment, plan sponsors may use easy enrollment, such as simple post cards, but Dorval said, “It is hard to wrap my head around plan sponsors wanting easy enrollment but not auto enrollment.”
According to Dorval, some plan sponsors may feel that if they auto enroll, participants will be less engaged, but New York Life is finding auto enrollment starts engagement. “Not huge numbers, but more than what would have been engaged without it.” He said plan sponsors can take advantage of the opportunity auto enrollment gives to re-direct education. “Replace the seminar about compounding interest with one about budgeting that allows employees to save and invest more.”
Gray contended life circumstances are what cause participant engagement. “Don’t look at your retirement plan as an engagement vehicle, just a savings vehicle,” he said. “When things happen in [participants’] lives that make them want to take action, make it easier to take action and help them know where to go.”
Hemker added, “Do you know everything that is being put in front of your employees, have you read it yourself, and is it necessary? Ask, ‘is this what we want to be doing?’ It’s time to narrow the scope after 30 years of putting everything in front of them we can.”