Day two of the 2018 PLANSPONSOR National Conference, held earlier this month in Washington, D.C., included a panel discussion focused on the weight of a plan sponsor’s responsibility in understanding and benchmarking retirement readiness.
Speakers on the panel included Tina Wilson, senior vice president and head of investment solutions innovation at MassMutual; Jeff Fister, senior relationship manager with ADP; Lynda Abend, chief data officer at John Hancock Retirement Plan Services; and John Doyle, senior vice president of defined contribution strategies at American Funds from Capital. The experts reviewed a long list of reasons why sponsors must take action to improve workers’ retirement readiness.
Wilson mentioned how retirement readiness impacts an employer’s bottom line in a very direct way. Employees who do not retire on time because of a lack of financial assets will tend to have greater health care and disability claims, and they may also generate more workers’ compensation claims. This, in turn, can negatively impact an employer’s balance sheet.
Fister, citing a recent Willis Towers Watson survey, said strong retirement benefits also have an impact on new employees and potential recruits. This is because individuals are searching for employers who will preside over their retirement future, he said. Fister also pointed out how 63% of workers name retirement planning as an important factor in selecting a particular job, and how two-thirds of Millennials and Gen Xers say their attraction towards a company increases when the company prioritizes its workers’ financial health.
Not only is communicating retirement readiness to prospective employees significant, the importance relays towards current workers too, said panelists, as the very term links the existing employee to future outcomes. A former GAO study found only 13% of workers indicated they were confident in their retirement income, cited Fister. An emphasis on plan data, from smartphone use to personalized experiences, can leverage a participant’s decision and eventually, future retirement readiness.
“Communications is really the key part there,” said Fister. “And basic education is important. Don’t make the assumption that your employees know what they need to know when it comes to themselves getting ready for retirement.”
According to the panel, one related issue to retirement readiness gaining higher traction as new workers leave college and enter the work force is student loans. For these employees, it is imperative for the plan sponsor to encourage rational prioritization of financial goals across short-term needs and retirement planning.
“Get them to start thinking about their other financial issues, and maybe that will bring them into the discussion around getting ready for retirement, because paying off student loans is real and it is a challenge today. Retirement is not real yet for a lot of participants,” Doyle explained.
Including student loans, panelists discussed how the financial status of participants can create a great burden when preparing for retirement. Wilson accentuated how those with an array of financial complications cannot fund all solutions at once. Instead, plan sponsors can help participants resolve each issue separately by issuing education on health savings accounts (HSAs), ensuring participants are creating an emergency funds account, and maybe, even implementing student loan assistance programs.
“As an industry, if we continue to focus on retirement in isolation, we won’t be able to move the needle as far as we think,” Wilson said. “We have to deal with the reality that people do think about things more broadly, we have to be there with them and help them measure … We think about retirement as a silo, I guarantee you all the employees we work with do not.”
For many plan sponsors, improving retirement readiness will mean making decisions for participants, likely by enacting automatic features. Auto-enrollment, auto-escalation and use of more aggressive qualified default investment alternatives (QDIAs) are a few tools helpful for boosting retirement readiness, the panelists agreed. Instead of automatically enrolling participants at a 3% default rate, Abend suggested plan sponsors create a matching contribution in order to ensure maximum savings rates.
“Be aggressive with auto-enrollment,” Abend suggested.
Plan sponsors may believe this to be a pricey expense, but the likelihood of contributing via a match is higher than employers believe. Plan data is available for sponsors to assess their plan design, said Wilson, and with the right calculations, employers can achieve automatic enrollment for all participants while paying the costs.
“We go in with a premise that if you spend the same amount of money on your plan, how do you get a better outcome? Don’t always think of it as you have to spend more to get the right outcome, sometimes it’s just spending differently,” she said.
While these tools are drivers of retirement readiness, Doyle said plan sponsors must consider the health costs for impending retirees, and accessible features to measure these looming costs. As participants are contributing towards retirement, they must understand how future medical expenses will affect retirement income. Plan sponsors and participants can utilize calculators and services offered by recordkeepers to comprehend the magnitude of these expenses, said Doyle.
Measuring plan design, its features, and communications to understand what is the best solution for participants can be tough solely on plan design statistics, said panelists. According to Doyle, solely employing plan statistics will likely lead to gaps in retirement readiness. Instead, implementing a qualitative approach can drive targeted education and prove beneficial to ensuring participants are prepared for retirement.
Abend said the first step is to look at recordkeeping statistics and ask, directionally, how groups of participants are acclimating to the plan design and any further changes. Plan sponsors can separate employee populations into age service, location, compensation, etc., to dissect this detailed data. If employers provide recordkeepers with an analysis on their workers, then they can, in turn, deliver a segmentation on those numbers.
Yet, given all the comprehensive data, specificity in numbers and communications with participants, a recurring question plan sponsors have is the amount of guidance they can offer before engagement turns into a potential fiduciary liability. In response, Wilson said that as long as sponsors are acting with their participants’ best interest in mind, they should be optimistic.
Doyle echoed a similar sentiment, adding that sponsors should feel good about emphasizing retirement readiness.
“As a plan sponsor, influence what you can,” he said. “Focus on getting people in the plan, and on saving the right amount of money.”