There have been big changes since 1974 that perhaps some industry players back in the day would have found unimaginable. In 1974, most workers with employer-sponsored retirement plan coverage were in defined benefit plans, and those with defined contribution plans were in profit sharing plans; the 401(k) hadn’t even been introduced yet. That year saw the introduction of the first mass-produced personal computer; the Altair was sold in kit form for $395 or assembled, for $650, which translates to $3,142 in today’s dollars. The Dow Jones Industrial Average closed the year at 616.
No adviser to the plan. (Really!) Then: Retail brokers. Now: Specialist retirement plan advisers
When ERISA was enacted and companies began to sponsor retirement plans for their workers, these plans were often supported by just a handful of people. “Retirement plans were usually handled by someone who did something else as a primary function—employee benefits, life insurance or financial planning for high-net-worth individuals—and were almost universally done on a commission basis,” says Jim Sampson, managing principal of Cornerstone Retirement Advisors LLC in Warwick, Rhode Island.
Consulting firms that charged an hourly fee or brokers who sold retail funds might aid a retirement plan sponsor. Without a specialist adviser to act as a support to the plan, participant education was a minor area of concern, according to Trisha Brambley, president of Retirement Playbook Inc. in New Hope, Pennsylvania. “Most of the education focused on why participants should join the plan,” she says. “The middle market—plans with $500,000 to $1 million in assets—had very little service and might have used a consulting firm or an attorney on a project basis.”
In 2003, says Brambley, brokers began to pay more attention to the retirement plan market. It was clear that plan sponsors needed help evaluating their fund lineups because of the increase in investment vehicles.
Today, about two-thirds of plans (60%) use a financial adviser, according to PLANSPONSOR’s 2014 Plan Benchmarking Report.
How much are those plan investments worth? Then: Quarterly Valuations. Now: Daily Valuations.
Once upon a time, pre-Internet and pre-401(k), defined contribution (DC) plans were valued annually, semi-annually, quarterly, or, for a few, monthly. Imagine: you could see the market fluctuating but you could not get an accurate assessment of account status until the valuation. This was perhaps not such a problem before participants were putting their own money into plans, but as 401(k)s gained popularity, it became more of a concern. Without access to the Web, which was in its infancy, participants had to wait weeks after the close of the quarter to make investment changes to their plans.
Things began to change in the ‘90s. “Daily valuation is now wildly popular,” PLANSPONSOR reported in 1994, noting that people were raising concerns over increased costs, additional recordkeeping stresses and possibly even the potential for harm to investment performance.
How to get participants to enroll in the plan? Then: Voluntary Enrollment. Now: Auto Enrollment
When 401(k)s were new, employees had to voluntarily agree to put some of their salary into them. A faintly off-putting term, negative enrollment was a plan design feature that emerged in the 1990s that placed employees into a plan with the understanding that they could opt out, or required them to elect not to participate. In 1997, PLANSPONSOR magazine took a look at why most employers were saying no to a practice that effectively boosts participation, and held up McDonald’s as one of a handful of companies using it—and reporting 95% enrollment. Fewer than 50 companies were using “negative election,” according to PLANSPONSOR’s story.
Could there be legal implications? One source warned that deferring the pay of minimum wage workers could be asking for trouble, even for a retirement plan contribution, and cautioned plan sponsors to contact the Federal Wage Board before pursuing auto enrollment.
Negative election got a rebranding and a reboot in 2006’s Pension Protection Act, when auto-enrollment got a government seal of approval, and a much better name. Today it is widely used in DC plans, and most credit it with boosting plan participation.
What Are We Saving For? Then: Accumulation. Now: Income.
In the early days of 401(k) plans, Brambley says, participants were given charts showing them the accumulation they would have by age 55, for example, if they continued saving in the plan. “But there was not much talk about what that million dollars would buy,” she says, “what it would really mean.” Brambley predicts the retirement industry is going to come up with new and better ways to translate accumulated assets into an income stream.
Firms are dreaming up more ways—income products and guaranteed income—to be able to help people convert that nest egg into steady streams of retirement income, Brambley says.
“First,” she says, “people have to know that a million dollars means $40,000 a year for life.” Also, there must be greater understanding of how to reach that goal. So many people are far from ready, and plan sponsors and advisers must prepare to show people how they can do it, so they do not simply throw up their hands and give up. “All is not lost on Social Security yet,” Brambley says, and the prospective amount should be calculated in along with other sources in addition to 401(k) assets. Several sources may be considered—some people may work part-time, others might have a defined benefit (DB) account or spousal accounts—to help participants understand what could produce income annually in retirement.
Educating Participants Then: Investment Knowledge. Now: Targeted Communication
Over the years, participant education has focused on investment knowledge--helping participants select the proper place to put their funds. Now, the use of target-date funds has lessened the focus on that. Plus, DC plan sponsors are starting to see the value of providing general financial education to participants with the goal of helping them get their finances in order so they are able to save for the long term.
The next phase in communicating with participants, Brambley says, is realizing that one size does not fit all. Communication needs to more precisely target the needs of participants. “I see targeting in a couple of different ways,” she says, “first, in terms of actual participants, there is more analysis on who is participating, and at what age, and in which funds. What does a plan’s population look like?”
Brambley says a new frontier will be retirement industry providers continuing to slice and dice information about participants more finely to be able to identify problems and see where more education is needed.
“Stepping back and taking a bigger look at what is happening is a way to customize,” she says. “What is the reason some people are not saving or not taking advantage of a generous match? Even on the high end of the pay scale, people can have financial stresses, and using diagnostics to track is a way to see what a plan sponsor can do to target the vulnerabilities of their own population.”