Executives from Voya Financial and MassMutual discussed 10 developments in the retirement plan industry at the 2016 PLANADVISER National Conference’s panel, “Top Trends.”
First and foremost are new regulations and policies, led by the new fiduciary rule, said Charles Nelson, chief executive officer of retirement at Voya Financial. “Each company will approach it differently,” he said. “Some may utilize the best interest contract (BIC) exemption or retreat from offering certain services. At Voya, we will utilize the BIC where it is most appropriate.”
Another regulatory development is open multiple employer plans (MEPs), which have a chance of being “approved in Washington, and that could help us grow our industry,” Nelson said.
Second, is the growing recognition of the cost of employees not being retirement ready. “Many years ago, companies sought to limit their liabilities by freeing their defined benefit plans,” said Tina Wilson, senior vice president, head of retirement solutions innovation at MassMutual. “But that liability still exists if employees don’t have sufficient funds to retire and are financially trapped.”
Sponsors and their advisers need to ensure that participants are “funding their plan adequately,” Wilson said. “Typically, the CFO is not engaged in the plan. We looked at plans with 1,000 employees and found that, on average, it is costing them $2.7 million to $3 million a year in the liability of employees unable to retire. We must measure this cost” and call sponsors’ attention to it.
Third is the need to engineer a retirement plan for success. “401(k) plans were designed to be supplemental,” said Nelson, who then pointed to six ways advisers can help “DB-itize” defined contribution plans. Use automatic enrollment, he said, paired with qualified default investment alternatives (QDIAs) that place participants’ funds into appropriately diversified portfolios. “Optimize the match to ensure people are saving at the right levels. Use escalation, reenrollment and embrace income” options, he said.NEXT: Outcomes
Fourth is the value of investments in driving outcomes. MassMutual has studied outcomes in detail and has learned for “savers early on, investments are irrelevant,” Wilson said. “Instead, it’s about how much you save. But at age 40, 45, investments become critical.” That’s why people at this age and older need to be invested in “target-date funds, managed accounts or custom portfolios that are a diversified default,” she said.
Fifth, it is important to apply behavioral science to retirement innovation. “Innovation is critical and we haven’t been that innovative with enrollment,” Nelson said. “We don’t think everything should be digital. Choose different platforms” for different touch points, he said.
Sixth, are data-driven asset allocation solutions. By this, Wilson said, the industry needs to embrace smart data platforms where demographics are tailored to “individualized circumstances to select [a certain] glidepath or custom allocation. It’s much more proscriptive on am individualized level.”
Seventh is weighing income replacement versus account balances. “Income is the new outcome,” Nelson said. “Plan sponsors are becoming increasingly focused on income, and that is how you are going to be measured going forward. But include all sources, including IRAs and Social Security.”
Eighth is finding solutions for income. “Income is also very personal,” Wilson said. “Solutions need to work for each individual. No one size fits all. It must be a set of solutions that are worked through an adviser, not a tool.”
Ninth is financial wellness that extends beyond the defined contribution plan. This means “holistic solutions to solve income stream needs. Income needs fluctuate in retirement, so solutions should be designed accordingly,” Nelson said.
Finally, participants need help navigating healthcare costs and building true financial wellness. “Because participants say healthcare costs prevent them from saving more for retirement, we need to talk about a benefits budget to optimize their spending and help them make better financial decisions,” Wilson said.