Left to right: Peter Gordon, Joe Ready and Eric Wietsma
During a roundtable discussion at the recent PLANSPONSOR National Conference, Peter Gordon, CEO, John Hancock Retirement Plan Services; Joe Ready, executive vice president, Wells Fargo Institutional Retirement and Trust; and Eric H. Wietsma, senior vice president, Retirement Services Sales and Participant Development, MassMutual Retirement Services, shared their thoughts about what lies ahead for plan sponsors and plan participants with Alison Cooke Mintzer, editor-in-chief of PLANSPONSOR.
PS: We’d probably agree that what helps an employer most in increasing the effectiveness of its plan is the design. Is it all about automation, or are there other design initiatives?
Gordon: Automation is key. Other things matter, but if participants aren’t saving early or saving enough, they’ll find it hard to have a successful retirement.
We know that if you auto-enroll Millennials, about 80% will participate at 5%, and by auto-increasing them annually, you’ll get them to 10% shortly. Ten percent that early is where they need to be in order to have financial freedom later. We know it works, and there’s opportunity to keep doing it. It gets tougher for older people who missed the auto-enrollment wave. In that case, re-enrollment can be a vital component.
Ready: Auto-enrollment and plan design have created a one-size-fits-all process, but there are really four buckets of employees—each at different points in their journey to retirement—in a plan. The first bucket has early savers. The second, the mid-career group, is struggling with aging parents, kids in college. Most of our services, including plan design, are geared toward those buckets.
But two more are emerging, the third being near-retirees. The reality for these participants is they are nearing the end of the accumulation journey. They are more focused on optimization and managing risk. They’re asking, “How do I maximize my savings? How do I allocate my assets to enhance returns while managing volatility and preserving principal?” We can help them optimize, but their path is set in terms of their nest egg size. For this group, help goes beyond auto-features to a different set of products and services that help them preserve their assets and increase returns as they enter the final phase of their retirement journey which is the “living in retirement” bucket.
As an industry, we may have done well on the accumulation side, but now our focus needs to expand to helping people in those latter stage buckets manage risk, know what they can afford and how they can invest. There are products and services available in the retail investment space that need to evolve into the retirement plan market to support what we do for those last two buckets.
PS: How is retirement viewed in the overall benefit discussion?
Wietsma: Over the last 20 years, we’ve seen the defined contribution (DC) plan go from a supplemental “good idea” to a primary benefit.
We see a similar change in health care. High-deductible health plans (HDHPs) with health savings accounts (HSAs) are much the norm. Employees have a certain amount of income to allocate toward benefits. Besides trying to get 10% into their retirement plan, they have to fund an HSA as well.
Meanwhile, I think partnering with sponsors to help participants manage this will be key for us. A holistic benefits tool, such as MassMutual’s MapMyBenefitsSM, shows employees their hierarchy of needs, from protection to health and retirement. For retirees and near-retirees who’ve saved inadequately, having the proper protection benefits might matter more than retirement.
Left to right: Peter Gordon, Joe Ready and Eric Wietsma
PS: How do you define financial wellness, especially in relation to retirement plans?
Wietsma: Helping people understand how they’re doing in saving toward retirement feeds directly into financial wellness—that sense that you have your finances under control.
A recent PricewaterhouseCoopers’ survey found one in four employees call financial stress a distraction at work. The American Psychological Association also reported that every year since 2007, financial issues have been a top cause of stress. Helping employees feel secure that they’re saving enough is key to productivity.
Older employees are increasingly planning to work well past retirement age as well. This has real mathematical implications for employers because health care, workers’ comp and disability costs are greater for older employees.
PS: How can plan sponsors use data available from you—the recordkeepers, the providers—to help engage and empower their employees?
Ready: I used to hear “big data” and wonder what that meant. Our industry is on the cusp of using data to drive a lot more action, and central to that is what I call “Know Me.” Most of our data-driven elements have to do with age, gender, tenure, compensation, etc. That’s just scratching the surface. Big data uses detailed information, beyond the traditional retirement data, to connect with individuals on a personalized, targeted basis that shows you know not only who they are but where they are in their journey. Through technology, you can know their full balance sheet (savings and liabilities), investment preferences and other personal and cultural attributes that can help you communicate the participant’s next best step more effectively. Technology’s also evolving rapidly beyond just data—for example, voice biometrics let us recognize a voice print—that’s something we’ll be rolling out next year that will significantly improve participant authentication to enhance the protection of their data.
PS: Is “participant engagement” a bit of a myth?
Gordon: The fact is, auto-methodology does work, but only about 40% of the industry uses it. Auto features are really about people not being engaged, they use that inertia to make it work.
In the meantime, we need to do other things. You can’t just automate your way through everything. Start educating, use auto to the fullest, and, finally, think about how you engage somebody. Silicon Valley is way ahead in this. We do it in customized education or giving encouragement to specific divisions and age groups. But, as Joe said, it requires personalization at the individual level. They don’t need a gigantic body of information. Simply put: Save early, save more, invest smart.
There’s no silver bullet. You need to pick the low-hanging fruit, which I’d call automatic features. You need to educate people, which we generally do in the plans, the workplace and in partnering with the government. Finally, we’re all working on getting communications to be more personalized, to motivate participants. That’s the breakthrough: When you put all those together, you at least solve the accumulation issue.
PS: As Baby Boomers retire and try to determine how to live on whatever they’ve saved, what’s the role of retirement income products?
Wietsma: It starts with having participants understand the budget concept. As people plan for retirement, there’s been a gap in understanding how much is enough. I’ve had people argue with me that, “I may have only $10,000 in my savings account, but I have $130,000 in my 401(k)—I’ve got to be ‘good.’” We all know that won’t solve the issue.
For even good savers, it will be a combination of solutions. Getting to retirement and annuitizing your entire 401(k) balance probably won’t be an outcome for most. We’ve had very creative minds developing products, whether trying to cajole people to take more investment risk by putting a withdrawal guarantee over it or having them fund a personal defined benefit (DB) plan. We have to do better at making these products understandable, age appropriate and fair as to fees.
With Greenwald & Associates, we recently surveyed a group of retirees. All reported being surprised that health care costs were about 50% more than they’d forecast in their planning, and these folks had planned well.
So, given this idea of creating a budget, taking income—Social Security, whatever DB plan you have—and the basic expenses—health care, monthly living costs, etc.—looking at a guaranteed income solution would make sense to most individuals. Then they make an asset-allocation decision about the rest.
PS: What is the employer’s role in addressing distribution decisions with employees when they separate from service?
Ready: The most important issue we face is the fiduciary rule and conflict of interest standard. Mainly what we do today is tell participants what their options are when they retire or come out of the plan. These are pretty basic conversations. Usually, people take a lump-sum distribution or an individual retirement account (IRA) rollover. I think in the future you’ll see a more balanced approach around the in-plan discussion. Sponsors put a lot of time and effort into making these plans cost effective and robust with education and advice services that improve outcomes—why wouldn’t we extend those benefits into the retirement phase?
For middle-class Americans, the average distribution out of a 401(k) plan at age 65 is $150,000. They typically need at least $250,000 to consult with a financial adviser. So, there is potentially a significant population of participants that will be facing, on their own, all the complexities of longevity risk, market volatility, income management, investment risk and when they should begin receiving Social Security benefits.
I expect you’ll see more in-plan retirement services and products that help participants manage the distribution aspect of their “living in retirement” phase. The products and services developed within the plan will help those individuals manage the complexities and risks that they face in this phase. If you think participants have been overwhelmed with the accumulation side, they’re really going to be overwhelmed with the distribution side of the equation. You’ll see more enhancements on the qualified plan side where people say that staying in-plan is actually a pretty good option.
PS: How does recordkeeping consolidation change the plan sponsor experience or deliverables, and what will ongoing consolidation mean for the industry?
Gordon: In the last 10 years, 18 large providers have been acquired, and 40% have gone away. All three of us here have been involved with consolidations.
As to why this is happening, it’s no longer just a retirement plan issue, it’s a retirement issue, because when you’re thinking about distributions, all your assets—personal as well as those in the employer-sponsored plan—are important.
So, this business will require much more investment from providers. I think the industry realizes that. You’ll either stay in or have to get out, because if you’re not fully committed to helping solve these complexities and simplify them so someone can actually execute a successful retirement, then you’re not really serious about this business.
With the financial crisis, all the financial institutions scrutinized their books of business across all of their disciplines, and were forced to make those hard decisions. There are more to come, but on the positive side, they can be made without disruptions to the plan sponsor. I think this means we can look forward to better solutions. The industry will be stronger than ever, and it will need to be to solve this.
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