Top-Down View

During a roundtable discussion at the recent PLANSPONSOR National Conference, David Musto, CEO of Retirement Plan Services at J.P. Morgan Asset Management, Joe Ready, executive vice president at Wells Fargo Institutional Retirements & Trust, and Elaine Sarsynski, executive vice president of MassMutual’s Retirement Services Division and chairman of MassMutual International LLC, shared their thoughts about what lies ahead for plan sponsors and plan participants with Alison Cooke Mintzer, editor-in-chief of PLANSPONSOR.

PS: What are the challenges facing the retirement plan industry today?

Musto: One is the fact that we as an industry seem to focus way too much on averages—average contribution and participation rate, average accumulated savings. It’s important to be more specific and more thoughtful in the way that we describe results, which leads to the second challenge: We don’t always have a consistent target for success as an industry, but income replacement rates are a good place to start.

Sarsynski: A major concern of most employers we work with is attracting, engaging and then retaining employees. How do we ensure that our employees are focused on their objectives? We know that engaged workers are critical to the success of the organization, so employee benefits in general are very important, and that goes from health to other welfare benefits as well.

Ready: The burden for retirement has fallen 100% on the individual, and it has to be more of a shared responsibility. Every data point we see says individuals know they own their own retirement, but they need help.

The industry is under attack with critics saying that we failed. A lot of it has to do with our language around averages, but there’s a lot of proof that the system does work. The legislative and regulatory uncertainty creates a lot of noise, so people get paralyzed and unsure of how to react or where to move.

PS: How do we as an industry make sure that these plans are in fact designed appropriately for participants to really help them?

Sarsynski: You have to understand the needs and wants of the sponsor and the demographics of the plan. Then focus on plan design factors: auto-enroll, auto-deferral increases, step-up contributions, opting out rather than opting in, target-date funds (TDFs), custom choice funds, your lineup being no more than 15 investment categories, those sorts of things. I’d say two-thirds of a participant’s success is due to the plan design. One-third of participants’ success is around how the plan provider, adviser and employers work together to influence participant behavior.

Influencing that participant has to be done in a variety of ways; everybody receives information differently. For example, Gen Yers can watch themselves age on their iPhone, and it motivates them to think about increasing their deferral rates.

When I’m out talking to sponsors, I like to say, “How many of you know what percent of your employees are on track to retire with at least 75% of monthly replacement income?” Often they can’t answer that question. We want people to be able to retire comfortably on their terms, that’s why we do this. So, we have tools that tie into the individual’s data, and whether it’s at the participant or the plan level, all sponsors can know whether or not they’re on track.

PS: What are some of the various measurements, metrics and data points that you can use to evaluate whether or not participants are adequately prepared?

Ready: Retirement preparedness for every individual means a lot of different things. Most middle class Americans think in terms of pay replacement, and at Wells Fargo, we use 80% annual income replacement. The most important thing is to have a target and a plan, and then break that down to a simple next best step to improve the retirement outcome. Retirement preparedness for somebody that is near retirement is not only about a paycheck. It gets into things like Social Security, Medicare and market volatility and how to create that paycheck, so it’s a whole separate sort of retirement readiness.

PS: What about things like match design—a stretch match, for example, and trying to use the fact that participants save up to get the maximum match to their advantage. Are you seeing that at any of your plans?

Ready: That’s very common. Traditionally, the 401(k) was about voluntary participation, and the way you enhanced that was to drive a match at the lower end of the deferral. Now it’s about a savings rate, so we’ll take a match and drive it to a 50-cent match on the dollar up to 6%, versus a dollar-for-dollar match on the first 3%. It doesn’t change your match cost, but it encourages higher deferral rates.

If you think about our industry, there’s tremendous focus annually around medical and voluntary benefits, but for some reason we’ve put retirement on the side. Now we’ve started to see dialogue to encourage enrollment in retirement plans as part of the annual benefits enrollment process. This drives a higher savings rate, because after medical, the second biggest decision an individual will make in terms of controlling his destiny is retirement, so we bring that into a level of importance like we place on medical benefits.

Musto: We’ve seen a continuum as we work with our clients, in terms of willingness to invest in the plan and to embrace innovation. It’s difficult to change those perspectives and views, but it’s a very powerful conversation to have with the retirement committee to try and get folks from human resources (HR) and the financial organization on the same page.

Personal engagement is critical. First, you need to diagnose before you prescribe. Understand where participants are, what segments of the population aren’t on track to achieve that 75% income replacement rate, and why they’re not enrolled, not participating enough or have bad diversification. Then make better-informed plan design decisions, and target education and communication outreach to those participants.
Second, it’s really about connections, connecting the emotion to the money. You can have two individuals that aren’t contributing enough into their plan, one 55 and one 25. You might want to show the 55-year-old how others at his age have accumulated income replacement and what expenses might be. But for a 25-year-old, forget about retirement income replacement and expenses when you’re 75, just focus on the power of compounding in the short term. By connecting with people in those ways, we find the results are dramatic in terms of influencing behaviors.

PS: What other trends are you seeing in investments? How can plan sponsors optimize the investment solutions within their plans? And what’s the role of investments today outside of just the default?

Musto: I think the move toward professionally managed solutions is really having a positive impact. We know that the majority of participants would rather have someone with experience to guide and drive their investment strategy, but there’s still room for a continued evolution of those solutions in the marketplace.

We’ve also seen among our clients a fairly rapid move to simplify lineups. There are firms that have pursued what I would call institutional approaches, trying to prepackage components of the core menu that in combination will allow participants to have “training wheels” as they select investments.

It’s really important to think holistically about plan design, communication, administration and investments. These things need to work in harmony.

Sarsynski: I think that education around this target-date point is really important because often that’s their sole investment. We just got some research that we did with our participants, and we saw that 52% of our Gen Yers just default into their target-dates; that number goes down to 31% for Gen Xers and 24% for Baby Boomers. Everyone has got to understand how they use target-dates or lifecycle funds or a custom choice account, because that’s where the Gen Yers are putting their money. And based on what we know, 90% of plan participants don’t do anything with that investment all year long, so we’ve got to make sure we’re really focused on that lifecycle or target-date fund.

Ready: We ask committees, “Where do you spend most of your time?” The answer: 70% of our time was on investments and fees. And those two items, although very important, have the least impact on retirement outcomes. Savings rate and proper asset allocation are going to drive the outcome.
The dialogues we’re starting to promote in the benefit committee meetings are more driven around reinvesting the cost recovered from the lower fees and investment expenses into education, one-on-one conversations, advice access or improving the glide path to drive better retirement readiness.

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