Top Action Points for DC Plans in 2016

Leading-edge employers already know “retirement plans are not enough” when it comes to improving employees’ long-term financial outlook, according to a new Mercer study. 

Research from Mercer suggests that the work of defined contribution (DC) plan sponsors is often affected by the broader financial issues faced by their company’s work force, so it makes sense to include broader topics and considerations about financial wellness in the benefits design effort.  

The findings are from a new Mercer survey, “Inside Employees’ Minds,” which finds younger employees “are more concerned with current financial challenges and making ends meet than with saving for retirement.” Of particular importance, Mercer finds, just fairly small groups of workers, whether Millennials or Baby Boomers, say they are particularly concerned about their retirement outlook.

The lack of concern is itself concerning, Mercer says, and the findings demonstrate that employers need to consider broader financial wellness rather than only employees’ and retirees’ ability to achieve a target income replacement ratio. Betsy Dill, financial wellness advisory leader at Mercer, says plan sponsors can no longer rely on the simple message of “contribute more, or else.”

“Many individuals who are dealing with immediate needs feel they have to focus more on reducing debt than they do on making extra retirement contributions,” Dill says. “Employees will receive far more value from receiving help in making the best decisions to suit their own financial circumstances—not necessarily focusing solely on their retirement plans.”

With this point in mind, Mercer encourages employers to “question their current retirement and financial offerings.”

NEXT: Questions to ask 

The first question plan officials should ask heading into 2016, according to Mercer, is whether the programs offered to help employees address their financial needs are actually understood and used at a satisfactory level. There is no sense in investing additional dollars in the benefits package if the dollars already being paid in are not being maximized.

As Mercer explains, many large employers, in addition to their defined contribution plan, “offer employees the ability to access financial advice, tools that calculate retirement income, algorithms to recommend asset allocations, health advocacy for dependents and parents and assorted voluntary benefits, among other options.” Very often some or all of these programs go underutilized in a given employee population.

Another important consideration is for the sponsor to put itself in the shoes of the plan participant, as it were. What is it like to actually use the plan, and are there common points of friction that can be addressed? A key extension of this question, Mercer says, is to ask: How different is the retirement experience of men and women in the organization likely to be? Of employees at different salary levels, or in different job functions? 

“Women face a myriad of challenges in the work force, including lower salaries, more employment gaps and longer life expectancy,” Mercer says. “Women also typically have retirement balances that are 30% to 40% lower than those of men. Employers need to use analytics to understand the differences and develop targeted communication or support strategies to address these realities.”

Beyond the increasingly common issue of streamlining the investment menu to promote easier decisionmaking, Mercer urges plan sponsors to ask whether their benefits ecosystem maximizes tax efficiency. For example, the youngest employees in a given work force could potentially benefit from Roth contributions rather than a pre-tax election, Mercer says. “Also, the ability to offer in-plan Roth conversions can increase opportunities for tax diversification and efficiencies, especially in combination with traditional after-tax contributions,” the firm says.

NEXT: More questions to ask 

Mercer reminds plan sponsors that lifetime employment is “extremely unlikely these days.”

“Are you encouraging participants to consolidate their balances into your plan?” the firm asks. “We believe that many participants would benefit from having all retirement assets in one place. It would make managing retirement assets less complex, and in-plan investment fees are typically far lower. In addition, higher assets within a plan drive down costs for everyone through economies of scale.”

Beyond all these points, plan sponsors must also be aware that “round two of money market reform will take effect in October 2016.” According to Mercer, the ongoing reforms “have reduced the expected returns and made [some money market options] less customer-friendly, as well as caused potential implementation challenges for DC plans.” Sponsors should therefore “consider whether a money market fund remains a suitable option or whether other alternatives—such as stable value—better meet objectives.”

Finally, Mercer predicts that the distinct themes of retirement income planning, environmentally and socially responsible investing, and retirement plan leakage will all be major discussion points in 2016, so now is the time for DC plan sponsors to start thinking deeply about them.

“Overall, employers need to realize that their employees’ financial needs are evolving, so their approach and offerings need to evolve in tandem to meet those needs,” Dill concludes. “Empowering employees to make better financial choices through education and programs can boost employees’ morale, productivity and focus.”