“With one in three Americans having zero saved for retirement and nearly one-third of Americans over the age of 85 having no savings, it is hard to say that we as a nation are preparing people for retirement,” says Rick Irace, chief operating officer (COO) at Ascensus in Dresher, Pennsylvania. “As providers, we have been charged with this noble cause. We are not doing enough.”
Advisers are uniquely tasked with changing this trajectory, and they have been making headway, says Justin Morgan, managing director of plan administration and service at Unified Trust Co. in Lexington, Kentucky. “Advisers are succeeding in making sponsors more aware of the importance of the 401(k) plan as it relates to the end goal of retirement income replacement rates,” Morgan says. “Retirement readiness is resonating among sponsors. By showing them what percentage of their work force is on track to be able to retire, advisers can have more successful conversations with them.”
Approaching the conversation about retirement readiness from the sponsor’s point of view rather than the participant’s will get the sponsors to stand up and pay attention, says Jim Kais, senior vice president and national retirement practice leader at Transamerica, in Miami.
“If you tell the chief financial officer [CFO] that the company is going to pay for the cost of people not retiring, either now or later, and that the cost of setting up a plan and offering matches is far less than the cost of health care and workers’ compensation for older workers”—let alone the risk of having a work force that cannot afford to retire—they grasp the significance of establishing a robust plan, Kais says. “Put it in terms of profit and loss,” he suggests.
Indeed, a recent TIAA survey of 900 plan sponsor executives found that their top concern was people delaying their retirement—thinking they had too little saved to retire on, notes Daniel O’Toole, senior managing director and head of research and plan menu construction at TIAA in Boston.
In line with the worry about cost is the practical issue of work force management, says Sri Reddy, senior vice president and head of full-service investments at Prudential Retirement in Hartford, Connecticut. “Plan sponsors are beginning to realize that if their participants cannot retire, it may produce unintended consequences,” Reddy says. “If you expect five people to retire and only one does, you are unable to promote four people.” Together, these two issues “resonate in a language for plan sponsors that makes sense,” says Rob Austin, director of research at Alight Solutions in Charlotte, North Carolina. “When you tell the plan sponsor that people might keep working simply because they cannot afford to retire and that this will cause problems for succession planning, then, without question, the retirement adequacy conversation holds more gravitas.”
A Delicate Balance
However, for an adviser pitching new business or in the early stages of a new sponsor relationship, it may not make sense to talk about automatic enrollment, company matches, escalation, re-enrollment and more aggressive deferral rates because that is sure to overwhelm the sponsor, says Aaron Schumm, CEO of Vestwell in New York City. “When advisers are pitching a plan design to a sponsor, the easiest way is to communicate an apples-to-apples comparison in terms of investment administration and recordkeeping services,” Schumm says. “Once the relationship has been established, the adviser will see far less pushback when talking about getting the plan to deliver better results.”
The best way for plans to help participants is to automatically enroll them, the executives say. However, the 2016 PLANSPONSOR Defined Contribution (DC) Survey found that only 41.1% of plans use automatic enrollment and that this has remained stagnant over the past five years.
But with “plan sponsors taking a more proactive role in driving participation and how retirement savers are invested,” advisers can strike while the iron is hot to make the case for automatic enrollment and escalation, says James Nichols, head of Voya Financial’s customer solutions group in Windsor, Connecticut. “One of the most successful ways to help Americans achieve financial security now and in retirement is auto-enrollment and -escalation,” Nichols says. “We think they are critically important.”
The caveat to this is to not use a 3% deferral rate as the default, Nichols says. The DC Survey found this is still the overwhelmingly favored default, used by 45% of sponsors. The only reason sponsors have stayed at this level is because the Pension Protection Act of 2006 (PPA) set 3% as the safe harbor for discrimination testing, Nichols says.
Steve Parnell, director of strategic markets for Hartford Funds in Wayne, Pennsylvania, agrees: In Hartford Funds’ book of business, the 3% deferral rate is the norm. However, there are some plans using an initial deferral rate of 6% or higher, he says. “It is encouraging that some plans are listening to their advisers, and seeing that it is successful.”
The Full ‘Auto’ Suite
When plans use auto-enrollment, particularly at an aggressive initial deferral rate, and pair it with annual automatic escalation of 2% up to a 10% or 15% threshold, “combining the two is tremendously powerful,” Irace says.
Parnell says he is “very encouraged, seeing plan advisers thinking outside the box by encouraging higher deferral percentages with a stretch match, as, to get to an 80% pre-retirement income replacement ratio, you might very well need to save 15% of your salary.”
As far as employers’ resistance to using automatic features and company matches due to cost concerns, advisers can effectively counter that by pointing out that the tax deductions are greater than the costs, Irace says. “And if it is a company in a high turnover industry, worried about ending up with accounts with small balances, suggest delaying eligibility for six to 12 months,” he adds.
However, while auto-enrollment has been embraced by a number of plans, the PLANSPONSOR DC Survey found that a scant 16.5% of plans use auto-escalation, providing an opportunity for a conversation that many advisers still need to have with their plan sponsor clients.
“It is very important that when the adviser has the conversation with his plan sponsor client about automatic features that it is done in a thoughtful manner,” Morgan says. “It should not be a rubber-stamp decision. Don’t just ask the sponsor to agree to automatic enrollment and escalation and check the box, but talk about the importance of having an optimal deferral rate.”
The next big conversation advisers can have with their sponsor clients is to automatically re-enroll participants into the plan every one to three years, so it is not just new employees but also existing ones who are given the chance to be swept into the plan, executives say.
The DC Survey found that only 13% of sponsors had conducted a re-enrollment in the past 12 to 18 months. This did not surprise the sources for this story, who note that re-enrollments are typically done only when a recordkeeper or the investment lineup is changed. Clients of Hartford Funds, however, are beginning to ask about re-enrollments as a best practice, Parnell says. Advisers can help sponsors realize that it does not make sense to do everything they can for new employees only, but that they periodically should try to help existing employees as well, he says.
Unified Trust Co. is also beginning to see a slight uptick in re-enrollment “on an annual basis or known frequency,” Morgan says. “The idea is to recast the net and use participant inertia as a positive.”
Retirement Income Replacement
Finally, the last ingredient that industry experts believe is critical to help participants save adequately for retirement is to show both the sponsor and the individual participant their retirement income prospects. For sponsors, it means telling them what percentage of their workforce is on track to replace 75% to 80% of their income by retirement age. Unfortunately, only 14.1% of employers are monitoring retirement readiness, according to the 2016 PLANSPONSOR Defined Contribution Survey, so there is much work that needs to be done here. By showing sponsors where they stand, this can open the door for advisers to have conversations about deferral rates starting at 6%, stretch matches, eliminating leakage, financial wellness and using auto escalation to get up to contribution levels of 15% or higher.
For participants, this means converting their balance into monthly income illustrations and providing them with a retirement income calculator tool that can show them how changing their investments, savings rate or retirement date can improve their situation, Nichols says. The home page of Voya’s website has this tool front and center, he says. “The experience is focused on outcomes, whereas our old web page only showed you your balance.”
Given all of these tools available at advisers’ disposal , Irace says he is more optimistic than ever that they will succeed in getting more people ready for retirement. “Seeing employers continue to adopt best practices to help people reach their financial goals, I cannot imagine a more exciting time for all of us to be in this industry,” he says.
The majority of plans, 61.7%, use a target-date fund (TDF) as the qualified default investment alternative (QDIA), the 2016 PLANSPONSOR Defined Contribution (DC) Survey found. Likewise, the 2017 PLANADVISER Adviser Value Survey shows that, among plans with an adviser, 79% have TDFs.
Retirement industry executives believe TDFs are a sound QDIA, due to the fact that very few people can build a well-diversified portfolio on their own; moreover, because participants do not change their investments, the self-adjusting glide path is a good solution.
But TDFs need to become more dynamic and personalized, says Shelby George, senior vice president of adviser services at Manning & Napier in Rochester, New York. “As an industry, we shouldn’t just promote automatic enrollment as the crown jewel, but [promote] a holistic approach to participant education and a TDF that has additional levels of risk management for those closer to retirement. Those might be a more cost-effective way for employers to help people with retirement readiness.”
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