Here’s a novel thought—401(k) plans should cover all of their employee participants’ financial needs, not just their retirement needs.
While many companies have their hands full figuring out how to secure their workers’ retirement, research and consulting firm Mercer hypes a study it recently performed that found “in an evolving, volatile market, companies with DC plans should shift to address their employees’ broader financial needs.”
Unsurprisingly, Mercer’s survey, “Inside Employees’ Minds,” reports that younger employees are more concerned with current financial challenges and making ends meet rather than saving for retirement. A mere 10 percent of millennials are worrying about retirement, whereas nearly 30 percent of baby boomers are worried about retirement savings. Many approaching retirement have debt levels that will be a drag on their retirement income.
“No longer can we only push the ‘contribute more or else’ agenda because many individuals dealing with immediate needs feel they have to focus more on reducing debt than they do on making extra retirement contributions,” Betsy Dill, Financial Wellness Advisory Leader at Mercer, said in a statement.. “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.”
Mercer encourages employers to question their current retirement and financial offerings to their employees, with the following areas of focus in mind:
- Are the programs offered to help employees address their financial needs understood and used? Many large employers, in addition to their 401(k) 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. Often, these programs go underutilized. Employers need to assess which employee segments would benefit from these programs and how to connect those employees to benefits in optimized ways.
- How different is the retirement experience of men and women likely to be in your organization? Women face a myriad of challenges in the workforce including lower salaries, more employment gaps, and longer life expectancies. Women also typically have retirement balances that are 30percent to 40 percent 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.
- Is your investment lineup working for your employees?
Employers are encouraged to review their analysis of the retirement plan’s participant demographics and investment behaviors and assess how appropriate your investment lineup is for your participants. For example, custom multimanager options may provide participants access to greater diversification without adding complexity to the investment decision-making process.
- Does your retirement plan maximize tax efficiency and do employees understand what that means?
The youngest employees in your workforce could potentially benefit from Roth contributions rather than a pre-tax election. 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. Consider what makes sense for your plan, and then ensure that your employees have access to information that allows them to understand the current landscape.
- What is the appropriateness of your plan’s default investment alternative?
A Government Accountability Office report from September 2015 reiterates the importance of selecting and monitoring the retirement plan’s default and recognizes many of the challenges that plan sponsors face in the process. Ensure that your plan’s default is still a good fit for your participant base; use analysis of participants to determine the appropriate default.
- What challenges result from having retirement assets in multiple places?
Lifetime employment is extremely unlikely these days. Are you encouraging participants to consolidate their balances into your plan? 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.
- When did you last review your plan’s capital preservation option?
Round two of money market reform will take effect in October 2016. The recent reforms have reduced the expected returns and made them less customer friendly, as well as caused potential implementation challenges for DC plans. Consider whether a money market fund remains a suitable option or whether other alternatives — such as stable value — better meet objectives.
- Are you helping participants make better decisions at retirement?
“At retirement” optimization can provide significant benefits to retiring participants. This includes making social security elections, medical coverage decisions, tax optimization and decisions on when to draw from which retirement product.
- Are environmental, social, and governance (ESG) factors a consideration for your investment lineup?
This issue is being raised more often, particularly by younger participants, as many are interested in sustainable investing. Recent US Department of Labor guidance has clarified the use of ESG factors in selecting plan investments. Potential responses can range from explicit responsible investing/impact investing options to the consideration of ESG as a key factor in the selection of investment managers.
- Are loans really deteriorating the financial wellness of your participants?
Many sponsors are deeply concerned by participants taking out loans on their plan assets. But we must not be quick to judge—as some alternatives like credit card debt or payday loans exist at far higher interest rates. It is important to monitor loan activity, but it’s also critical to understand the reasons behind the need for participant loans.
“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,” added Dill. “Empowering employees to make better financial choices through education and programs can boost employees’ morale, productivity and focus.”