Employers and their consultants have a difficult line to walk. You have to balance complex fiduciary responsibilities with the goal of always seeking ways to improve outcomes for participants. You also want your plans to be something employees opt in to, thus keeping both participation and satisfaction rates high.
It’s not simple work, and it’s important to get it right. We recently conducted research spanning nearly one million defined contribution participant accounts and found that close to three in ten (28%) employees who make their own investment decisions often notably over- or under-allocate to equities as compared to what you typically find in the glide path ranges of professionally managed strategies. A sizable number were close to or at 100% equity exposure even in the critical years leading up to and in retirement.
These findings underscore the importance of designing strategies to help increase participation and improve both outcomes and satisfaction among participants. At the same time, it’s important to have the processes in place to ensure you’re meeting your strict fiduciary responsibilities.
We believe these four steps can help you walk that line:
No. 1: Understand the importance of employee demographics to your choice of a suitable QDIA
Many plans have overemphasized cost as the key factor in the selection of their qualified default investment alternative (QDIA). While cost is important, simply defaulting to a low-cost target date fund (TDF) without employing a thoughtful selection process isn’t likely to deliver sufficient long-term value to participants when considered alone. The QDIA should factor in the demographics and behavioral profile of the employee base.
There are important behavioral elements to consider when determining whether a QDIA is a good fit. Human decision-making around market risk, inflation risk, interest rate risk, and longevity risk often differs depending on a participant’s life stage. Understanding how emotions and biases shift over time, depending on the age of a plan’s participants, can help to inform what, when and how asset allocations should shift in a QDIA.
Another issue is how the QDIA works to help protect older employees, particularly when markets waver. If the QDIA is a TDF, for example, ensuring that conscious and deliberate decisions are being made regarding risk exposures, especially as the glide path approaches and potentially moves beyond its target date, is critical. In making that assessment it’s important to evaluate not only high-level equity or fixed-income allocations but also allocations to more volatile sub-asset classes such as emerging market equities and high-yield bonds, which may do more harm than good for participants closing in on retirement.
The QDIA is the anchor of a plan. Our research finds TDFs, as well as managed accounts, can serve a great role in delivering diversified, risk-appropriate portfolios to participants. But it’s important to bring a thoughtful approach to the selection process.
No. 2: Revisit auto- and re-enrollment policies
Employees instinctively realize that they need to save for retirement. Removing as many barriers as possible to allow inertia to overcome procrastination can help. For example:
- Establish an automatic re-enrollment policy into a QDIA for all eligible employees—not just new hires
- Raise the default contribution rate—for example, from 3% to 6%
- Increase the frequency of automatic enrollment and re-enrollment for all employees
- Add an automatic escalation feature that increases a participant’s contribution by a fixed amount each year
Consider re-evaluating these auto-enrollment and sweep policies with your provider on a systematic, recurring basis to help keep participants on track.
No. 3: Re-evaluate participant education
Here again, understanding the underlying demographics of the plan participant universe will help determine the best educational mediums and materials to use. People expect personalization so the information you provide should be relevant, meaningful and something they can act on. The tools and resources exist to deliver that. More importantly, participants will increasingly expect it as so many other parts of their lives are being tailored specifically to their interests and needs.
Email campaigns, audio presentations, newsletters, webinars, workbooks, workshops, and in-person discussions and presentations are some of the many ways in which long-term participant engagement and outcomes may be enhanced. But it shouldn’t be an exercise of going through the motions. It’s important to measure the success of the program and continually seek ways in which it could be improved.
It’s also worth recognizing that even when an ideally designed and delivered educational strategy has been activated, some participants may still fail to engage. For those employees, you might be well served by automatically enrolling and re-enrolling them into a QDIA.
No. 4: Add a Self-directed Brokerage Account (SDBA)
There is always a diversity of age, circumstances, expertise and more within a company’s demographics. As a result, a one-size-fits-all retirement plan can feel too confining for some participants.
Offering an SDBA option might be ideal for employees who are knowledgeable, experienced investors comfortable making their own asset-allocation decisions or who choose to delegate management of their SDBA to their personal financial advisor.
Another example could be participants seeking to express their Environmental, Social and Governance (ESG) priorities. While plan sponsors and consultants might understandably be hesitant to define what ESG is in a core plan line-up, individual participants may have clear-eyed views of their own. An SDBA can help fill that gap.
Likewise, with many plans offering only one or two fixed-income funds in their core line-up, an SDBA offers those nearing retirement, or their advisors, the opportunity to diversify that portion of their account to better meet their specific needs.
Focus on Plan Goals
As a company grows and shifts over time, taking a thoughtful approach to all aspects of its defined contribution plan becomes even more important. Fees are always a primary consideration when selecting the right investment vehicles, but not the only one, so do your due diligence.
Make sure the QDIA has been thoughtfully selected based on employee demographics. Revisit auto-enrollment features to potentially increase plan participation and improve outcomes. Take a closer look at your educational approach and consider ways it could be improved. And consider the benefits of adding an SDBA to give participants additional flexibility and options. Design elements like these can help achieve your overall goal of keeping employees invested and engaged with the plan.
Nathan Voris is Senior Managing Director, Business Strategy, Schwab Workplace Financial Services. Jake Gilliam, Managing Director, Head of Multi-Asset Solutions, Charles Schwab Investment Management, Inc.
See Keeping on course: Analyzing real-world participant account risks and A potentially risky proposition for plan participants for full details on our recently released research regarding plan participant equity allocations.
