Inertia is taking hold in some areas of the Defined Contribution (DC) industry today, and the reasons are clear. An active litigation environment has many plan advisors on their heels, and the steady drumbeat of negative headlines about American’s retirement readiness and the overall health of the DC system can breed defeatism.
While challenges do exist, there are opportunities for you to make meaningful progress. Our topic paper explores three “easy wins” – actions that you can take today to help plan sponsors improve retirement outcomes for their plan participants.”
Easy Win 1
Encourage participants to enroll at prior savings rates
- In many cases, auto-enrollment and auto-escalation are now more of the rule than the exception. While that’s good news for improving participation, it’s not a silver bullet.
- So what’s the problem? As participants change jobs they may be auto enrolling at rates lower than their previous, escalated deferral rates. Barring intervention, we are increasingly likely to see participants experience what we call “auto-decrease”, wherein they may spend much of their careers at or near a low default deferral rate.
- For plans with auto-enrollment, consider giving new hires a clear opportunity—by way of the behavioral finance concept of “Active Choice”—to continue a higher deferral rate from a prior plan while continuing to maintain the safety net of auto-enrollment.
Easy Win 2
Target communication for better outcomes
- Study results suggest that financial stress can be a productivity killer at work, and one of the biggest financial stresses among employees is preparing for retirement.1
- According to the 2016 Franklin Templeton Retirement Income Strategies and Expectations (RISE) Survey, stress about financial issues related to retirement peaks among Americans ages 45–54.2
- We suggest that plan sponsors focus on specific demographics within their plan and target communications to help those participants plan for retirement.
Easy Win 3
Offer flexible payout options for participants in retirement
- According to one data set, a mere 13% of plans allow for ad hoc partial distributions.3 That means that the vast majority of plans may be pushing participants—particularly those early in retirement—to make suboptimal decisions about how they manage their retirement assets to meet retirement expenses.
- Talk with plan sponsors about offering participants the flexibility for drawing down their plan assets.
- Late-career participants tend to have highly individualized retirement income challenges. No circumstance is typical and distribution flexibility is key.
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- Source: PwC. “2016 Employee Financial Wellness Survey.” http://www.pwc.com/us/en/press-releases/2016/pwc-financial-wellness-survey-press-release.html
- Source: Franklin Templeton Retirement Income Strategies and Expectations (RISE) Survey, 2016. The 2016 Franklin Templeton RISE survey was conducted online among a sample of 2,019 adults comprising 1,011 men and 1,008 women 18 years of age or older. The survey was administered between January 4 and 18, 2016 by ORC International’s Online CARAVAN®, which is not affiliated with Franklin Templeton Investments.
- Source: “Retirement distribution decisions among DC participants—An update,” Vanguard, September 2015.
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With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
