In the not-so-distant past, DC plans were supplemental savings vehicles intended to augment a pension and Social Security benefits. Today, however, DC plans serve as the primary source of retirement security for many working Americans. As a result, more participants are shying away from the “do it yourself” approach and looking for more help.
With the evolution of these plans, in both complexity and priority, employees are looking to their employers for guidance. Unfortunately, though, this message hasn’t reached many employers, but it also presents a great opportunity for retirement advisors to share some insights with plan sponsors.
Because of this disconnect, there is currently a significant difference in what plan participants want from their employers and what plan sponsors think they want. While sponsors still look for participants to become educated about saving and investing, participants are extremely open to more intervention and communication from their plan sponsors.
Understanding and, more importantly, addressing this disconnect is critical for both groups. From the potential increase in participant retirement savings and engagement to more appropriate plan allocation and fiduciary protection for the plan sponsor, there is much to be gained. Following are a few items advisors can keep in mind when talking with their clients about the best ways to ramp up employee retirement support.
Make it Easy: Automate Where Possible
According to recent surveys of sponsors and participants by American Century Investments®, only 8% of employees believe their employers do everything they can to encourage them to save for retirement. And a majority suggest they would save more if their employer did more to encourage them.
When it comes to saving for retirement, 84% of employees want a nudge from their employers, and 15% want a “kick in the pants.” Perhaps in recognition of their own behaviors, participants look to their employers to both encourage and set some boundaries to help them save.
Recent research shows that a majority of participants are very receptive to automatic enrollment and are also in favor of a higher default contribution rate, with more than 60% agreeing that their companies should have a 6% automatic enrollment. The numbers go up even more when it comes to the desire for a forced roll-up each year — approximately 70% percent are at least fairly interested in having a program that automatically increases their savings by 1% annually. Advisors can help educate and remind plan sponsors about these options and the potential outcomes that auto features can achieve.
Reset Education Programs: Focus on Finding Money
Most participant education programs focus on the importance of saving and the value of the employer-sponsored plan, two elements many participants already understand and appreciate. Talk with plan sponsors about changing the focus to financial wellness and household budgeting. This will help their participants make small lifestyle changes to make saving affordable. Have them try simple trade-off exercises to help participants recognize where they can “find money” to save. Highlighting items such as coffee purchases, movie rentals and dining out can help participants consider simple spending changes that can have a significant impact long-term.
Mix it up: Consider a Plan Investment Re-enrollment
When talking with clients, advisors should also be mindful of plan investment re-enrollment, a process in which participants’ current account balances and future contributions are invested in the plan’s Qualified Default Investment Alternative (QDIA) unless participants elect to opt out.
This can be an extremely effective strategy to improve participants’ asset allocation. Early career participants who are invested too conservatively, pre-retirees who are invested too aggressively, and participants who have simply failed to rebalance for an extended amount of time are a few of the most common employee groups that benefit from this action. Advisors also can discuss an even more proactive strategy, which includes conducting a retroactive automatic enrollment at the same time to capture eligible participants who are not contributing to the plan.
Additionally, educating plan sponsors about the fiduciary protection they may receive by executing an investment re-enrollment is important as well. With the opt-out provision, sponsors gather either affirmation of elections by engaged participants, or confirmation of the default by disengaged participants. Generally, anywhere from 70% to 85% of participants will default into the plan’s QDIA, which should result in the overall plan allocation being better suited to the demographics of the workforce.
Conclusion
It’s important to understand that employers recognize that their most important plan objective is to help provide financial security for their participants. Now is the time to talk with clients about evaluating current programs, as participants are more open to positive reinforcement and involvement than ever before. Proactively improving the current program through plan administration, employee communication and investment selection are ways advisors can help their clients. Being progressive in plan design, putting up guardrails for employees and establishing a solid retirement plan framework will effectively elevate the employer’s offering while providing employees with the increased support they desire.
Diane Gallagher is Vice President of DCIO Practice Management for American Century Investments. She can be reached at [email protected] or 816.340.3063.
