Principal Financial has traditionally been a dominant player in the small to midsize market 401(k) space. But the Des Moines-based financial services company plays an even more dominant role with other kinds of retirement plans. To learn more about Principal’s position and vision for the retirement plan world, EBN recently spoke to Nora M. Everett, president of Principal’s retirement and investor services unit, and chair of Principal Funds.

How engaged is Principal outside of the realm of DC plans?

We actually are No. 1 with regard to plan count in the DB world, in the non-qualified world, and in the ESOP world. So when we talk about retirement plans, we aren’t just talking about 401(k)s.

What’s happening with your DB business?

Of course no one’s predicting that the DB space is going to be a growth engine. But we’re confident that this block is going to be around for a long time. That doesn’t mean there aren’t plenty of opportunities for us in the full-service payout business. If a defined benefit plan wants to lay off that risk, we’re also on the other end with our full service payout work.

Also see:PBGC rate increases will create ‘ripple effect through whole system.”

Have you seen any uptick in the DB area with very small plans, where business owners are trying to maximize retirement savings in a way they can’t with a DC plan?

Our experience has been pretty much what you see in the overall market – a flat to slightly declining trend line.

How about ESOPs?

Our ESOP business is fairly flat right now, too. But we’re watching three positive factors we think will contribute to growth: Business valuations are back up to pre-recession levels, credit markets have loosened, and as the population continues to age, business owners are looking to retire.

Also see:ESOP fiduciaries not entitled to presumption of prudence.”

Do the advisers and consultants who represent you to plan sponsors assume the primary burden of participant education?

We’ve made a lot of investment in interactive participation education tools over the years, and advisers can take advantage of that. But we’re really flexible. We’ve got a whole menu of ways that we can deliver participant education, either through the adviser, or alongside the adviser, depending on what that adviser wants to do.

But we’re also seeing more and more advisers really understand that ultimately, to be successful, plan design is key to get the kind of outcomes we want for plan participants. Education’s important, but it’s not necessarily leading to the kind of actions people need to take.

Also see:Annual 401(k) plan education: 5 action items for participants.”

Do you mean auto-enrollment and auto-escalation?

That’s part of it. It helps people overcome indecision and inertia that stems from having to make so many decisions. In our block of business, when our plan sponsors are auto-enrolling, 91% of their employees stay auto-enrolled. And what’s interesting as well is if the plan design is to auto-escalate, 86% are staying with the auto-escalation. The number of our clients that are now implementing this auto-enroll has tripled over the last five years.

What’s the typical initial deferral rate for your plan sponsors who auto-enroll participants?

More than 50% of our auto-enroll plans establish a default of 6% or greater. That’s a great place to start, and auto-escalate participants up to 10%, usually in 1% increments, sometimes 2%. Some sponsors worry that 6% is too high to start, but we often find that participants are really thankful that that’s being done for them.

Also see:Helping employees get on the right retirement track.”

Tell me about Principal’s investment platform.

We’ve got an open platform for defined contribution plans, but also have a really broad array of proprietary options. Every asset class and fund structure is represented. We have a broad array of target-date choices – multi-manager, hybrid, active. About 65% of our account value is proprietary, but for about 10% of that 65%, we hire non-affiliated sub-advisers.

What about within target-date funds specifically?

It’s roughly the same percentage, interestingly enough. I don’t know if that’s a coincidence; there’s probably a correlation there.

Do you use outside funds to cover alternative investment asset classes?

It’s really a combination. We have a series of funds we call core satellite funds. It’s a suite of funds built around an enhanced index core fund. The funds outside the core are non-correlated, and actively managed.

Also see:What’s the right 401(k) contribution rate?

Do you have alternative glide path choices in your target-date funds?

Yes. But the vast majority of our plan sponsors and advisers really recognize that with the longevity issue – with many retirees living 30-40 years into their retirement – they really do need some exposure to some growth assts. So the vast majority of our target-date block is in the glide path that has some of that equity exposure throughout the retirement years.

Also see:Equity exposure in TDFs still needed in retirement.”

What is Principal’s retirement transition program?

We believe it’s important to engage participants when they are beginning to think about the upcoming change from saving for retirement, to turning their retirement savings into a regular retirement “paycheck.” We think age 55 is about right. The majority of them, the middle income ones, don’t have a personal financial adviser. When that’s the case and if they’re interested, we can offer to connect them with one of our counselors or a Principal Advisor Network adviser, to look at their financial picture holistically.

How does it work?

First, there’s educational content online, some modeling tools that give them a chance to have a reality check about whether their retirement nest egg is going to be adequate the way they’re going. And there’s a link that would allow them to move to an adviser who is part of our network, as I mentioned. Everybody at this stage feels that their set of facts could be very different than their neighbor’s or their fellow employees, and they’re usually right. So there’s still that need for some customization. 

Do you make it easy for participants to buy annuities? Many plan sponsors are nervous about incorporating an annuity option into their plans.

So in 2008, the Department of Labor put out a safe harbor rule for the selection of annuity providers, and that really was a helpful roadmap for plan fiduciaries. It really set out the process that you should go through as a fiduciary when you’re choosing your annuity provider. 

Also see:Annuities meaningless if savings ‘practically zero.’

But at the end of the day, it also comes down to a judgment call on the financial strength of the annuity provider. So as an insurance company we show the ratings that we get from the various rating agencies, our size, our history, our capitalization. All of those things from a practical perspective just add to the comfort level with regard to following the safe harbor rule around process.

So you offer an in-plan solution?

Yes. In October we introduced our Principal Pension Builder that will allow participants to buy a deferred income annuity while they’re still actively participating in the plan. Plan sponsors can incorporate it into their plans, and participants can begin contributing next March.

Also see:In-plan guaranteed income products growing in popularity.”

The challenge for all of us in the industry will not to not overcomplicate the annuity contract and the decision-making process the participant will need to follow. We’re trying to keep it as simply constructed as possible.

What about longevity annuities?

In February we came out with one of the first qualified longevity annuity contracts. It is an available enhancement to our deferred income annuity product.

What do you see coming down the pike for the industry more broadly?

A lot will depend on what happens in Washington, D.C. For example, there’s a bipartisan effort to create a new safe harbor for the 6% minimum model deferral, auto escalated to 10%.

Why is that necessary? Lots of sponsors are already doing it, as you have pointed out.

I think it’s just that additional reassurance. I think of it as additional insurance for the plan fiduciary, just like the QDIA safe harbor. It creates a level of certainty that just takes away any concern.

Also see:Small employers have new retirement plan option with myRA.”

Another issue is expanding coverage, particularly among employees of smaller companies. As you get into the smaller employer, 100 lives and less, you still have almost 50% of those employees who don’t have worksite access. So we’re also looking for bipartisan support for a startup tax credit for small employers, to address that coverage issue at the very small end of the market.

Richard Stolz is a freelance writer based in Rockville, Maryland.

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