Retirement readiness metrics key to 401(k) plan success
“Success” has many definitions. When it comes to retirement plans, it’s critical to use the ones that tell you and your employees whether they are headed down the right path. It’s also helpful to have a gauge that drives the point home to the CFO and CFO, such as the financial implications of a plan that isn’t getting employees where they need to go. EBN recently discussed these and other topics with Elaine A. Sarsynski, executive vice president of MassMutual Retirement Services and Worksite Insurance. At the beginning of 2015, MassMutual Retirement had $155 billion in assets under management, comprised of more than 35,000 plan sponsors whose plans collectively cover around three million participants.
What do you consider the most significant change in the defined contribution plan field in recent years?
When I entered this business in 2008, the industry was using very static metrics for measuring how well a retirement plan was doing, mainly just participation rates and average account balances. But about five years ago, we said: ‘Wait a minute; the important question is how many people are on track to retire with sufficient replacement income to last their retirement years.’ Sponsors should be able to know the percentage of their employees who will be able to retire on track at, for example, age 67.
What about employees’ own understanding of their likely retirement income situation?
Absolutely, they need to be able to feel comfortable measuring that. About five years ago we began to build and introduce guidance tools to help employees actually answer the question around their retirement readiness. And our tools are tied right into data in the recordkeeping system, so we’re not using averages or any assumption around this. That’s really critical, because many of the competitors started to talk about retirement readiness, but they make a lot of assumptions that don’t apply to the individual.
Using our Retire Smart Ready Suite of guidance tools, participants can, in a very short session, determine the probability that they are on track to retire at let’s say age 67 with at least a 75% replacement income. Those are the default parameters we built into the system. If the probability is too low in their eyes, they can model different investment allocations and deferral amounts, and see how they change their odds of meeting their goals, then make those changes when they are satisfied with the projected outcome probability.
How does the tool help plan sponsors?
The reporting tool can roll up the individual accounts to estimate the aggregated probability of retirement success for their employee base. They can adjust the variables to test different goals, such as the retirement age. Maybe they want them to be able to retire at 65, or even 62, and look at the output. We generally assume retirees will need to replace 75% of prior income when they retire. Depending on what they learn when they get the report, they can change the way they are communicating with employees, or make plan design changes.
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Can sponsors examine results based on different demographic variables?
Yes, they can drill down by age, gender and other criteria. So let’s say there’s a millennial group between the age of 25 and 30 that are too heavily in money market or fixed income funds. Sponsors can then customize their educational efforts to that particular group. Through integration of enrollment data with other systems, we can also know whether or not they’re married or have children.
But it’s not all about demographics. About two-thirds of a plan’s success is based on plan design, such as whether it has auto-enrollment and auto-escalation of contributions. And do they have the appropriate investment lineup.
Have you measured the impact of this tool?
Yes. Between March 31, 2013, and the end of 2014, deferrals of participants who used it increased 17%, compared to only a 1.1% deferral increase for those not enrolled. So clearly, if an employee is given the guidance and uses the guidelines built into the system, it has a big impact on deferrals.
If, in the analysis your system generates, you see that a particular plan is under-performing in retirement readiness, does that set off any kind of alarm bells?
Absolutely. Our relationship manager is already working the sponsor and the adviser. They will sit down and review their annual report on their plan. If a large number of participants aren’t on track, we’ll explore with the sponsor plan design changes that can lead to better results.
Do you give participants a way to understand the impact that their spending on healthcare in retirement will have on their standard of living?
We’re incorporating this in a guidance tool is we’re working on for phase two and three of our “Map My Benefits.” That’s our holistic guidance tool that we use to measure an employee’s entire benefit program, including healthcare, voluntary benefits such as life insurance and disability income, and of course retirement.
We measure the optimal portfolio of workplace benefits for that specific employee. [The tool uses] very sophisticated algorithms … yet [it is] very simple to use. The second phase of this tool is to begin to add that healthcare cost element so that when we think about the retirement savings, they can either do it there, they can put it in an HSA, or at least acknowledge the point that healthcare is very important.
You work with employers who want a customized glide path for their target-date funds. Is that a popular option for sponsors?
It’s just not a huge number of our sponsors, I would say less than 10 or 15%. It is a niche offering. But it’s important for sponsors to understand what’s in the target-date funds that plan providers offer off the shelf. They’re all different, both in regard to the underlying investments, and the glide paths.
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Do you offer a retirement income solution?
Yes, it’s called MassMutual Lifetime Income. We picked this product up in our acquisition of the Hartford retirement book [of business] in early 2013. It’s simple to understand. Essentially a participant can purchase, on the investment platform, units that each produce $10 monthly income at retirement. They can slowly begin annuitizing their retirement income over their retirement, if they want to. The cost of the units will vary according to the participant’s age and interest rates at the time of purchase.
How popular is this offering?
Around half of our sponsor clients have incorporated it into their investment lineup, but it hasn’t caught on yet with participants. Only around two or three percent of them have used it.
Also see: “UTC launches game-changing lifetime income strategy.”
Do you give employers a way of measuring the financial impact of having an unsuccessful retirement plan?
Yes, we are able to actually calculate the amount of potential liability that an organization would have if they do not have a retirement program that produces outcomes that allow their employee base to retire appropriately. Let’s say that’s the age 67 with the 75% replacement income target we use as a default. We tie it back to the increases that the employer would expect to have for disability, workers’ compensation, and healthcare. It really is compelling. So depending on the results, the CFO may conclude the company needs to do more to assure the success of the plan.
Richard Stolz is a freelance writer based in Rockville, Maryland.