Why employers need to reevaluate their DC plans
Plan sponsors should take the time in 2017 to reevaluate their defined contribution plans and make tweaks where necessary, industry insiders say.
A lot of organizations put retirement plans in place years ago, but as people leave and new people come on board, nobody knows what the purpose of their plan was or whether or not they are accomplishing the goals set out for their plan, says Robyn Credico, defined contribution consulting leader at Willis Towers Watson.
That is why it is important for plans to set strategic objectives for their retirement plan committees and establish metrics for measuring success.
Most employees don’t stay with one company until retirement, but plan sponsors look at what everyone else is doing, whether it matches their business or demographic group, and that’s what they tend to do. “This one is a pet peeve of mine,” Credico says.
“Our suggestion is always go back and revisit what the purpose of the plan was, and then talk about what items support that purpose or if things should be done differently,” she adds.
Plan sponsors should determine if the purpose of the plan is to be competitive and attract the best people or if it to get people to save for retirement. What is the purpose from a cost perspective?
Once the plan committee has agreed upon the objectives of the plan, they need to look at their plan and see how well it is meeting those goals. Look at the plan design and talk about the contribution formula and investment options. Look at the plan from the perfect employee’s perspective. If they did everything you think they should do, do your plan objectives meet their objectives?
If the answer to that is “no,” you may need to rethink your plan design, Credico says.
If employees put the right amount into savings, are invested appropriately to receive the company match, they should be all set, but when a company looks at the data and how people are behaving, they find out people aren’t doing those things, she says.
Then the conversation turns toward how to communicate better with employees or how to change the default program to get more people into the plan and into the right asset allocation for their time of life.
Credico says she asks every client best practice questions that get at the heart of why their plan is organized how it is and how they communicate the benefit to employees.
“If you had auto everything in your plan and 95% of your people are defaulting to what you are recommending, why do you have any communication program?” she says. “A lot of money is spent on communication and education materials that ultimately plan participants are paying for, so if nobody is using them, why are you asking them to pay for things that are not of value?”
The answer is that even if there is a default, employers want to educate people to do a better job of saving for retirement and a number of retirement plan vendors are getting better at this, she says.
Plan sponsors need to look at their workforce and their demographics. Some forms of communication do not apply to everybody.
“From a cultural perspective it is important to understand your demographics and communicate in a way they will connect with. It is important not to use generic material,” Credico says. It is also important to target different generations with information that means the most to them over the mediums they use most.
Onsite meetings work well for some demographics and some workforces. The healthcare industry likes to have someone sitting in the lunchroom where people can go ask questions, she says.
Older workers are concerned about having money to live on in retirement, but they get most of their information through onsite meetings, paperwork or emails sent home by the company. Younger workers may be more concerned about paying off student loan debt or buying their first home. They are more likely to get their information from social media or the Internet.
“A lot of research supports just asking people to do one thing at a time and once they’ve done that thing, they can go onto the next,” she says.
If a company has career employees, those who plan to stay until they retire, “you need to focus as much on decumulation as we have historically focused on accumulation,” said Bill Dewalt, senior investment consultant with Willis Towers Watson.
There are many types of lifetime income that plan sponsors should consider to help employees turn their DC plan investments into guaranteed income in retirement.
“The bigger the balance, the more lost people tend to be and the more they are going to want help,” Dewalt says. “There are challenges. Plan sponsors need to decide how far they want to go with lifetime income. What we are trying to do is get in front of the topic. This is coming. Demand will continue to grow. This is something, historically, plan sponsors spent time on.”
He recommends speaking to your record keeper to see what they can do for your plan that can be easily implemented.
“What we advocate is that plan sponsors make not just a single solution but an array of solutions available and approach it that each individual plan participant will have a unique situation and will need to tailor a program to their needs,” he says.
That could mean a number of things: a fixed income annuity in the retirement plan; taking money from the plan and rolling it into an IRA and buying an annuity with that money at the time of retirement; taking partial withdrawals at retirement or letting people set up systematic withdrawals.
Dewalt says that plan sponsors have to realize that employees have spouses, they have money in old 401(k) plans, IRAs and legacy defined benefit plans.
“They need to pull it all together with Social Security and map out a strategy, and so what we’re finding is this fits really nicely into the broader topic of financial wellness,” he says. “A lot of sponsors are interested in talking to employees more broadly about financial wellness.”