The industry has put immense effort into introducing new participants to retirement education and helping prepare resources to assist in participants’ long-term needs.
While that effort can and should continue to be a large focus, there needs to be an additional layer of planning, preparation and servicing to those participants who are near or at retirement with a shorter time horizon.
For those impending retirement participants, there is an increase in certain trends, offering insight into how plan sponsors can prepare investment menus to provide the value and options needed to act in participants’ best interest. Three elements stand out the most:
1) Participants are more engaged. Historically, target-date funds were produced for the un-engaged participants with a set-it-and-forget-it mentality. However, research shows there is a growing portion of engaged participants. When surveyed by JP Morgan, roughly 41% of investors would elect to take a do-it-themselves retirement investment approach. Under the scrutiny of the Department of Labor’s fiduciary rule, there needs to be a strategy implemented to service their needs both as individuals and as a group of specifically engaged participants.
2) Participants’ needs have changed. Are participants more engaged because their needs have changed? Or, have their needs become more particular because they’re choosing to be involved? Either way, there’s no doubt participants are facing a plethora of diverse, unique and challenging futures that can impact financial decisions.
Participants used to see their retirement account strictly as a savings vehicle for retirement with a long-term horizon, given that participants were working a very long time at one job. Now that switching jobs frequently is so common, the way actively engaged participants view their savings vehicle could fall under numerous uses, depending on their needs.
Also see: “How to be a good fiduciary and not get sued.”
Needs could be based on the following factors: retirement time frame, accounts from previous employers, objectives of existing RIAs, financial knowledge and interest, income desires, salary needs, medical costs, family responsibilities, etc.
3) Participants can take legal action. While this was always possible, it has grown in popularity with the scrutiny of fiduciary responsibilities under the DOL’s new law. With lawyers actively seeking cases to enforce the DOL rule, the onus is strictly on the plan sponsors and the parties involved in fiduciary responsibilities to ensure they are acting in the best interest of all participants. It is not uncommon to have high-net-worth participants be part of the engaged group, with strong knowledge and capability of understanding their legal rights as participants.
Plan sponsors should not take certain action to avoid being sued — the action taken should follow the strategy implemented, with of course, rigorous documentation at each step.
Fiduciaries need to be able to defend the strategy and choices, or lack thereof, of investment options and services to participants who show engagement.
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