Town Hall: Rethinking Employee Benefits Package - Why Personalization is the Key

 Learn strategies for creating a benefits package that offers personalization to each employee.

Transcription:

Lee Hafner (00:07):

All right. Good morning everybody. Welcome to the last day of the conference. Thank you for joining us. I am on stage with John Lowell, an Atlanta-based Partner with October Three, which is a consulting firm, and we're going to be talking about creating a retirement benefits package that is more personalized for your employees. So thank you very much for being here this morning.

John Lowell (00:30):

Appreciate you having me, Lee.

Lee Hafner (00:32):

So retirement is a complicated part of employee benefits for a lot of people, and there's a lot of details that go into it and there's been a major effort to personalize benefits. We've talked about it here this week with healthcare specifically and some other things, but why is retirement a little bit more tricky when it comes to that personalization aspect?

John Lowell (00:58):

It's a great question and it's something that employers and their employees have been struggling with for really quite a while. I think the biggest problem is for those of you who certainly who are in broader benefits, when you look at all the benefits that you offer besides retirement, they don't have a ton of rules that stop you from having multiple plans at different locations in different states or for different types of people. But retirement just has a ton of rules. And so there's been a real challenge because if you just look at the two of us on stage, someday Lee is going to want to retire and she's going to have one set of needs. And someday, well, I might not, but assuming I do retire someday, I'm going to have a different set of needs. How do you build something that works for me and works for Lee and for that matter, how as an employer, do you know what works for me and what works for Lee?

(01:59)

So it's a challenge that we have seen employers facing and not really finding solutions to it in particular the last couple of years. And this year because of passage of one particular or inclusion of one particular provision that nobody actually read in Secure 2.0, and I'm glad you didn't read it, I wrote it. But in any event, because of the inclusion of that one particular provision, we've developed a framework for what a personalized retirement program might look like. The whole goal behind it, frankly, if you take any individual's personal needs, the idea is to provide better outcomes for your employees and honestly, better outcomes for employers too. If we can keep your absolute cost of providing the benefits, for example, where it was or where it is or where you are budgeting and keep it pretty darn stable and at the same time provide what employees are asking for, what surveys show they're asking for.

(03:12)

And this is surveys, whether it doesn't matter what age group we're looking at, doesn't matter what geography we're looking at, it doesn't matter if we're looking for blue collar or white collar, but if you can reduce the cost of turnover, if you can provide for upward mobility for your younger people, particularly your younger stars, you're going to have a much better workforce management program. And in doing so in the long run, what we are finding and working with employers is they're actually seeing stable costs with reduction in total costs while at the same time personalizing those benefits.

Lee Hafner (03:51):

Yeah, thank you. And so you touched upon that younger talent, and a lot of them these days it seems like from employer feedback say, well, I don't need to save right now. I'm 40 years away from retirement, and they're also having a hard time saving in general and paying their bills in general. So that education seems to be lacking. Why is it important and how can employers take those initial steps from the time an employee comes into the company to encourage them to save, to invest in the right ways to where it sets them up for success for the long term?

John Lowell (04:26):

Well, those are great questions, Lee. And it's really tough when you think about it, and I've heard some of you actually talking this week that in some of the schools now they are offering some financial literacy classes. I certainly didn't have any when I was growing up. My guess is that most of you have not had them either. Somewhere along the line you learned about it just like somewhere along the line you learned about benefits. But people don't necessarily, when they're young, see the value in saving. And frankly, even if they do, we see so many people these days who start out saving in their 401k plan or their 403 B if they're in a not-for-profit environment, and what do they do? They suddenly have an expense. Well, gee, I can stop contributing to my 401k or 403 B, or I need more money than that.

(05:22)

I'm just going to take a withdrawal and yeah, I got to pay some more taxes, but that's okay. I'll just take a withdrawal because the money's there and then I can take out some more credit cards while I'm at it. And all those things working together all of a sudden, how are these people ever going to retire? They've got no savings and they're building up debt. So for those of us who have been in this business for a long time, I remember when almost nobody had a 401k plan, 401k got added to the Internal Revenue code in 1978. The first real plans were probably around 1981, and you didn't start to see more than a very few of them until the mid eighties, but what were they intended as they were supposed to be supplemental savings plans, an opportunity for an employee to take their otherwise retirement income and add something to it, and then gradually that began to fade away.

(06:24)

I mean, I could talk for hours on all the bad things that Congress did to make them fade away in the accounting profession as well, but that's a different story. But the fact is they began to fade away. And pensions, which had been very traditional for a lot of companies and a lot of their employees back in certainly in the late seventies and early eighties and even into the nineties, began to fade away. That was okay for quite a while, or at least people thought it was okay, but what are surveys saying right now? One of the surveys that I refer to a lot, Franklin Templeton, and by the way, I have no ties to Franklin Templeton, no allegiance to them, perfectly fine people, but I only use their survey because it's something they do every year. They do a survey called The Voice of the American Worker, and it's really about what the American worker thinks about financial issues.

(07:21)

The number one issue, according to that Franklin Templeton survey, and it was the number one issue by a very wide margin, is having financial independence in retirement. What that meant, the way they expressed it when they asked the questions was, people know that they will have enough money to retire and that they will not outlive their wealth. Well, since most of us are not financial sophisticates, that's really difficult because as you might've heard, I don't remember if it was yesterday or the day before, but somebody expressed that they thought you needed about $3 million to retire. Let's suppose that's the right number. Is that the right number for you? Is it the right number for me? How long do you think you're going to live? Do you know? You know how much you're going to spend in retirement, whether you'll need long-term care, whether you're going to be really healthy or not healthy, whether you have a spouse or partner who might need some of that retirement income because they're going to be less healthy, or maybe they'll live to be 110.

(08:27)

We don't know any of those things, and that's why benefits need to be really personalized. But at the same time, that's why the sudden largest increase in things that I got to get the generation right that the millennials are asking for. I can never remember which one is millennials and which one is Gen Z. But the biggest thing that millennials are asking for, and these are in surveys that I'm not a part of, I look at the data when I see it published, they're asking for guaranteed lifetime income. That's a real buzzword. What they're not asking for, which frankly are the same thing, are annuities. They do not want annuities, but they want guaranteed lifetime income, same thing, different words. And so the question is how do you get them guaranteed lifetime income and how do you get it at a fair price? So that's step one in what we're working for. And then step two is going to be how do we personalize it?

Lee Hafner (09:31):

So can we launch right into a few of your thoughts on how employers can take steps to personalize retirement more?

John Lowell (09:40):

Sure. So the construct that we are talking to a number of companies about, and the reason that I say we're talking to them is because we didn't get the law change that we really needed to do this the way we wanted to until December. So implementation takes a little while, but what we do is we start out with a core retirement plan, and it's nothing but an account, but it's an account that is intended to provide a lifetime income benefit. So you get an account that your employer pays for. In a perfect world, if your employer is really focused on retention, they're going to build it so that the amount that goes into your account each year grows either or both of as you get older or as you have more tenure with that employer. Every year that account increases with the amount your employer dedicates to it and with a rate of return.

(10:49)

And that rate of return is not some fixed number. It's not something like 4%. It's not tied to some treasury instrument, which is fairly common. Usually it's going to be tied to the rate of return that you as the employer actually get on the trust assets. So if the trust assets are returning in a year, for instance, 7%, everybody's account gets 7%. If the trust has a bad year, maybe they only get 1% and then a couple of other things, they get a guarantee of return of principle. So their account when they leave can never be smaller than the total amount of money that's gone into it. So there is downside protection, and some employers have said, can we guarantee something better than that? Can we guarantee a minimum of 2% or 3% or 4%? So there are all these things going on. The employee does not need to be a financial sophisticated to make this work.

(11:54)

So that's the core benefit, and it's intended to provide lifetime income at what we as actuaries. I know you don't want to hear about actuaries, but sometimes we have to appraise ourselves what we would call on an actuarial equivalent basis. So it's a fair basis. There's no insurance company in the mix that needs to take a profit or needs to do some level of risk management on their own for this. And then there's also a supplemental plan, which you might recognize as a 401k. So people put money in it as they choose, their employer may choose to match those contributions. So it sounds pretty vanilla at this point, and we haven't personalized it yet. So someday, if I were to retire, I might say, and I'm just going to pick out numbers, I haven't thought about how much I might want per month in order to retire, but let's say I decided I needed $5,000 a month to retire, and I look at my account when I'm getting ready to retire and I only have $4,000 and that's not enough, but I really want to retire.

(13:03)

So how do I personalize it? So I've got this supplemental plan over there, this savings plan, this 401k. What I'm going to do is I'm going to take my 401k money and I'm going to buy an additional a thousand dollars a month. I, I'm not actually going to take that money and buy an annuity though. What I'm going to do is I'm going to use it in the core plan. So I'm going to take the money in one plan, I'm just going to drag it over and move it into the other plan, and then at this fair price, I'm going to convert it to the amount of income that I need. On the other hand, if I had a benefit of $6,000 a month and I decided I only need $5,000, I'm going to take some amount of money from the core plan and I'm going to move it over into my savings plan, into my supplemental savings plan, my 401k, and when I do that, I'm going to give myself extra play money because I didn't need that much lifetime income.

(14:08)

That's what I decided. In addition, something that came up a lot last year, certainly a little bit less so this year, but last year we can all certainly remember what the rates of inflation were like, and most of us are feeling it this year too, although not quite as much. So I've got this $5,000 a month, but I know those costs are going to increase over time. So what I'm going to do is I'm going to say I need some inflation protection. So I'm going to take some of what I've got in the 401k and I'm going to move it over and at a fair price, I'm going to buy myself some inflation protection. So now maybe in year one I'm going to get $5,000 a month, and in year two I might get $5,000 plus 3% and in year three, $5,000 plus 3% plus 3% on that, and it'll go on. But I'm doing that because I need it. And Lee decides she doesn't care about inflation, so she's not going to buy inflation protection. And the whole reason for that is this is a very personal benefit. So one further fear that we have heard from employers, or I'm sorry from employees is, well, suppose I take this lifetime income and I retire when I'm 65 to pick an age and I die when I'm 70.

(15:39)

Isn't that a bad thing from a retirement standpoint? I just wasted all this money. Well, one of the other things that we're doing, and we're doing this with some employers who are moving along in this process and actually for the first plan that we built and is going live, and if what's today, today is September 29th. So it actually goes live on Sunday, October 1st. So if people want to do it, they can pay a little bit extra and they buy themselves a special form of guaranteed lifetime income where they get the same amount of income that they otherwise would have. But if they die too soon, then their named beneficiary or their estate gets a refund to make up the difference. So they're actually not losing out on anything. So all of these things put together for each one of them. It's a very personal circumstance and it makes things different certainly from any structure that we've seen.

(16:49)

Our client who is going live the CEO felt strongly enough about this that he decided he wanted to do the employee communication all by himself. So he stood in a room with things that we had prepared for him. This is not a giant company, but he stood in an all employee meeting with things that we had prepared for him, and he presented to his employees and he asked for their feedback. They were using some sort of an app where they were giving feedback as he was going along, and he reported back to us that the feedback from his employees was off the charts wonderful. They just absolutely loved it.

(17:34)

He threw out numbers because everything was on a scale from zero to a hundred. He threw out numbers like the average score that he was getting from employees was in the nineties because they liked the whole concept. This was a company that already had rich benefits. They will continue to have rich benefits, but they'll have benefits that are rich separately for each employee as compared to benefits that might work for you but don't work for me or vice versa. So that kind of takes care of the employee side, but then there's the employer side, and that gets a little bit trickier because the thought has always been, and it does make sense, if I'm giving my employees better benefits and I'm paying for them, doesn't it cost more?

(18:21)

So what's going on there? Well, as I said in this core plan, we're giving employees a rate of return that might equal the rate of return on the trust assets, or it might equal the rate of return on the trust assets minus a little bit of margin to cover expenses or minus a little bit of margin to cover risk. One of the keys though, let's suppose you have somebody who, I'll make the numbers easy. They had an account balance of a thousand dollars and they left on January 2nd, and the traditional way of doing these is you value the benefit once a year. So they left on January 2nd, and again, let's continue to make the math easy. They got a rate of return of 10%, but if you're only valuing it once a year, does that mean you can't actually determine their benefit until December 31st and you have no idea how to control what the cost of those benefits are going to be?

(19:32)

So the next key of what we did for the employers is we said, let's value it every day in your 401k plan, whoever your record keeper is, if you go to their website every day, at the end of the day as an employee, you can look at your account balance and if you are the plan administrator every day, at the end of the day, you can see what the total of the account balances are, or you can break it out by subgroups. Well, similarly, every day an employer can see this, but that also means that for the person who leaves on January 2nd, there's no noise going on for the next 364 days. They can look at that, they can value it, they can convert it to lifetime income on the day that the person leaves. And what that does is it provides that the plan liabilities and the plan assets will almost necessarily always be a perfect match or a near perfect match. Well, if you know that you have to put in 5% of pay and it's not deviating because of an imperfect match, then that 5% of pay is always going to be a fairly close number.

Lee Hafner (20:47):

Thank you. So if you have a good retirement plan, your employer is very supportive, you set yourself up for what you think is success and you're going to retire at 65, that's the goal. But at 59, you decide I'm going to go write a book and your plans change. How can personalizing these benefits also help when the unexpected occurs and retirement happens earlier than expected or something else comes up?

John Lowell (21:20):

Some companies have decided if you're loyal to them, if you stay with them long enough to retire, rather than saying, I'm going to job hop and this is going to be one of my one year stints. So what some companies do is they say, we really want keep good employees, and if they want to keep good employees, what they're going to do is they're going to take some of these things and they're going to subsidize them. So they're going to say, if you stick with me for long enough, I will give you some additional subsidy. Now that does cost money, but what's the other side of it? If any of you are involved in recruiting, recruiting's an expensive process. You also know that when you lose a valuable employee, whoever replaces them needs to be recruited. They need to be trained. There needs to be a transition process while they're getting them up to speed.

(22:20)

That all costs a lot of money. Surveys that we've seen say that the cost of unwanted turnover for blue collar work tends to run 30 to 50% of payroll, and for white collar work tends to run 50% to 150% in fairly high management to sometimes as high as four to 500% of pay in the C-suite. Those are huge numbers. So if you can stop that as an employer, you're actually saving money. But from a personal standpoint, you know that if you've given your company some level of loyalty and you suddenly have a change of heart, hopefully you'll be nice enough to tell your employer that you had the change of heart and give them a little bit of notice. But if you've had that change of heart because you have all this flexibility that's built into the program, you can make it work for you. Once you retire, you can do that adaptation, that personal movement where you're moving money from one plan to the other or back in the other direction. You can make it work. You can start drawing your benefits earlier. You can draw your benefits later. Whatever it is that works for you will work under these plans.

Lee Hafner (23:37):

Thank you. So let's back it up a little bit. Retirement is one piece of the whole financial puzzle. It's a huge piece, but again, people have so many things to think about and be concerned about leading up to this. So we've talked a lot about it this week in the different panels, the caregiving and the high cost of healthcare and all the other things that contribute to this family planning and things like that. What advice can you share with the people who are going to go back to their companies next week about educating their workforce as far as financial literacy to where retirement's a big part, but it's only one piece of their education along the way?

John Lowell (24:19):

That's a great question. It's actually a really tough question. But what we've been suggesting, and I find this trickier if you really don't have particularly good retirement benefits, because if you have bad benefits, do you really want to tell your employees, well, yeah, we've got bad benefits, so you need to save more. That's not a real good message to be giving, but if you have good benefits, communicate them to death. Sell them, give them examples. One of the other things that we are building into this process, and we're doing it on an outsource basis because we want people who are particularly trained in financial planning and financial literacy, but for some organizations, what we're doing as a part of this is we're offering employee coaching. So people actually come in and work with the employees, they work with them early, so when they're in their twenties and convince them to save at a level that's palatable for them and explain to them all about what it means to take risk and investing and when you can take risk and when it's not advisable to take risk.

(25:36)

But they're also working with people who are in mid-career and they're working with people who are in the retirement zone. So, do I have enough money to retire if I don't, can I make it enough money to retire? How do I do this? Where do I set my priorities? So there's so much to it that's about messaging and using professionals who are really good at this to help with the messaging. Again, what the employers are telling us, what they view as the reduction in the cost of turnover, the way they are planning for this will more than pay for any costs in the benefits and the communications that go along with it. Good time for questions if anybody has any.

Lee Hafner (26:21):

Absolutely. Thank you. So we'd like to open up with just a couple minutes there left if anybody has any questions or topics that John can cover in the few minutes remaining. Thank you so much for joining us. Everyone else, thank you so much for attending the conference. Safe travels if you're headed home today.