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Improving Retirement Benefits in a Time of Transition

Getting employees to save, and save more, is the top challenge for plan sponsors in a time of transition.

The U.S. retirement system is in a period of transition, the vast majority of companies that sponsor 401(k) plans agree. In response to a recent survey by Institutional Investor, in partnership with Prudential, 82% of plan sponsors say that the retirement system is either evolving and will likely adjust to changing needs (49 percent) or that they believe it is in grave danger of failing (33 percent). There are variations — companies with small plans are more likely to be worried than those with large plans, for example — but most respondents share some key concerns, including regulation and demographic change. Advisers and consultants are even more likely to see the system as being in crisis, with nearly four of ten agreeing.

Whether the changes sweeping through the system constitute a crisis or only a period of difficult but reasonable change, “it's a challenging new road, and we'll all have to adapt to it,” says Ryan Gardner, principal and senior consultant at Fiduciary Investment Advisors.

Fortunately, the cost of building a great plan may be coming down — in some respects, at least. Plan sponsors and their recordkeepers have become much better at mining data on participants and their 401(k) accounts, says Gardner, making it easier and less expensive to analyze participants' contribution history and proximity to a target retirement income and then advise them how best to reach it, as well as to design a glide path for target date funds.

Automatic enrollment and auto-escalation, along with the growing adoption of target date funds, have made it easier, too, for plan participants — many of them — to place themselves on a surer path to retirement security. “Auto-everything!” says Bob Hunkeler, vice president of investments at International Paper, underscoring the powerful effect of these features that help turn many workers' habitual inertia to good advantage.

Some of the challenges that the retirement system faces have been well understood for years; plan sponsors' concerns today center on the direct or indirect effect these problems are likely to have on employer-sponsored plans. More than half of survey respondents (54 percent) say the lengthening of retirement due to longer life spans will have a very high impact on their defined contribution plans; a similar number (53 percent) reported that regulatory changes that could alter Social Security, Medicare and other benefit programs would have a high impact as well. Changes to Social Security affecting the value of benefits under the program would intensify the pressure on employers to help their workers provide for their retirement, while longer lives raise the hurdle for plan participants to achieve a comfortable target retirement income level.

Meeting any of these challenges and achieving a comfortable retirement is easier if participants save, and save substantially. The fact that a great many are not is one of the troubling realities of this period of evolution for retirement in America. It is also a matter of concern for plan sponsors, 57 percent of whom say employee undersaving will have a very high impact on their plans. Some of the causes of low saving are behavioral, such as a tendency to focus on what provides satisfaction today, even in the realm of investment, and a reluctance to think about the future. But retirement saving is just one of an assortment of competing demands on both employees, including education, housing, health coverage and caregiving both for children and aging relatives. “It's definitely the case, particularly in our hourly workforce, that a lot of people can't save anymore,” says Tom Foley, director of employee benefits at building materials manufacturer USG Corp. To the extent that the employer helps out through its benefit programs, it faces its own set of tough choices.

The rising cost of health care provides an example. Over half (56 percent) of plan sponsors worry that their employees are underestimating the impact of health care costs, leading them to misjudge the income they will need in retirement. Even the cost of preretirement health care could affect their retirement savings, since there may be a tradeoff between the employer’s contribution to the health plan and its 401(k) match. “Rising health care costs mean that employer contributions to retirement plans have to compete with the health plan,” says Paul Denu, defined contribution practice leader at USI Consulting Group. “More money will also go into the health plan because that's the benefit employees value the most.”

The realization that retirement saving is just one of a number of competing demands on employees' resources — “Maybe the health savings account is the better place to put our money in the first place?” suggests Mark Kopp, manager, U.S. defined contribution plans at Ford Motor Co. — is one reason many plan sponsors are refocusing their retirement education efforts on a financial wellness approach that aims to inform participants about the financial risks they face and to provide tools to manage those risks. But offering such tailored advice and training, not to mention obtaining lower fees and responding to closer regulatory scrutiny of 401(k) plans — which a third (33 percent) of plan sponsors expect to be one of the top three forces impacting their plans in the next three years — is easier for larger companies with larger plans and more resources.

“It takes resources to bring in consultants and third-party advisers,” says Gardner. “Larger employers have more internal resources allocated to managing and overseeing the plan, more people and sometimes whole departments,” whereas smaller plans may have only one or two individuals juggling multiple responsibilities. The danger is that a two-tier universe may be developing, in which many smaller employers never have the resources or bandwidth to structure plans that adequately address participants' needs.

Yet, automatic features and the declining cost of data analysis are helping even smaller employers to better understand their employees’ situation and needs and nudge them in the direction of greater saving.

“Plans have improved their profile a lot in recent years,” says Lori Lucas, defined contribution practice leader at Callan Associates. “They've streamlined their fund lineups, made greater use of auto-enrollment and -escalation and gotten fees down.” For these reasons, although many plan sponsors are concerned about the future of the overall U.S. retirement system, they largely are optimistic about their own 401(k) offerings; in our survey, almost two thirds (61 percent) rated the overall health of their plans as excellent.

This suggests that, in spite of rapid change, competition for both employer and employee assets and greater regulatory scrutiny, the 401(k) model is still flexible enough that plan sponsors can continue developing it in directions that serve participants better. As they do so, however, the critical factor in any plan sponsor’s success will likely remain the same. “Employees won’t invest their way to a successful retirement,” Denu says. “They’ll save their way to it.” Getting them to start saving, and save some more, is the top challenge for plan sponsors in this time of transition—and will continue to be in years to come.

ABOUT THE SURVEY

This study was developed by Institutional Investor, in partnership with Prudential, to identify the investment risks and behavioral challenges that need to be addressed throughout the retirement planning process and how plan sponsors, advisors and consultants are trying to overcome them.

To support this research, a survey was distributed to Institutional Investor's audience of plan sponsors as well as advisors and consultants between January and February 2016. We received 511 completed survey responses from the plan sponsor audience and 295 completed survey responses from advisors and consultants.

Auto Enrollment: An automatic contribution arrangement that can be used as a feature in a retirement plan to allow employers to enroll employees in the company’s plan automatically upon meeting eligibility requirements

Auto Escalation: A plan design option that allows a plan sponsor to increase participant deferrals annually by a set increment.

RISKS: Investing involves risk. Some investments are riskier than others. The investment return and principal value will fluctuate, and shares, when sold, may be worth more or less than the original cost, and it is possible to lose money. Past performance does not guarantee future results. Asset allocation and diversification do not assure a profit or protect against loss in declining markets.

The target date is the approximate date when investors plan to retire and may begin withdrawing their money. The asset allocation of the target date funds will become more conservative as the target date approaches by lessening the equity exposure and increasing the exposure in fixed income type investments. The principal value of an investment in a target date fund is not guaranteed at any time, including the target date. There is no guarantee that the fund will provide adequate retirement income. A target date fund should not be selected based solely on age or retirement date. Participants should carefully consider the investment objectives, risks, charges, and expenses of any fund before investing. Funds are not guaranteed investments, and the stated asset allocation may be subject to change. It is possible to lose money by investing in securities, including losses near and following retirement.

© 2016 Prudential Financial, Inc. and its related entities. Prudential, the Prudential logo, the Rock symbol and Bring Your Challenges are service marks of Prudential Financial, Inc., and its related entities, registered in many jurisdictions worldwide.

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