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Defined Contribution Plans and the Changing Role of the Financial Adviser

External retirement advisers can help a corporation’s financial team modernize benefit offerings — improving employee morale in the process.

Not that long ago it was somewhat unusual for a company’s CFO and finance team to play an active role in designing a defined-contribution plan. Yet with the growing realization that retirement programs are not merely costs to be managed but a key part of driving business results, access to corporate finance executives has dramatically increased and is likely to be a key consideration for 2015. Savvy financial advisers are finding new ways to bring real value to their clients by capitalizing on this trend.

Most advisers are very comfortable discussing the tactical aspects of their plans, such as fund performance, recordkeeping and participant communications. Top advisers know, however, that there is also a great opportunity to change the conversation to help their clients’ meet strategic objectives, including:

• Aligning more closely with enterprise goals;

• Rewarding targeted employee groups;

• Improving recruiting potential;

• Boosting health and financial wellness; and

• Reducing balance sheet volatility.

Human resource and finance departments are joining forces to find new ways to manage the company’s bottom line while also improving employee morale. Sponsor costs can increase significantly as a result of workers delaying retirement because they have not saved enough for their postcareer years.

In Managing Financial Risk in Retirement and Benefits Programs, a CFO survey published in June 2014 sponsored by Prudential, we found that finance executives’ commitment to ensuring employee satisfaction with company benefits remains as strong as ever. Nine out of ten respondents agreed that employee satisfaction with benefits is integral for their companies’ success, an uptick from the previous year’s survey.

One way to increase employee satisfaction with retirement benefits, as well as retirement preparedness, is to add automated plan features. Many sponsors worry that automated features will increase costs. It’s a logical assumption. Yet when thoughtfully implemented, automated plan features do not have to be more expensive. Many plan sponsors are initially fearful about adding these features out of concern they may see a dramatic increase in company match costs.

We have found this is not the case. Delayed retirements can directly impact a corporation’s finances. Automated features, when applied appropriately, can save on potential long-term costs as they help older workers better prepare for retirement by keeping down health care costs and improving productivity. Plan sponsors should base their decisions — whether concerning fees, investment selection or plan features such as auto enrollment and auto escalation — on what’s in the best interest of participants.

One size does not fit all. Plan design can accomplish a sponsor’s financial objectives while driving desired employee behavior. A typical uniform match structure, in which all employees receive the same match, can be modified to a formula specifically structured to remain cost-neutral to the plan sponsor while still allowing for the inclusion or expansion of auto enrollment and auto escalation. A plan design structured with various tiers of matching for employees can determine increases in line with employees’ ages or tenure within the organization, similar to a traditional defined benefit plan.

We have a client who came to us with the need to better deploy defined contribution dollars. We were able to work together to craft a new design that met the client’s needs while motivating increased employee savings. Within the first two years of instituting the new plan design, roughly 32 percent of the client’s employees are saving 10 percent or more of their salary.

Separately, a national advisory firm approached Prudential about a joint client that was noticing a disturbing trend of delayed retirements because of low account balances. In working closely with the plan adviser, we were able to dig deep into the relevant data, identify the root causes of the problem and then design a program that increased employer and employee contributions into the retirement program by more than $150 million over a five-year period, significantly improving employees’ overall retirement readiness.

The role of the adviser is changing. Those who can move the conversation from a tactical approach to a strategic plan focused on retirement readiness will add real value to plan sponsors. Going forward, they can help manage various priorities, while providing better retirement outcomes. They become a trusted adviser for the retirement plan mechanics while aligning benefits programs with corporate strategic goals.

Harry Dalessio is head of U.S. sales and strategic relationships at Prudential Retirement, part of Prudential Financial, in Hartford, Connecticut.

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