Employees in the private sector generally don’t spend a lot of time mentoring their colleagues about personal finances, but public sector workers often do. Brian Haendiges, who runs ING Group’s defined contribution business in the U.S., recounts the example of a young police recruit who was persuaded by a superior to invest in his employer’s 457 plan, the public sector equivalent of a 401(k), instead of buying a motorcycle.
“Now a captain, this policeman tells me it was the best decision he could have made and one that he has described over and over again to new recruits,” says Haendiges.
When it comes to strengthening their workers’ retirement readiness, corporate plan sponsors have much to learn from their public sector counterparts, especially those serving police officers and firefighters. These workers frequently hand in their badges at age 48 or after 25 years of service, so plan sponsors have invested heavily in educating their participants about the virtues of tax-deferred savings. That has yielded results: More than 90 percent of police and fire personnel participate in defined contribution plans, compared with about 80 percent of corporate employees.
“There is three to four times the intensity on preretirement issues in 457 plans,” says ING’s Haendiges.
A case in point is ICMA Retirement Corp., a not-for-profit financial services firm established by the International City/County Management Association to serve public sector plans. The Washington-based organization, which manages some $23 billion in assets, has about 120 educators in the field -- one for every 4,600 participants. Vanguard Group, which manages $300 billion in retirement assets for roughly 2.6 million workers, has about 140 consultants, or one educator per 19,000 participants.
“When you look at what it takes to motivate people, it’s the face-to-face interaction,” says ICMA CEO Joan McCallen.
Public sector plan sponsors are also more likely to offer participants an annuity when they make the transition into retirement, enabling them to receive a steady, guaranteed income stream. Some 65.7 percent of all government defined contribution plans offer annuities as a distribution vehicle, whereas only 32.5 percent of private sector plans provide this choice, according to consultant Andrew Ness of Mercer Investment Consulting.
Of course, the high fees associated with some types of annuities have given these vehicles a black eye. Annuities used as a savings option, for instance, have sales commissions as high as 1,000 basis points and annual charges of as much as 300 basis points. But top institutionally priced annuity distribution products have fees in the range of 130 basis points.
“Institutionally priced annuities used as a distribution vehicle are useful,” says Keith Shadrick, president of Indianapolis-based Axia Advisory Corp., an investment consulting firm that advises plan sponsors with a combined $600 million in assets.
Such vehicles are becoming more flexible. A single annuity distribution option has typically been offered to departing employees as an all-or-nothing proposition. But plan sponsors are beginning to offer a choice of providers and the option of annuitizing a portion of assets, says Kelli Hueler, president of Minneapolis-based consulting firm Hueler Cos.
Her firm’s independent annuity placement platform, called Income Solutions, simplifies this process by allowing plan participants to log on to a Web site, compare annuity offerings from nine different insurers and leverage competition and group purchasing power to obtain the best institutional pricing. Income Solutions is available through several large-plan administrators and can be accessed directly, for a fee, by plan sponsors.
Hueler says more awareness of annuity options is needed. “One critical issue is the lack of visibility and communication about the benefits of partial annuitization to participants,” she says. As public sector plan sponsors well understand, education is the antidote.
