Retirement plan trends that can help sponsors connect to employees
As plan sponsors explore how they can help their employees, financial wellness is just a jumping off point.
Increased popularity of financial wellness programs, nonqualified plans to attract more key talent and managed accounts with customized portfolios — not to mention the continued consolidation of recordkeeping companies — a great deal is currently happening in the retirement plan space, says David Graver, vice president of retirement plan services at Fort Pitt Capital Group LLC in Pittsburgh, Pennsylvania. We sat down with Graver to get his take on how these trends are impacting plan sponsors and their participants.
Katie Kuehner-Hebert: Tell me about the impacts of the latest trends.
David Graver: In 2020, there were a lot of changes to retirement plans, as people needed access to their money. The CARES Act loosened restrictions on taking out loans against a plan, as well as distributions. These are no longer in place, but because of them, COVID brought to light that there will always be many plan participants dealing with financial wellness issues.
As such, plan sponsors are now exploring how they can help their employees with these issues, not just looking at what they do through their retirement plan, but how they can support their employees’ financial stability as a whole.
As a result, financial wellness has come to the forefront, as plan sponsors are looking to help employees feel more comfortable. The fact of the matter is that if employees are not sitting at work paying their bills, many are still preoccupied with worrying about their finances, which takes away productivity at work.
Recordkeepers have fantastic wellness programs that plan participants can access to accomplish a lot of things — budgeting, tackling debt, aggregating multiple accounts to see if they are on track for retirement.
Some recordkeepers have integrated health savings accounts into their 401(k) plans and some are even exploring student loan assistance options in the plans.
Student loan repayment programs outside of retirement plans are a trend many companies are looking into right now. With most college graduates entering the workforce with a mountain of debt, programs offered by companies to help pay down that balance can be a differentiator when trying to attract young talent and aid in the overall financial wellness of staff.
Another trend is the consolidation of recordkeeping companies. For instance, Empower Retirement recently acquired the retirement plan business of both MassMutual and Prudential, and Principal Financial Group recently completed the integration of the Wells Fargo Institutional Retirement business.
While these deals reduced the number of options that advisors go to use to see what’s the best fit for their clients, consolidation is not necessarily a bad thing. It’s helped pricing, which is now a very competitive race-to-the-bottom in fees on both the fund administration side and recordkeeping side.
However, advisors should still be concerned whether their clients really want to be in the plans that acquired theirs. Advisors should employ benchmarks to make sure the new plans are right for their clients, and whether service levels have dropped off when clients are being onboarded into the new plans.
A third trend is the really big uptick in the offering of nonqualified plans as a way to attract and retain key employees. Offering deferred compensation plans is a way to not only keep those highly-paid key employees, but also to attract new ones. Those have been really gaining popularity this year and we’re expecting an even greater spike in adoption of these plans in 2022.
What is your advice on how to best connect with employees?
Plan sponsors need to make sure they are taking advantage of communication tools from their recordkeeper to educate and encourage their employees to be active participants in the plan. Whether it is mail or email campaigns focused on a specific topic or demographic, webinar series, in-person presentations – companies and their employees are putting millions of dollars into these plans, they need to leverage all the tools at their disposal.
The majority of 401(k) and 403(b) plans have an advisor hired by the plan sponsor. Plan sponsors should ensure their advisors are earning their paychecks by spearheading employee educational programs and wellness initiatives. Investment advisors really should be the quarterback of the entire retirement plan relationship, including employee education.
How can companies improve the enrollment process for employees?
The easiest way to simplify and improve overall plan participation is to elect automatic enrollment. It’s a great feature — once an employee becomes eligible to be in the 401(k) plan, they automatically go into it at a set rate, 3 percent for example, which the employer can then match if the plan has that provision.
Another great thing about this is that the employee would have to opt out — not opt in, meaning that the sticking rate is really really high. Once auto enrolled, statistics show between 80 percent to 90 percent of employees end up staying with the plan. If employees had to opt in, the percentage would likely not be as high.
There is also auto-escalation, in which every year an employee’s contribution rate automatically increases, with a cap, typically 10 percent. Coupling those two features can really improve participation rates, which overall helps the health of the plan — and most importantly, helps employees save more for their retirement.
What else are you seeing?
One investment offering that has received more attention lately is managed accounts. Since the early 2000s, target-date funds have been very popular within plans, making up the largest investment holding. For a lot of people, target-date funds are appropriate and accomplish exactly what they are meant to do. But that logic has changed a little bit recently. Target-date funds typically have only considered age range and an individual’s target retirement data, but not risk tolerance or whether the individual will have other sources of income or assets. Most recordkeepers now have managed account options where customized portfolios are utilized, each tailored to that specific plan participant.
Managed accounts are becoming more popular, but the caveat is that individuals often pay an additional fee for them. Participants may choose to allocate their own retirement plan account or rely on the advice of an outside advisor they use personally.
Also, as mentioned previously, most 401(k) and 403(b) plans have an advisor on the plan hired by the plan sponsor. The plan advisor normally comes into their clients’ workplaces on a regular basis and can help people manage their account allocations. If a participant regularly works with their personal advisor or the advisor on the plan, managed accounts might not be suitable for them.
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