Your Clients Auto-Enroll. Now What?

Advisers can aid retirement readiness through expanded use of auto-features that go beyond enrollment.

Pat Murphy, president of John Hancock Retirement Plan Services, calls it “auto-enrollment 2.0,” and “the next phase of auto.”

Automatic features are redefining retirement plan best practices, especially automatic deferral escalation pared with “stretching the match.” Murphy says these are two of several tactics he sees starting to catch on as plan sponsors notice the limits on bringing people into plans without a clear path forward.

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Too often, “inertia wins the day,” even within plans that auto-enroll, says Joe Ready, director of institutional retirement and trust for Wells Fargo Retirement. This leads to lackluster retirement readiness even though more people are participating. Both Ready and Murphy cite the traditional 3% auto-enrollment entry point as being a major part of the problem. Many participants will camp out at this rate, believing, “If my company put me at 3%, they must know what they’re doing—that must be the good number,” Murphy explains.

Plan advisers can help their clients see the sense in trying more aggressive strategies, then guide in making adjustments to the plan design.

“The only way people will have a good retirement outcome is to save their way there,” Ready says. After a client adopts auto-enrollment, “the best thing [an adviser] can do is say, ‘Let’s focus on how we can improve the savings rate.’”

By most industry measures, a 3% salary deferral is expected to fall short of delivering retirement readiness, even when continued over a whole career. Ready urges moving participants to at least 10% as soon as possible, perhaps first auto-enrolling them at 6%, then auto-increasing their deferral 1% a year until 10% is reached.

Advisers could meet resistance, though, as sponsors may fear pushback from employees or heightened costs for the plan. Neither has to be the case, Ready says. The vast majority of participants want to be told what to save, he feels, while stretching the match offers a way to get around increased plan costs brought about by higher average deferral rates and employer contributions.

As to cost, “That’s where you get into the idea of a stretch match,” says Murphy. The sponsor can elect to match 50% of the first 12% of salary deferred, rather than the traditional dollar-for-dollar match up to 6%. “Here you keep the expense of running the 401(k) plan the same for the corporation but encourage participants to contribute at higher amounts to get that full match.”

NEXT: How to make it work

The adviser can discuss with the sponsor whether this model, or perhaps a different one, will work for its particular employee base. “Advisers should step back and look at the population,” Ready says. “Let’s really understand the savings behavior by age, gender, tenure and compensation, and let’s understand how the match formula is engaging or could engage people more broadly.”

The adviser could ask the recordkeeper for data showing the average saving rates broken down by each of these demographic factors, Ready says. He could then help devise strategies for picking up the slack among the most at-risk groups.

“[Say that you see] a bunch of people stuck at 4% savings rate on average. If the average savings rate is at 5% and you want to get them to 10%, maybe you can stretch that formula to a rate of 6 or 8%. … You can keep tweaking that formula,” he says.

At the same time, though, the match should not be stretched to the point where employee engagement snaps. “You do need to be careful,” Ready says. “You don’t want to stretch it so far that you have just a select group getting to the maximum of the stretch formula and you’ve demotivated other people.”

Carefully observing the data is critical in this, he adds. “Doing these various cuts of data, either by compensation and/or average saving rate, can really start to give you a lens into how to get maximum impact to the group that needs it the most.”

The demographics may also inspire a creative idea for a custom auto-escalation or match. For a company with a significant number of older employees, the adviser could suggest a plan design that automatically does catch-up contributions for those 50 and older. Most plans, he says, just notify the participant; this strategy would auto-enroll them and allow them to opt out.

While doing their self-study, some plans may discover that, for them, the enhancements are not worth pursuing. Murphy notes that John Hancock tells its clients what the features can do and how they may—or may not—be able to help. “We ask if they trying to attract and retain employees. Maybe they just want to replace 50% of someone’s income. Maybe they have a rich pension plan, so the 401(k) plan should be looked at in overall context of their retirement and benefits programs.”

NEXT: The best plan for a stretch match?

According to Murphy, the use of stretch matches is still fairly uncommon. He says they particularly meet the need of companies that want to help their participants save but, due to budgetary constraints, must limit their investment. No long-range predictions have been made as to how they may affect retirement readiness. He does note that early reports show plans with stretch matches, “do tend to have higher participation rates and deferral rates.”

When a plan sponsor does decide to auto-escalate and/or revise its match, of course that’s just the beginning. Informing participants about any change to a plan is critical, not to mention—for qualified plans—legally necessary. “When implementing these features, the sponsor needs to analyze how to make it as easy as possible on the participants,” Murphy says. “For example, make easy messaging a part of the implementation; use education and communications—why [the feature] is important and how to best utilize it; have face-to-face meetings, send emails, use mobile apps, have multiple different channels.”

The sponsor’s study of its work force can also help to target the approach and message, Ready says. Demographics may show that, for example, the company has a large group of Asian or Hispanic employees. The adviser and sponsor can discuss whether changes should be made to accommodate these workers’ different decisionmaking and saving style, he says.

If at any time, the plan sponsor still needs a nudge toward taking that next step, Murphy offers reassurance. He says he has seen the difference when participants catch on to the concept of growth. “We tend to get more engagement from participants at 6% rather than at 3%, especially once they start to see the money accumulating in their account,” he says. “It’s all theoretical until then.”

How Passion Can Build an Adviser’s Brand

Many advisers evoke the idea of “passion for work” as an anchor for their brand. But as the industry continues to be more competitive, is an idea enough?

The 2015 PLANADVISER Adviser Value Survey discusses adviser value propositions and the influence of advisers on retirement plans, and concedes that quantifying the value of an adviser to a defined contribution (DC) plan can be a bit of a challenge.

According to Linda York, vice president of syndicated research at Cogent Reports, just citing passion is not enough for an adviser to prove they are different from the competition. Instead, she says, advisers aught to let the numbers do the talking, and focus on the particular elements of investing and plan design where an adviser’s touch can take a plan above and beyond. 

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Looking to PLANADVISER’s research, larger DC plans, with 1,001 to 5,000 plan participants, are the most likely to work with an adviser, at 73.6%. Plans with assets between $50 million and $200 million appear to be a sweet spot for advisers, with nearly three-quarters of plans in that asset range using an external retirement plan adviser.

The survey’s findings reveal that DC plans that use an adviser have higher usage of plan features considered to be best practices. This holds across employer matches; average contributions; occurrence of auto-enrollment and auto-deferral increases; written investment policy statements; and target-date funds (TDFs), among others. Advisers drive more frequent scrutiny of investments, the survey says: 38.1% of plans with an adviser review their investment lineup every quarter, nearly double the 21.7% of plans without an adviser that do so.

With so many statistics to point to, just citing passion is not the best approach, York says. Besides, passion in danger of becoming an overused industry word, as retirement plan advisers across market segments increasingly cite it as a core strength or differentiator. 

NEXT: Above and beyond the investment menu.

In addition to helpful information on investments, York points out that advisers can provide ongoing assistance to plan sponsors, helping them maintain a balance as they strive to juggle the various demands of running a successful plan. Advisers should especially be adept at optimizing auto-features and the use of TDFs, while at the same time making sure participants are supported enough to be confident decisionmakers.

York suggests advisers find ways to go the extra mile. “Bring the added benefit to participants in the plan,” she tells PLANADVISER. “That way, the adviser becomes an integral part of the ongoing benefit the plan sponsor is providing.” This in turn boosts the plan sponsor’s loyalty to the adviser.

York notes that in a recent survey on DC plan participants, Cogent looked at participants and what they seek most from an adviser. The general theme was that participants prefer to work with an adviser in person, in individual one-on-one sessions, she says, and the most successful interactions give a participant a holistic picture that lets them see their overall financial goals and investing needs.

The best interactions between adviser and participant go beyond describing the dozen options in a plan, York says. “Do they have assets outside the plan? What are their investing and savings goals? Are they saving for retirement, or are there short-, medium- or long-term strategies they want to put together?”

While it is more work to cultivate those relationships and some participants may be contributing just 5%, others might be very fruitful, York says, with assets outside the plan. But that effort is part of going beyond the basics of participants knowing how much to defer: “It’s giving them the confidence in the investing strategy, and the role the DC plan plays in their portfolio.”

NEXT: How passion translates into a tangible value proposition.

Ellen Lander, principal of Renaissance Benefit Advisors Group, admits that many advisers tend to use the same words, with passion being one of the terms that comes in for a generous amount of industry love. The word passion may simply be, for many advisers, a kind of shorthand for the enthusiasm they feel for their work.

“I think it comes down to actually doing what you say you’ll do,” she tells PLANADVISER. “Just because you aren't passionate doesn’t mean you won’t do whatever it takes to take exceptional care of your client, and minimize their work and angst.”

In Lander’s view, passion typifies her interest in what she does, which includes an interest in researching to find out more about the necessary tasks that go into supporting a retirement plan, whether it’s choosing investments for a plan or going through a request for proposal (RFP) with a new client. “We like clients to ask questions—it means they are interested,” she says.

While some advisers may have a list of five bond funds they turn to when choosing investments for a plan, Renaissance Benefit conducts a new search each time they are getting a new client set up. Otherwise, Lander says, if you’re working off a list, where did it come from? How is it being updated?

“We are focused on our clients and our work,” Lander says, “not on building our practice. [Growth] comes about as a byproduct; we don’t sell or market.” She says the business is built completely on client referrals.

Serving the plan is critical, York agrees, but a plan sponsor’s loyalty to the adviser can also come about indirectly, when participants meet with the adviser and report back to their plan sponsor employer how satisfied they were with the information. While not a direct interaction with the plan sponsor, York says this can help establish the adviser as a critical part of making the DC plan a success. “And that’s really hard to give up,” she says. Few plan sponsors are as willing to replace an adviser who is getting high marks from participants while also helping the plan sponsor meet expectations about the plan.

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