The Markets May 30, 2013

Harmonizing DB and DC Plans

It is common for companies to have both defined contribution (DC) and defined benefit (DB) plans, but inconsistencies between them can lead to poor investment results and fiduciary risk.
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One difference that can cause problems is the number of managers DC plans use compared with DB plans. DB plans usually employ multiple managers to try to produce more predictable outcomes, but most DC plans use a single manager and passive strategies that leave little opportunity for outperforming a benchmark, according to Josh Cohen, defined contribution practice leader at Russell Investments.

DC plans may have single managers in part because these plans have historically been supplemental to DB plans, so analyzing the number of managers was not a priority. But now that the DC plan has become the primary retirement-saving vehicle, there is more desire to harmonize the two plans, Cohen said.

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“It appears that DC is now the arrangement of the future, so we need to give it the attention it deserves,” said Kevin Turner, managing director of consulting at Russell.

Harmonizing the two plans means investigating the differences between them and determining how to make them more consistent, Cohen added. It uses a combination of common asset class exposures and unique exposures appropriate to each pan, he said. For example, both plans may employ equity strategies, but a DB plan may include private market, alpha and liability hedging strategies, whereas a DC plan may incorporate inflation protection and capital preservation strategies.

 

Another trouble spot for DC plans is bundle pricing, which leads many plan sponsors to default to recordkeepers for investment options. Recordkeepers may not provide an open selection of best-in-class investment options for plan sponsors and participants, according to Cohen and Turner. They may also not be well-suited for coordinating across DB and DC plans for investment advice, asset class exposures, manager selection, performance monitoring and reporting, they said.

In the past, bundled arrangements in DC plans produced unfavorable foreign exchange rates for plan sponsors, Cohen and Turner added. 

It’s tempting to use one person as both the recordkeeper and investment manager because of economics, Cohen acknowledged. It’s not necessarily the wrong choice, he said, but it should be evaluated.

Harmonizing DB and DC plans is most common in the large-plan market (typically more than $1 billion in assets), Turner noted.

 

Data & Research May 30, 2013

Motivation Key to Better Saving Behaviors

Tools and services focused on employee motivation will lead employees to take effective action to save for retirement, a research paper contends.
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A Prudential survey of 690 employees between the ages of 21 and 64 who are eligible for their employer-sponsored retirement plan found that 88% believe contributing to retirement savings is a must. However, there is a gap between this belief and their ability to do so. Fifty-seven percent do not believe they can save enough for retirement.  

Prudential’s research paper, “Turning Employees Into Lifetime Savers,” says behavioral motivational theory demonstrates that changes to close the gap between employees’ attitudes towards saving and their actions are possible and can be long-lasting. These changes are optimally sustained when certain motivational conditions are present, including when: 

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  • People genuinely value the goal to which they aspire at a personal level; 
  • People internalize the reasons for which they pursue that goal and start acting to achieve values for their own sake and right (vs. taking action due to feeling “pressure” or guilt/obligation); and
  • People genuinely enjoy the pursuit of the goal, such as feeling closely connected to others during the process or discovering interesting new opportunities to grow and take pleasure in life. 

Using its research, Prudential developed the Lifetime Saver Commitment Profile, a scientific index that captures individuals’ quality of motivation, engagement and satisfaction with savings and retirement planning over time. The results show most employees in America (67%) are moderately motivated to save for retirement. Only one in 10 (13%) employees eligible to participate in an employer-sponsored retirement plan is highly motivated, while motivation naturally increases as employees get closer to retirement age.  

This relatively small group of employees who are highly motivated to save for retirement includes a higher proportion of women, older employees and more highly educated people who have been in the work force for a long time. Fifty-seven percent of those with the highest motivation to save are female. The median age of the most highly motivated is 50, and their median number of years in the work force is 25.  

Nearly all in the high motivation group (95%) are proud of what they have put away to date and plan to continue making contributions: Forty percent expect to contribute between $2,500 and $9,999 in 2012, and 36% anticipate contributing more than $10,000. This rate of savings is important since the majority (57%) feel they will need to save $500,000 or more by the time they retire.  

Most of this highly motivated group (69%) reviews their retirement accounts at least once every month. Only 40% of less motivated employees review their retirement accounts at least monthly. Overall, those with a lower motivation to save are much less likely to save (58%), compared with those that have the highest motivation to save (80%). The strong relationship between lifetime saver motivation and real retirement savings and readiness indicates an opportunity for employers to focus on improving employee motivation.

The survey shows employer guidance matters. When asked to grade their employers’ retirement plans, only 6% of the highly motivated gave their plan a “C,” assessing their plan as “sub-par.” By contrast, more than three times that number among the lower motivated group (21%) gave their plan a grade of C or lower. In addition, the highly motivated group describes their employers’ retirement plans very differently from the way in which those with a lower motivation to save do—regardless of gender, age, income, assets and debt.  

Among the group with the highest motivation to save, 89% say their retirement plan helps keep them focused on their retirement savings, versus 69% of those with lower motivation. Only 22% say their retirement plan is complicated, versus 54% of those with lower motivation. In addition, 92% of the group with the highest motivation report their retirement plan has investment choices that are easy to understand, compared to 69% of those with lower motivation.  

This indicates plan sponsors can help motivate their employees to take action to save for retirement by keeping employees engaged, removing barriers to saving and making retirement savings easy.  

The Lifetime Saver Commitment Profile helps employers understand what motivates people to take charge of their financial future and further assists in customizing communication and education strategies. Based on this work, Prudential said it is in the process of developing a suite of solutions to support clients in building greater participation, savings and satisfaction in their employees.

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