Advisers Must Reconstruct Sponsors’ Retirement Plans

It no longer is enough to simply offer a retirement plan and hope that employees participate, according to a new white paper from retirement plan consultancy Axia Advisory.

According to the report, “Redefining the Retirement Plan,” with the help of their advisers, sponsors must completely rethink their retirement plan to make certain that participants are saving, saving enough and saving properly. “Most plan sponsors are familiar with the three Fs: fiduciary, fees and funds,” the report says. “Organizations, though, can end up with a fourth F if they’re not careful: failure of their employees to be ready to retire.”

Strengthening outcomes starts with plan design, namely automatically enrolling participants at a meaningful deferral rate, 6% or higher, rather than the 3% industry standard, Axia Advisory says. This needs to be paired with annual automatic escalation of 1% to 2% up to a savings rate of 15%, the firm suggests. “Many plan sponsors are still reluctant to auto-enroll and auto-escalate employees in their retirement plans, though most studies show it’s both needed and wanted by employees,” the report says.

Plans should also re-enroll employees, and the qualified default investment alternative (QDIA) should be a professionally managed, diversified fund such as a target-date fund, managed account or balanced fund, Axia Advisory suggests. The firm cites a recent J.P. Morgan report about re-enrollment that notes how defaulting participants into a QDIA gives strengthened fiduciary protection to sponsors. In addition, most participants remain invested in the default investment and benefit from better outcomes than if they had selected the investment themselves.

For those sponsors concerned about the higher cost of matching a larger number of employees who are automatically enrolled and escalated, Axia Advisory says that they can keep their costs the same by stretching their match. For instance, rather than match 100% of an employee’s first 3% of contributions, they can match 50% of their first 6% of contributions, or 25% of their first 12% of contributions.

Finally, sponsors need to be committed to educating participants about the importance of saving for retirement, Axia Advisory says. The firm points to a recent report from HSBC, “The Future of Retirement: A Balancing Act,” which found that 81% of workers said saving for retirement is not their main priority. “Improving financial literacy is an intricate part of helping participants develop good habits and, in turn, save more in the retirement plan,” the white paper says.

A key way to get participants more committed to saving for retirement is to provide them with a retirement readiness report that will show them how much monthly income their balance, savings rate and portfolio holdings are projected to provide them in retirement. “More providers are offering retirement readiness or plan health reports,” the white paper says. “This can give plan sponsors the ability to break down the information and target a specific group of employees with customized communication materials. [It has] become critical for plan sponsors and the providers they use to supply plan participants with retirement income projections. By shifting the conversation away from how much a participant has in their account to what the balance means, plan sponsors will be able to inspire their employees to begin [saving] sooner, save more, and become engaged with the plan.”

The white paper can be downloaded here.