Client Service November 21, 2018

Even More Retirement Industry Evolution Expected in 2019

While previous years saw an increased focus on financial wellness educational content—delivered in fliers, websites and mobile applications—providers in 2019 will favor action-based strategies and solutions.
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According to Chris Whitlow, CEO at Edukate, 2019 will likely bring a continued focus on student loan repayment programs, automatic rollover implementation, and consumer-based financial products.

“Financial wellness has made an evolutionary change from being content-driven to being more about taking specific actions,” Whitlow says.

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He says employees have always had many sources of financial stress, but now employers are embracing the fact that employees can be very different from one another in terms of their financial wellness needs. This drives an important question for retirement plan fiduciaries to ask in 2019: How can we deliver the various solutions necessary for them to take action?

Drew Carrington, senior vice president, head of institutional defined contribution (DC) at Franklin Templeton Investments, agrees with that assessment, noting that student loan debt repayment seems to be quite a hot topic for 2019. He pointed to the private letter ruling issued earlier this year by the IRS as adding fuel to the fire. The ruling came after a 401(k) plan sponsor requested approval for its proposal to amend the plan to provide student loan repayment non-elective contributions without violating the “contingent benefit” prohibition of section 401(k)(4)(A) and section 1.401(k)-1(e)(6) of the Income Tax Regulations.

Carrington says such a feature can be of interest to younger employees, mainly those who aren’t currently taking advantage of the 401(k) match to participate. Even if employees abstain from participating in the 401(k), these workers are paying down debt to achieve financial wellness. In fact, he says, there is emerging evidence that allocating dollars to student loans can spearhead future savings—including tax-qualified savings for retirement.

“Employers view it as another way to try and improve not only retirement readiness, but this broader, more holistic financial wellness concept,” Carrington explains. “We view the trend towards financial wellness not as competing with 401(k)s, but really as improving overall retirement readiness.”

Automatic features still in vogue

Automatic enrollment and auto-escalation will continue to be widely implemented in 2019, according to Brigen Winters, principal at Groom Law Group. He ties the ongoing popularity to long-standing market forces established by the Pension Protection Act, but also to recent changes made in the tax code to nondiscrimination safe harbors. He expects continued interest in automatic plan features throughout 2019.

“We are also monitoring and talking with plan sponsor clients about various legislative proposals that would further adjust the auto-enrollment and escalation rules, including the caps, and related safe harbors,” he says.

Plan fiduciaries may also see changes to Department of Labor (DOL) guidance on auto-rollovers. Instead of participants leaving a prior plan balance with their former employer, setting up an automatic program—where the 401(k) balance follows the worker—enables higher savings while reducing small balance cash outs, Carrington says.

“The likelihood that someone cashes out their 401(k) plan falls dramatically once their balance goes over $10,000,” he says. “If we can get them to rollover a couple of plans to reach this figure, suddenly they are much less likely to cash out.”

The future of fiduciary and financial wellness

Winters believes that even if the DOL fiduciary rule is really gone for good, Congress may introduce and implement reform legislation for plan sponsors. If not in the upcoming year, then perhaps in 2020. 

“I think it’s certainly possible that Congress will pass and the president will sign bipartisan, comprehensive retirement reform legislation in the near future,” he says. “There is pent-up demand for a retirement bill and a number of bipartisan proposals are in the mix as Congress works to finish up its work during the lame duck session and prepares for the 116th Congress.”

Behind student loan repayment programs, auto-rollover modifications and fiduciary standing lies a common theme for this upcoming year retirement industry—action-based financial wellness.

“Employers are starting to recognize that as a single entity, they do not necessarily have all of the financial benefit capabilities to service their employees’ needs,” Whitlow says. “So, we’re seeing employers really think outside of the box and partner with providers, say their local credit union, to deliver some type of emergency savings product. They need to consider how they’re going to take action, and the data around the employees. What are the little things that employers can be doing to take control of the financial wellness surrounding the company?”

Client Service October 23, 2018

Who Is Responsible for Retirement Security?

National Retirement Security Week, from October 21 through 27, highlights the complementary roles of governments, employers and individuals in creating better retirement security for everyone in the U.S.
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National Retirement Security Week highlights the major influence of defined contribution (DC) retirement plans when it comes to helping U.S. employees generate assets to live on in retirement.

To mark the occasion, experts and analysts have published copious amounts of new reports, white papers and blog posts harkening both the successes and the shortcomings of the DC plan system. Many agree that plan advisers and plan sponsors—along with government regulators and product providers—have done a lot to boost retirement security since the passage of the Pension Protection Act (PPA) in 2006. But there is also near universal agreement that all retirement industry stakeholders can do more to help prepare people for their post-employment future.

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According to Jim Poolman, executive director of the Indexed Annuity Leadership Council (IALC), one shortfall in the industry is the fact that participant education has focused far more on the accumulation of assets—rather than on full retirement planning, which also includes guidance on how to spend down those assets effectively. Poolman says plan sponsors, broadly speaking, are only just starting to look beyond maximizing participation rates and asking whether plan participants are taking full advantage of the employer benefit offering.

“Beyond accumulation, it is important to talk about lifetime income, about the risk of outliving your income or your retirement savings,” Poolman says. “We need to talk about expenses and educate individuals about unforeseen costs and hardships in retirement. This is educating them not only about saving for retirement, but about what circumstances surround a successful retirement.”

Poolman suggests “unforeseen circumstances,” such as the sudden diagnosis of a chronic medical condition, can totally derail a participant’s savings strategy—assuming there is even one in place. Even those who proactively take care of their health and put plans in place for paying for future health care face an incredible challenge, given the rising cost of care over time. He says employers can step up here and implement education and potentially even ancillary savings opportunities around medical security for workers’ retirement years.

Employees Want Help—That Much Is Clear

According to Robert Scheinerman, president of group retirement business at American International Group (AIG), a survey conducted by VALIC, an insurance company within AIG, shows one in four employees “do not even know what to ask first about retirement planning.”

“There were various qualitative responses which demonstrate a large portion of the U.S. population does not really feel comfortable doing retirement planning on their own,” Scheinerman says.

He recommends plan sponsors utilize a three-pronged approach when designing their benefits. One prong will address those rare individuals who understand their retirement needs and how to craft their own savings strategy. The second prong or tier will be tailored for those who believe they have some idea about how to make a plan, but continue to need support. The third and most important tier will be designed to benefit the majority of people, who are unfamiliar with retirement planning.

“While there are a certain amount of people who think everyone should just do it themselves, we know today that this is not realistic,” Scheinerman says.  

Communications via email may be sufficient for supporting those participants who take charge of their own planning needs, he says, but purely digital communications are not sufficient for those requiring additional support. Offering in-person or at least on-the-phone retirement counselors makes a world of a difference.

“Should plan sponsors or participants express concern with investment portfolios, for example, a retirement plan counselor can analyze investment profiles and pinpoint which participants are investing too aggressively, or too conservatively,” Scheinerman says. These are the types of questions most people just don’t feel comfortable answering on their own—even those with some level of expertise on finance as a general topic.

Scheinerman and Poolman agree that plan sponsors should consider developing formal education schedules that include regular follow ups and benchmarking. Plan sponsors must also remember how investment risk tolerance changes as employees age, and ensure their participants know that retirement planning is a marathon—not a one-time event.

“Quality participant education occurs throughout the life cycle of the plan participant. Getting somebody to contribute 10% to their 401(k) is not the end of the game,” Poolman says. “We should be promoting continuous education about how important it is to be financially literate throughout your entire life, so that you make necessary changes along the way.”

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