The Markets December 7, 2016

Helping Participants Get the Most out of TDFs

Even though TDFs have been gaining some impressive traction in the DC plan space, many participants are not using these investment vehicles in the way they were designed.  
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Target-date funds (TDFs) are designed to take a holistic approach to retirement investing by utilizing all of a participant’s assets within a unified, evolving portfolio, but many investors are still not using these vehicles as they are intended to be used.

According to the latest “Participant Preferences in Target Date Funds” study by Voya Investment Management, only 10% of participants surveyed allocate all their recurring contributions into a single TDF. More participants (11%) are actually only investing 1% to 10% of their contributions into one or more TDFs, while another 10% invest 41% to 50% of their recurring contributions into TDFs.  

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When asked why they use TDFs in this (suboptimal) way, the top reason was to add to diversification (45%), suggesting that plan sponsors may need to re-evaluate how they educate participants about the benefits and features of TDFs.

Susan Viston, client portfolio manager with Voya’s multi-asset strategies and solutions team, spoke with PLANADVISER to offer some tips. First, she suggests identifying investors in the plan who are deviating from investing all or most of their assets into a single TDF, before meeting them with targeted communication and educational materials.

She says plan sponsors should provide “clear and engaging participant education and communication around the TDF to help participants understand not only how they work, but how to select the one that’s right for them.” She adds, “We’ve seen a lot of participants not using TDFs the way they were intended, which we believe can lead to sub-optimal risk profiles and sub-optimal retirement outcomes.”

Sponsors need to clearly explain the benefits of having professionally-managed and diversified portfolios that change asset allocation according to a participant’s age as they near retirement. Viston suggests taking a multimedia approach. “You can’t just have one campaign. Use different forums like videos in addition to brochures and letters,” Viston says.

NEXT: TDF basics are needed

Videos and other educational content should briefly explain to participants how a plan sponsor evaluated different providers and why they believe their choice was the best option. Here, sponsors can explain the importance of the series’ investments and the way a TDF glide path is meant to function. Better understanding of these vehicles could not only boost engagement, but also reinstate confidence in investment decisions.  

The survey found that self-proclaimed inexperienced investors, who tended to be younger participants, were the least confident in reaching retirement goals. “I’m a big proponent of multimedia because it’s a way to engage these groups without overwhelming them with the paper materials they’re receiving, or emails they might miss,” Viston says.

Videos can be featured throughout a recordkeeper website, sent to participants via an email link, or even shared on social media channels connected to the plan sponsor. 

Toni Brown, senior defined contribution specialist with Capital Group, recommends utilizing technology to deliver advice the moment participants set their initial contributions online. She notes that a pop-up window with brief information about TDF best practices could be set to appear when a participant would make allocations that may seem rather odd, like partially investing in several TDF vintages within a single series.

Viston notes that she’s found participants to invest in as many as ten TDFs within a suite. “That shows a clear lack of understanding TDF strategy,” Viston says. As Brown points out, the extra point of communication may prompt investors to consider whether they truly want to make such a decision.

NEXT: What’s working for TDFs? 

According to Voya’s survey, TDF users are more confident about reaching retirement goals and making investment decisions than non-users. More than 75% of respondents said that TDFs reduce the stress of retirement planning, as opposed to 37% for non-users. Voya also found that TDF users contribute a median 2% more of their income toward their accounts than non-users (8% vs. 6%).  

Furthermore, only 34% of non-users reported feeling confident that they were making good investment decisions. This may offer plan sponsors a key opportunity to boost participation levels by effectively communicating the benefits of TDFs to participants across their plans.

“The challenges are inertia, procrastination, and behavioral finance issues that can lead to poor decisions,” Viston says. “TDFs are designed to overcome this, and we’ve seen that they have been able to do that to the participant’s benefit. Participants have continued to contribute to these funds even in times of market stress and decline, meaning they are not selling at the wrong time.”  

The survey, which is the third of its kind conducted since 2011, also found that “simplicity and convenience remain more important than performance.” Auto-enrollment and auto-escalation features can further simplify the process. The firm indicates that both features have become more accepted especially among TDF users, with 76% saying that auto-enrollment would be helpful for employees and 72% saying that auto-increases would be helpful.

Brown suggests that plan sponsors should take advantage of what has been allowed by the 2006 Pension Protection Act (PPA) by offering TDFs as qualified default investment alternatives (QDIA), while also utilizing auto-enrollment, auto-escalation, and re-enrollment every three to five years.

She notes that auto features have been “effective in getting a large number of people into a TDF that’s managed for them. Participants on the whole appreciate it, and there is next to zero push back.” By the close of the first half of 2016, TDF assets topped $800 billion.

Still, as Voya’s TDF allocation data has shown, increased participation in TDFs doesn’t necessarily mean investors are using these vehicles to the best of their ability, and there might be over confidence in TDF use. Plan sponsors need to keep reaching out to TDF users to ensure they are managing their savings effectively even as they near retirement.

“I think that while communication and education is great, it’s not moving the needle as much as we would hope it would,” says Brown. “So, it’s important for the plan sponsor to be very proactive and make sure that employees not only become participants, but successful participants.”   

Client Service December 7, 2016

Generating Lifetime Income Top Concern for Participants

A new survey finds that while a majority of retirement plan participants want lifetime income solutions, many are unaware if their plans offer one.
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Moving into 2017, retirement plan participants are going to face several challenges preventing them from properly saving for retirement; however, plan sponsors can take several steps to put these investors on the right path.

Recently, financial services firm TIAA conducted a series of surveys which revealed some of the biggest issues threatening Americans’ financial security, as well as strategies that plan sponsors can pursue to help them overcome these obstacles.

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As Americans seek lifetime income solutions, many are confused as to how they work, and whether their plans offer these options. TIAA finds that nearly half of respondents say their retirement plan’s No.1 objective is generating a reasonable, guaranteed monthly income in retirement. But, 41% are unsure whether their plans offer such a solution.

The firm notes, “Plan sponsors are in a unique position to ensure that employees have access to and understand their options for the provision of lifetime income.”  

But before participants evaluate lifetime income solutions, plan sponsors can help them be realistic about the percentage of current income they will need to fund a comfortable retirement. TIAA’s David Ray notes that the firm offers a plan outcome assessment strategy that analyzes clients’ plan populations to determine an average income replacement ratio (IRR).

“This allows plan sponsors to step back and decide whether to improve plan design, plan management, educational materials, or make changes in investment solutions to drive better outcomes,” Ray tells PLANSPONSOR.

The survey found that 63% of Americans who are not retired estimate they will need less than 75% of their current income to live comfortably, even though most experts recommend replacing 70% to 100% of current income in retirement.

To help individuals gauge the necessary IRR, Ray recommends offering customizable tools that participants can use to generate their IRRs based on individual situations such as age, budgeting and spending preferences. These tools can also help them determine what needs to be done to reach that IRR and what to do to close savings gaps.

“It is vital for employees to estimate how much money they’ll need in order to live comfortably in retirement and take advantage of the tools that help identify how they can secure a stream of income they can’t outlive,” says Ron Pressman, CEO of institutional financial services at TIAA. “Having a source of guaranteed income can help savers be better prepared to deal with ongoing retirement expenses, such as healthcare, as well as unexpected events.”

Ray adds, “When it comes to thinking about lifetime income, you have to think about the risk of outliving that income, and that’s why lifetime income products are so valuable, especially as employees are living longer today.”

TIAA notes that annuities are one lifetime income option that retirees can take advantage of, but its survey found that only one in ten Americans have annuities. Still, the firm found that 92% of annuity holders are satisfied with their investment decisions, highlighting a key opportunity for plan sponsors to educate participants about the benefits of this option, as well as other life-time income solutions that may be available to them.

NEXT: Advice Matters

 

Americans value professional financial advice, but they are unsure where to find it and whether they qualify for receiving it. TIAA’s survey finds that 35% of Americans who have not worked with a professional financial adviser say they don’t think they have enough money to justify paying for financial advice. Forty-nine percent believe they need more than $50,000 in savings to justify meeting with an adviser.

“People felt like they had to have a certain dollar threshold to get advice, which of course isn’t the case,” explains Ray. “We provide advice through every channel that a participant can interact with, whether it be in person, through the phone, or over the internet. It’s the same advice regardless of which channel is used. And we found that more than two-thirds of people who get this advice choose to save more and adjust their portfolio allocations, so we don’t believe there is a certain dollar threshold for advice.”

TIAA finds that 67% of those working with a financial adviser are satisfied with their decisions, compared to 37% who are not. Moreover, three in four respondents said they would be more likely to consider a job if it offered financial advice as an added benefit at no additional cost. For Generation Y, that preference increases to 87%.

In fact, the prospect of financial advice at no additional cost was the most popular among various free perks an employer could offer—even outranking on-site medical care or free lunch prepared by an on-site chef. This means employers are at a key position to raise awareness of financial wellness tools and resources available to their employees to help boost productivity, as well as retention.

“Regardless of where they are in their professional lives or retirement goals, there is a wide spectrum of support available to help employees with financial planning,” says Pressman. “In addition to resources in the workplace, plan sponsors can work with retirement providers to offer other means to access advice when and where it’s convenient, such as one-on-one meetings, webinars, podcasts, and online tools and calculators. Perhaps most importantly, plan sponsors can communicate frequently with employees to ensure they know what’s available—and retirement providers that can help.”

Finally, the best way to save for retirement perhaps is to start as soon as possible. TIAA notes that out of its current retirees, those who started saving before age 30 were most likely to retire before age 60, and 97% of those early planners reported feeling satisfied with retirement.

Ray notes that the importance of saving for retirement as early as possible, making the right contributions, and taking advantage of compound interest is especially important for younger participants to grasp.

Moreover, TIAA recommends strategies tailored to each age group in a plan. The firm recommends customizable tools designed to help the individual prepare at all stages of financial planning. TIAA adds that these tools should also help participants understand key factors that will affect their individual retirement strategies including personal risk tolerance and asset allocation, as well as the current status of Social Security and Medicare.

Beyond age, TIAA found that participants also approach retirement differently based on other factors such as gender. “We found differences in gender when it comes to preferences and methods for retirement saving; so, we dedicated seminars for women. They tend to look at financials in a different way than men do.”

But while several lifetime income options and financial wellness resources may be available to participants, many don’t know they have access to these benefits. This puts plan sponsors at a key position to work with employers and providers to make sure everything on the table is made clear to participants, so they can utilize what works best to put themselves on the right track to retirement.

“Encouraging employees to explore and leverage the full range of benefits their plan offers while they are working can help lead to better outcomes when it’s time to retire,” says Pressman. “Year-end is the perfect time to help employees get reacquainted with plan features and make sure they are using them to their advantage in the New Year.” 

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