Client Service April 19, 2017

Non-Profit Market Sponsors Prize Offering Advice Access

TIAA finds one-on-one education and advice sessions with non-profit employees can have dramatic impacts on participation, contributions, investment allocation, and confidence. 
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More than half, or 59%, of not-for-profit plan sponsors are concerned that their participants will run out of money in retirement, and 69% worry employees will delay retirement because they don’t have enough money, according to a new survey by TIAA.

However, the research also points to various strategies sponsors can adopt to address these concerns, including taking advantage of in-plan lifetime income solutions.

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According to the survey, 54% of non-profit plan sponsors offer a guaranteed lifetime income option as part of their investment menu, while 46% don’t. Out of those that don’t offer one, 21% say fees behind these products are too high, and 34% say their employees can access such products outside the plan.

David Ray, senior managing director at TIAA, tells PLANADVISER, “There are more and less successful ways to offer lifetime income. Relying on participants to wait until they retire to get a lifetime income product is probably one of the least successful ways of doing it. Behavioral economics shows most employees won’t do it on their own.”

Furthermore, TIAA’s survey suggests that lifetime income products offered through workplace retirement plans can offer more valuable benefits at lower fees, at least in most cases. Ray points to a variety of potential benefits an in-plan lifetime income solution can provide to participants as they save for retirement. “In the accumulation years, the lifetime income concept, knowing you’ll always have some base level of income, significantly improves the confidence and commitment of participants.”

He also notes workers can have some piece of mind as they move through changing interest rate environments in the bond market. “A lifetime income product like a fixed annuity is a product that will insulate you, to a certain extent, from interest rate influx.”

Still, Ray says that the potential benefits of guaranteed income products need to be communicated more effectively to participants.

“Simplifying the message is important and it’s critical to use different methods to communicate the value of lifetime income products,” he explains. “There is a high percentage of employees in target-date funds (TDFs) that believes TDFs offer lifetime income, when in fact almost none of them do. So, education is critical to increasing adoption and understanding of these products.”

NEXT:  Targeted communication is more effective 

TIAA finds that some of the most effective participant education initiatives among non-profit plan sponsors involve highly targeted communication.

“Typically, if you have weakness in your plan, it is not universal across all the participants,” Ray says. “More often than not, it’s a segment or a few segments of your employee population that need more specific attention about specific challenges.” Plan sponsors can identify where these problems exist by tracking key metrics about the plan and its participants, leveraging data from the recordkeeper and other sources.

To this end, TIAA finds that when it comes to participant communication and tracking metrics, there is some gap between what sponsors believe works and what they practice. For example, the survey found that although 68% of sponsors believe targeting education to specific age groups is effective, only 31% do it. Furthermore, only 20% track participant data by age group. And although 21% of sponsors said tracking income replacement rates is important, only 14% do so.

Asked to identify what they see as “very effective” communication methods, these sponsors cited financial education targeted to different age groups (22%), seminars (16%), and education targeted toward women (11%).

“Another growing method of communication is using social media and gamification to engage participants—and to identify where they are along the education curve,” Ray explains. “Ultimately, that can help you know if they’re ready for retirement.”

Making this communication as personalized as possible is also important, Ray concludes. He says TIAA finds one-on-one education and advice sessions with employees can have dramatic impacts on participation, contributions, investment allocation, and confidence.

An executive summary of the TIAA analysis, “Not-for-Profit Plan Sponsor Insights,” is available here. 

Data & Research April 19, 2017

Little Pushes Can Drive Big Plan Improvements

New research from Morningstar argues retirement plan advisers and their sponsor clients can benefit from “nudging” employees toward better behaviors. 
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Sponsors of defined contribution (DC) plans spend plenty of time and effort on strategies to boost participation rates; however, high participation levels alone don’t necessarily indicate a healthy plan.

According to research by Morningstar, about half of DC plans offering automatic enrollment place their new participants at a “low” and “inadequate” savings rate of 3%.

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The firm’s latest research paper surveys thousands of participants and explores different ways to increase deferrals. The firm points out that participants accepted the default savings rate at roughly the same level, whether it was set at 3% or 12%. Moreover, those who choose their own savings level tended to opt for higher rates over the plan sponsor’s chosen default. Morningstar believes the default rate may even serve as a mental “anchor,” leading employees to incorrectly visualize where the acceptable starting point is. The firm concludes, “The results strongly suggest that increasing default savings rates is likely the simplest and most effective way to get participants to save more for retirement.”

The firm finds that 68% of plans recordkept by T. Rowe Price offer auto-escalation as an opt-in feature, but only 11% of participants choose to use this feature. Moreover, these features could be undermined by employee turnover, especially when a worker changes employers and finds they have been defaulted into a lower savings rate. Morningstar finds that the median employee turnover rate is four years for all American workers, and less than three years for those younger than 34. Unfortunately, many employees don’t carry over their previous savings rate.

The conclusion is that plan sponsors may be able to benefit from “nudging” employees toward better behaviors. This could include utilizing higher-than-average default rates, utilizing re-enrollment for current employees, or applying higher auto-escalation rates via an opt-out feature. Effective communication must also be implemented to minimize employee push back. Morningstar also notes that plan sponsors “concerned about the potential additional costs associated with higher levels of participation (and higher savings rates) could consider stretching the match to a higher level and/or changing the match rate to a discretionary formula, i.e., one that can be adjusted based on actual participant savings levels/costs.”

The employer match could be an effective incentive to get participants to save more. The paper suggests that instead of offering a 100% match on the first 3% saved, an employer could offer a 50% match on the first 6% saved, “thereby increasing the contribution rate at no cost to the employer.”

Moreover, Morningstar finds that communication and advice could also have a positive effect on savings rates. According to its research, 90% of participants who engaged with in-plan solutions such as robo-advice increased savings rates by about 2%. Morningstar says, “Advice solution providers should be aggressive when providing savings guidance to participants and can include recommendations on saving, investing, and when to retire.” 

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