Plan Sponsors Want More Automatic Retirement Features to Help Unengaged Participants

Plan sponsors are interested to provide employees a retirement offering that can automatically adjust for life changes, as well as market shifts, to help ensure they have enough income in retirement, according to plan provider TIAA.

In a pulse survey of 80 plan sponsors released July 20, TIAA found that plan sponsors are looking for a combination of automatic enrollment and adjustments, immediate employer vesting and lower fees. Plan sponsors also feel that participants lack education and interest in retirement plans, and plan sponsors are looking for a combination of provider and human resource focus to improve engagement.

“The average participant doesn’t want to deal with their investments,” says Tim Pitney, TIAA’s head of lifetime income default solutions. “People spend more time on vacation than their retirement plan.”

Pitney says that lack of attention is partly why the idea of automation is going beyond just automatic enrollment into a target-date fund with a glide path. Plan sponsors, according to the survey, are looking for greater protection from market downturns such as the hit that fixed-income investment took last year.

“We saw in 2022, for the first time in 40 years, equity markets decline in conjunction with a double-digit drop in bond performance,” Pitney notes. “People that were closer to retirement that were in target-date funds really got a double whammy.”

According to the pulse survey, plan sponsors are open to guaranteed income products that could protect from such a downturn, as long as they come without “high commissions and fees/costs,” in the words of one respondent.

TIAA first introduced a custom annuitization default option in 2014 and has since added 250 institutional clients, with a forecast of reaching 350 by the end of this year.

There is still a long way to go before the majority of plan sponsors offer in-plan annuity options, despite an industry-wide push for the option.

Pitney believes the retirement income shortfall being faced by many Americans, combined with their desire for plan sponsors to help alleviate their troubles, will transform a 401(k) system into one that looks more like defined benefit pension systems of the past, without the same onus for the employer.

“If you take a step back, what you really have, and what you are trying to do, is effectively synthetically create a DB plan on a DC chassis,” he says. “Instead of a DB plan that is a financial and fiduciary responsibility for the organization, the risk and cost get shifted to the individual participant.”

The desire for automatic guidance for participants comes from plan sponsors believing that participants have a “generally poor understanding of retirement benefits,” according to TIAA’s survey. That said, sponsors are split as to where education should come from: their own human resources department or retirement plan providers.

“This is more of an internal HR issue, but we just need someone to fully ‘own’ our benefits and education of our participants,” one respondent wrote.

For his part, Pitney sees plan design as the key area in pushing toward a better retirement product. To make that happen, however, requires a “triangulation” of the client, plan adviser and provider “working together to create the best possible plan for the employer.”

“Most of the automatic decisions are going to be driven by the plan sponsor,” Pitney says. “It’s one thing if you go up to somebody and ask, ‘Do you want guaranteed income in your retirement plans?’ They will say yes. But do they have the impetus and the drive and desire to pursue what that means? There’s a push versus a pull mentality there.”

Pitney says he is adding staff to his team to continue messaging and working with clients.

“There needs to be an impetus for change,” Pitney says. “Education is always important, but harnessing that default human behavior really has more impact.”