Deeper Analysis Could Create More Efficient DC Plan

When discussing retirement plan design, plan sponsors and their providers or advisers tend to have conversations about plan costs, but they should consider the more implicit costs of employees not being able to retire, according to Scott Boyd, SVP, National Platform Distribution and Relationships and head of Healthcare Solutions for Prudential Retirement, in Hartford, Connecticut.

Boyd tells PLANADVISER that it costs employers an estimated $8,500 per year per person unable to retire, including increased health care and benefits costs and lost productivity. In addition, a lack of mobility for middle managers may cause them to leave for competitors, and it could cost anywhere from 100% to 300% of salary to replace them. “The implicit costs can be bigger than what plan sponsors spend on their retirement plans,” Boyd says.

Prudential offers a service called DC Optimization, which it has trademarked. DC Optimization is a process that provides plan sponsors with information from defined contribution (DC) actuaries to help them design an efficient retirement plan that supports their organizations’ business objectives—whether it’s containing overall business costs, increasing employee participation in a retirement plan or attracting and retaining the right talent.

Boyd explains that the first step is to do a benchmarking of the plan against other organizations comparable in industry or location. He says, for example, this is very important in the health care organization space because they are competing fiercely for the same talent in the same geographic region; compensation may be similar, so evaluating the value of benefit plans is important for recruiting.

Then, with data from the plan sponsor, such as participation rates, contribution rates and age bands of employees, Prudential has an actuarial group model different plan design alternatives and their outcomes. “Sometimes plan sponsors need to deliver less of a benefit, sometimes they need to deliver a better benefit, or they may have a retirement readiness goal. It is a unique discussion with each plan sponsor,” Boyd says.

The plan sponsor is then presented with recommendations. Changes are implemented over a period of two to three, maybe even five years to reach the plan sponsor’s ultimate goal, according to Boyd. He explains this may be due to the complexity of the plan or the need to communicate with different hierarchies at organizations and different players in implementing the changes.

Boyd shared the case of one health care system which, after a series of M&As, had a number of different retirement plans they were trying to evaluate. Benefits were vastly different in the plans; in one a nurse would earn three times as much benefit as in another. The organization wanted all nurses to be incentivized the same. The organization also had low participation rates in its plans.

After DC Optimization, Prudential helped consolidate 23 retirement programs into one program, maintaining a cost-neutral basis for the plan sponsor. The average projected income replacement ratio in retirement for participants improved by 11 percentage points for 22,000 employees, and the participation rate reached 90%, up from 35%.

While Boyd works with health care organization plan sponsors, he says DC Optimization is used across many industries. Prudential believes a company should have 1,000 or more employees for DC Optimization to work.

Boyd says Prudential is starting to see more generational plan design as companies look to the changing demographics of the workforce and want to make sure older workers are adequately prepared to retire and that younger workers start saving strong. In addition, employers can create a program that encourages tenure among employees.

For example, a plan could match 25% of the first 6% of deferrals for employees with less than five years of service, match 50% of the first 6% for employees with five to 10 years of service, and likewise increase the match formula with longer service. Or an employer could add age plus years of service and match 25% of the first 6% of deferrals for those whose age plus years of service is less than 30, match 50% of the first 6% for employees whose age plus years of service is 30 to 40, and so on.

There are other ways to consider how to use match differently. Boyd notes that typically DC plans use a standardized formula for all employees no matter what the employee contributes, but plan sponsors may want to incent some employees more than others.

Boyd concludes that the ability of older workers to retire is necessary for workforce management. Companies need to have turnover and new talent, and to replace more expensive employees with less costly ones.