Growing Plans Together

The vast majority of retirement plan sponsors have no idea whether their plan participants are on track to retire at age 65. With few participants deferring enough and many planning to delay retirement, plan sponsors face the risk that numerous employees will linger past traditional retirement age because they cannot afford to exit the work force.

According to the Towers Watson 2013/2014 Global Benefit Attitudes Survey (see “Delaying Retirement”), half of respondents expect to retire after age 65, up from the 41% in 2009 who expected to remain employed that long. Among those planning to retire after 65, 24% intend to retire at 70, and 7% say they will never retire.

As obvious as is the need for advancements in retirement outcomes, only a minority of sponsors are considering the likelihood that their participants will be unable to retire at 65, according to the 2013 PLANSPONSOR Defined Contribution (DC) Survey. Participation rate is the most common criterion sponsors look to—cited by 68%—when analyzing the success of their plan. A meager 6.1% consider participants’ projected retirement income replacement ratios, and only 4.4% look to participants’ projected monthly income—the two figures most predictive of retirement preparedness.

The most effective way for retirement plan advisers to counter sponsors’ lack of foresight, experts agree, is to point out the financial disadvantages of an older work force to the sponsor’s chief financial officer (CFO). Advisers could also cite the productivity issues that can arise with aging employees. Then advisers need to benchmark participants’ overall preparedness and projected income in retirement to show the finance department where the company stands. The final and most essential step is to convince the CFO to markedly improve the plan’s design so that participants are, in fact, on track to retire at 65 or younger.

“Finance is so busy with pressing, day-to-day matters, that they are kicking the can down the road,” says Matt Kolenich, director of retirement plan services at Chapman and Chapman, a full-service employee benefits company in Twinsburg, Ohio.

“Most CFOs only look to next quarter’s profits, and, since the recession, their primary focus has been controlling costs,” agrees Robyn Credico, national practice leader of defined contribution consulting at Towers Watson in Arlington, Virginia. “More recently, health care costs have been a predominant focus for finance and HR [human resources].”

Retirement plan advisers can help sponsors avoid this impending crisis “by taking a leadership position on retirement readiness,” says Christine Marcks, president of Prudential Retirement Services in Newark, New Jersey. “Advisers need to change the conversation and help sponsors understand the magnitude of the problem.”

The Disadvantages

Advisers should open the discussion with finance by highlighting the costs to the company of having an older work force unable to retire, says Credico. To start with, senior workers are generally paid larger salaries because of their tenure. Further, their health insurance costs are much higher she says.

Indeed, annual health care claims for employees younger than 25 average $2,888, according to a report from Apex Management Group, a subsidiary of Arthur J. Gallagher & Co. For workers 65 and older, that number jumps to $10,264.

Workers’ compensation medical claims and time off also rise for older employees, according to data from the National Council on Compensation Insurance. For workers ages 20 through 34, claims average 53 days in duration and $5,073 in medical payments, while for employees 45 through 64, those figures jump to 66 days and $7,649 in payments.

Advisers can evaluate the total salary and benefit costs of an average 65-year-old employee against those of a 30-year-old, for instance. “We find in our research with CFOs that running the numbers is the best way” to convince them of the importance of retirement readiness, she says.

“Unbeknownst to them, a train wreck is coming,” says Don Healey, president and CEO of The Healey Group in Wormleysburg, Pennsylvania. “Employers will have to pay a much higher health care premium for someone 60-plus.” If advisers can reveal these costs to the CFO, they will get finance’s attention, he says.

Advisers should also point out that “older workers tend not to be as engaged,” Credico says. “If their job is labor-intensive, they may not be able to do the job they were hired for.” Further, if older employees stay in the work force, younger workers may resent having their chances for promotion delayed, and their morale and productivity may suffer, as well, she says. This may prompt talented, younger workers to leave the company, resulting in high turnover, Credico says.

To stay competitive, a company needs to be able to hire younger workers, says Sean P. Riley, a professional plan consultant with Eldridge Investment Advisors in Manchester, New Hampshire. “Younger generations bring an added perspective that often includes a much stronger technology background and fresh outlook on the world,” Riley says.

“Young blood in the company helps a firm avoid a sense of complacency,” Kolenich agrees.

Plan Health

However, despite the costs of an older work force, the conversation is not meant to be discriminatory or focused on pushing older workers out, experts agree. Instead, it is an opportunity to help those in finance understand why time spent improving plan outcomes and participant retirement readiness is well spent. Once an adviser has established the incentive to help people prepare for retirement, it is time to turn the attention to a plan’s health and see where the employer’s work force stands.

Advisers should begin the analysis of a plan’s health by asking the CFO, “‘What is the purpose of your plan?’” Healey says. “If the CFO’s answer is, ‘to help our employees prepare for retirement,’ he may be receptive to input from the adviser. If the answer is simply ‘to offer a competitive benefit,’ he may not. Next ask, ‘Has anyone ever done an analysis to see where your people stand?’”

By analyzing the retirement readiness of a plan’s participants, finance can know whether a large portion of the company’s work force will be unprepared to retire, Kolenich says. He looks at such metrics as income replacement ratios, projected monthly income and the percentage of a plan’s employee base projected to be able to retire at age 65 with 75% of their pre-retirement income.

“If an adviser can point out that, although a plan may have a 70% participation rate, only 27% of its participants will have a sufficient level of income in retirement, the adviser can get the CFO to realize [the firm] needs to boost savings levels,” Riley says.

It is also essential to look at the retirement readiness of the plan not just in aggregate but for each individual participant, Credico notes. “If, on average, the participants in a plan are saving 8%, but on closer inspection you discover that some people are saving 20% while others are saving nothing,” the adviser will need to work with the sponsor to improve outcomes for those who are disengaged.

Towers Watson uses a benchmark called FIT AGE, which calculates the age at which each participant will be able to retire with 70% to 100% of the income he is bringing in at that time, depending on the parameters the sponsor sets. The benchmark has proven that many plans have much work to do to increase participants’ retirement readiness, she says, as some participants will need to work into their 80s.

Making the case for change within the framework of plan health is critical, says Mendel Melzer, chief investment officer (CIO) of The Newport Group in Heathrow, Florida. Since presenting CFOs with a retirement readiness report 18 months ago, Melzer says, he has had great success in working with them to advance plan outcomes.

“When CFOs are shown the data on retirement readiness, they become very engaged,” Melzer says. “They become real proponents of automatic enrollment and ‘auto’ increases, which are very powerful tools. They understand the imperative need to accumulate money for retirement.”

Better Design

Once the CFO has proof that the company needs to boost its employees’ retirement readiness, the next step is to enhance plan design. Plan outcomes can be improved through such measures as automatic enrollment at rates higher than 3%, automatic deferral escalation up to 10% or more, use of target-date funds (TDFs) or risk-based managed accounts as the default investment, retirement readiness calculations, education and one-on-one advice, Kolenich says.

CFOs’ biggest push-back is expense, so advisers need to show them how such advancements can be made without increasing the plan’s costs, Kolenich says. Many CFOs may be unaware of stretch matches or the fact that they are not obliged to match higher deferral rates, he says.

Advisers can also successfully lower plan fees, which can improve savings and returns, thereby shaving several years off of a participant’s projected retirement date, Credico says.

Further, Riley says, CFOs also respond favorably when told that, if their participants are better prepared for retirement, this lowers fiduciary liability risk.

Some CFOs may resist extending eligibility to new hires, for fear that few will enroll in the 401(k) and the plan will then fail discrimination testing, Kolenich says. “We educate [these CFOs] that, if we pair earlier eligibility with automatic enrollment, we capture those participants,” he says.

While retirement readiness is still a relatively new concept, Marcks believes advisers have the power to convince sponsors to get their people on the right track.

She agrees that making the case to the CFO is the right place to start. “The leaders in this business will bring a greater focus to outcomes, so that people can enjoy retirement,” she says. “A call to action is necessary.”

Dismal Outlook

A majority of Americans have saved far too little for retirement and are doubtful that they will be able to retire comfortably. As a result, half of all employees plan to work past age 65—with more than one-third expecting to retire at age 70, later or not at all, according to the Towers Watson 2013/2014 Global Benefit Attitudes Survey.

This delay in retirement is obviously driven by the fact that 29% of workers have saved less than $25,000 across all of their retirement accounts, according to the 2014 PLANSPONSOR Participant Survey (see chart above). Only 16% have saved between $25,000 and $50,000. Generally, the percentages dwindle as the balances rise: Only 13% have total balances between $50,000 and $100,000, and 11% hold between $100,000 and $150,000 in their accounts.

In total, only 22% have saved more than $250,000 for retirement.

It is no wonder, then, that only 19% of the workers surveyed are “very confident,” and 21% are “confident” they will achieve their retirement income/savings goals by age 65. Conversely, 60% say they are “somewhat confident,” “only a little,” “not at all” or “unsure” if they will be able to reach those goals.

Art by Chris Buzelli