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401k Plan Sponsors Shift from Investment Focus to Emphasizing Retirement Readiness

401k Plan Sponsors Shift from Investment Focus to Emphasizing Retirement Readiness
January 05
00:02 2016

Over the last decade or so, perhaps with the advent of the popularity of target date funds, we’ve seen a dramatic shift from focusing on retirement plan investments towards emphasizing retirement readiness. This may reflect the general trend away from the do-it-yourself investing philosophy epitomized by day trading. This fad peaked just prior to the 2000-2002 market crash that left many day traders in the poor house, but renewed the confidence in old-fashioned nose-to-the-grindstone long-term investing. As if that wasn’t enough, the 2008/2009 economic catastrophe, from which we have still yet to fully recover, erased any remaining sexiness regarding investment. Savers sought to distance themselves from making investment decisions by delegating that responsibility to professionals. Similarly, in recognition of their fiduciary duty, 401k plan sponsors began restructuring retirement plans to echo this movement.

But are plan sponsors too late in making this change? Have retirement savers not only given up on investments, but given up on retirement plans in general? “Since we have been through some rough years in the past 15 years and we regularly read about a slow growth decade ahead, investments are no longer as promising as they were in the 80s and 90s,” says Andy Bush, Partner and Financial Advisor at Horizon Wealth Management in Baton Rouge, Louisiana. “They have become unreliable as the cornerstone of marketing persuasion. No longer can providers persuade people to invest in retirement plans based on investments and their returns alone. Perhaps the emphasis on investments has become a liability for providers. The cynic in me believes they have to find new ways (words, schemes, etc.) to keep the money flowing into their plans so they can continue to grow. I see it from time-to-time the guy who has a large amount of distrust for the stock market or any ‘investment’ that they can see and touch, so they pour their money into rental houses or local businesses.”

Explaining the Shift

Fiduciary service providers have also responded to this drift from investments towards retirement readiness. Matt Cosgriff, a Retirement Plan Consultant with BerganKDV Wealth Management in Minneapolis, Minnesota, says, “The transformative shift in the retirement plan industry from one that has historically focused largely on investments to one that has refocused on retirement readiness is in large part due to the realization that retirement preparedness is not about having the best investments, but rather tackling the behavioral issues that keep plan participants from becoming retirement ready in the first place.”

Many professionals, who are more comfortable with numbers, tend to use a quantitative frame of reference to explains saver’s behavior. “The last 10 years still includes the Great Recession,” says Rick Bender, Financial Advisor at Savant Capital Management in Rockford, Illinois. “Investors saw a substantial reduction in their portfolio values. What permits people to withstand difficult times within their portfolio during retirement is maintaining an appropriate withdrawal rate. This allows for the portfolio to rebound to previous levels, while not hindering the retiree’s lifestyle. The emphasis on readiness is valuable, people must replace their paychecks and understand how to do so.”

Beyond the measurable nature of income, both public policy and private corporate strategies have had a role in the drive towards stressing retirement readiness. “Several factors have contributed to emphasizing retirement readiness rather than investments,” says Robert R. Johnson, President and CEO at The American College of Financial Services in Bryn Mawr, Pennsylvania. “First, the retirement income crisis is getting a great deal of media attention. People are being inundated with messages from the media — and, not just the financial media — about the lack of retirement savings. TV commercials talk about your ‘retirement number’ (that is, how much will you need to save for retirement) and refer to different color money (‘I can’t spend that, that money is for retirement’). Second, the decline of the defined benefit pension plan and the move toward defined contribution plans has exacerbated the need for planning for retirement income and not simply making investments for the future. With individuals in greater control of their own retirement plans, retirement readiness is receiving greater attention. A third factor is the uncertainty regarding the Social Security system and how potential policy changes may impact individuals’ reliance on Social Security as a significant portion of their retirement income. People are genuinely scared that Social Security either won’t be there when they retire or it will be a much more scaled down version.”

Clearly, the exposure of the fallacy of defined benefit plans has created a need for retirement savers to become more self-reliant. “We have seen a significant shift to ‘retirement readiness’ conversations because of the state of the Social Security program,” says Jill Knittel, Financial Advisor at Sage Rutty & Company in Rochester, New York. “The Social Security Agency was created in 1946 but the original Social Security Act was created in 1935 and was created to support those Americans who reach the age of 65 to assist with ‘old age’ retirement benefits. Life expectancy at that time was 64, so it was created for those who outlived the norm. The current life expectancy for a U.S. resident is approximately 80 years. Additionally, pension plans are no longer the norm for many employees across the U.S. For the Baby Boomer generation and generations before, many employers offered pension plans for retirement. So, the combination of an employer pension plan and social security would be enough for a person/family to live on. Since those rich retirement plans hardly exist any longer, it is important that employees ‘replace’ those former pension plans with their own savings vehicle, 401k plans. The U.S. Department of Labor has become more active in suggesting employers become more involved with employees’ retirement education. I believe the retirement readiness conversations are much better received by all employees compared to the investment conversations which only resonate with those employees who have an interest in the stock market.”

In a way, this importance on retirement readiness merely continues the sense of self-determination that saw its origins with the development of the 401k plan in the 1980s. What was once simple, though, became a series of increasingly involved decisions. “I believe this shift is as simple as action/inertia and control,” says Greg Rhinehardt of Gordon Asset Management, LLC in Durham, North Carolina. “Other than the QDIA ‘Do-It-For-Me’ options like TDFs, selecting and changing investments means a participant must take action by calling the 800# or going to the provider website. Assuming they take the first step, now they are expected to know which funds and in what percentages would create the perfect asset allocation for them. In my experience, having to make this decision means one thing, no decision. There are solutions to help them through this process, (e.g., the plan’s Investment Adviser, education and eligible investment advice arrangement tools, web resources like Morningstar, etc.), and many of them are free or at no additional cost. Again, this means we are asking participants to take yet another action to get a phone number or figure out how the tool works or surf the web. That is when inertia sets in, and participants take the path of least resistance; they do nothing.”

Today we see plan participants taking back their control. “We have spent years telling them the path to success is to create and monitor a diverse investment portfolio, and with help it can be,” says Rhinehardt. “However, when it comes to picking their investments, participants, even those with a higher investment IQ, feel they have no control of success, and that scares them! So how do we help participants help themselves? The retirement readiness discussion is much easier to understand and applies to all participants, regardless of income or investment education levels. More importantly, success is controlled by participants! Don’t worry about the investments (QDIA). Don’t worry about some huge amount you need to have in savings by retirement (that they all feel is entirely unreachable). All we ask is for them to pick a number from 7 to 20, depending on how much you have already saved, your age, and the amount your employer is contributing.” As a result, participants say to themselves, “Finally, something I understand and can control.”

Ball In Plan Sponsor’s Court

As Rhinehardt alludes to, much of what needs to be done to encourage employees to concentrate on retirement readiness occurs at the plan design level. These design techniques have become so ubiquitous that many 401k plan sponsors may not even be aware they are incorporating these modern features.  “I’m not so sure many have noticed the shift, though some have mentioned that they appreciate the focus on helping participants think about their situation,” says Bush.

Some plan sponsors simply have not moved away from the traditional idea of what a retirement plan is used for. “Their own lack of or diminished awareness of the retirement readiness aspect of the plan, as opposed to their focus of the plan for the purpose of employee retention or as a benefit to business owners in a smaller plan,” says John C. Hughes of The ERISA Law Group in Boise, Idaho.

Other plan sponsors may have less confidence such changes can be effective. “They say it is tough to teach an old dog new tricks, and this holds true even in the retirement plan world with certain plan sponsors,” says Cosgriff. “Many of the more traditional old-line companies, especially smaller ones, aren’t as quick to implement new cutting edge plan design strategies. However, as more and more evidence comes out to support the positive impact that various plan design features can have on tackling many of the inherent behavioral issues plans face it is becoming easier and easier to make the case for change.”

Another cause of reluctance to update 401k plan design on the part of plan sponsors is their worry that employees remain apathetic regarding their own retirement readiness. Knittel says, “Much of the feedback from plan sponsors has been that they aren’t sure how ‘interested’ their employees will be in the employer’s involvement in their personal financial situations.”

In general, though, the greater plan sponsor community does see the ball being in their court. Cosgriff says, “Plan sponsors are becoming increasingly aware of the opportunity that they have to empower employees financially by structuring their retirement plan to automate much of the saving and investing process by implementing strategies like auto-enrollment, auto-escalation, and by leveraging various asset allocation and target data solutions.”

In addition to plan design elements, plan sponsors have tried to beef up general education. “Many sponsors have responded by aiming to educate the participants more about the purpose of the plan and the actions necessary to take advantage,” says Hughes. “In some instances, sponsors have increased readiness by putting in more of their own money; specifically, in the form of a matching contribution, which not only increases account values, and thus readiness, but also encourages increased participation, which also then increases readiness. There has also been the increased use of products such as TDFs and guaranteed income products. These products put more of a focused on lifetime income and retirement date concepts, which in turn highlight these concepts and awareness to participants. It also makes their plan accounts seem less like bank accounts.”

Even when plan sponsors desire to modernize their plan, the support they need just doesn’t go far enough. “The majority of sponsors are following the lead from the providers they work with,” says Rhinehardt. “While shifting the discussion to retirement readiness is what’s best for participants, most of the solutions brought to the market fall short of actually helping them. Implementing real retirement readiness solutions are more than adding a suite of TDFs or doing auto-enrollment at 3%, 4% or even 6%. Many recordkeeping systems are not able to accommodate some of the best ideas out there. For example, participants know they should save more, but that means living on less today! The present bias trait built into all of us says most people aren’t willing to accept a little pain today, (i.e., smaller paycheck), to forgo a major pain down the road, (i.e., not enough saved for retirement). So what’s the solution? Allow participants to increase their deferrals today, but pick a date in the future for the increased deferral to begin. No pain today and still doing the right thing! The challenge is this solution is difficult for plan sponsors to track and administer, and I don’t know of any record-keepers who currently offer this option.”

We – the industry, the plan sponsors, and the plan participants – have all moved further along down the road to emphasizing retirement readiness. There remains, however, a significant distance to travel. The lead must come from those most knowledgeable about the entire process. This burden can’t be placed on the shoulders of the plan sponsor, who, by definition, must continue to focus on their core business. Neither can the burden be the sole responsibility of plan participants, who, in turn, must continue to place their job as their priority. That leaves it up to the industry, which appears more than willing to take on this duty. On the other hand, as the sign says in the Buffalo Bills field house, “Don’t confuse effort with results.”

Rhinehardt adds the perfect coda when he says, “Most sponsors would tell you they are making the shift by following the lead of their trusted providers. Too often that leadership looks like the blind leading the blind on a sightseeing trip. Our industry needs to do a better job of leading them in a direction that will have a real impact on participant outcomes!”

Are you interested in discovering more about issues confronting 401k fiduciaries? If you buy Mr. Carosa’s book 401(k) Fiduciary Solutions, you’ll have at your fingertips a valuable reference covering the wide spectrum of How-To’s (including information on the new wave of plan designs) every 401k plan sponsor and service provider wants and needs to know. Alternatively, would you like to help plan participants create better savings strategies? You can buy Mr. Carosa’s latest book  right now at your favorite on-line or neighborhood book store.

Mr. Carosa is available for keynote speaking engagements, especially in venues located in the Northeast, MidAtantic and Midwestern regions of the United States and in the Toronto region of Canada.

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Christopher Carosa, CTFA

Christopher Carosa, CTFA

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