04 Jan. 2016 | Comments (0) Share Follow @Conferenceboard
Employers play a major role in helping their employees achieve successful retirements. They sponsor employee benefit plans, offer education about them, and structure the plans to achieve desired outcomes. A key question today is: Should they go further and also offer advice services to employees?
Defined contribution (DC) plans have become the dominant form of retirement plans in the United States. When a DC plan is the primary retirement vehicle, employees need to make complex decisions – often about whether to save, how much to save, how and when to use funds, how to invest, etc. However, employees have major gaps in their retirement knowledge and financial literacy.
Employers are faced with deciding what types of support to offer employees and how much. The Society of Actuaries (SOA) recognized that employees’ access to appropriate advice is important to retirement success and conducted two projects on this topic during the last two years. The Society of Actuaries’ new publication, Investment and Retirement Advice: A Guide for Employers, defines a range of approaches that may be used to improve individual retirement decisions. It also defines key questions for the employer to consider in deciding which approach will be best for their specific situation. The report was preceded by a background research paper, Models of Financial Advice for Retirement Plans: Considerations for Plan Sponsors, that includes a substantial amount of legal background.
The new report identifies a variety of ways that employers can influence decisions and identifies three primary categories of advice:
- Managed account services make investment and portfolio decisions on behalf of plan participants who elect the option. This is essentially a “do-it-for me” type of advice service. The managed account firms professionally manage the investments based on each participant’s unique information.
- Automated advice services, also called “robo-advisors”, provide an online personalized advice service. The participants enter requested data about themselves, plan assets, perhaps other assets, retirement goals and so on. The service then computes and delivers personalized recommendations, dealing with investments and even, sometimes, retirement planning.
- One-on-one advice is a service in which a credentialed financial advisor talks to and works with a plan participant one-on-one to provide personalized advice. The advice can range from recommendations concerning specific events, such as home purchase, to recommendations concerning in-plan investing, outside investments, retirement planning, and even ongoing retirement advice once a participant retires.
The report also identified six methods to help employees make better decisions that are not viewed as providing personalized advice.
The situation is complicated because there is no professional consensus on many important retirement matters, so different service providers or advisors commonly offer different recommendations given the same facts.
Many individuals, particularly those at moderate and lower incomes, have no access to professional retirement and financial advice, except at their work place. They can access huge amounts of information on the Internet and from friends, but they have no good way to separate the good from the bad, and they may have trouble recognizing scams. Employees in general have great confidence in their employer. Therefore, offering access to good advice, financial education, and/or guidance allows employers to deliver a great deal of value for a very modest investment. Employers, however, need to take care to deliver a positive experience, to meet legal requirements and to avoid liability in the case of an unfavorable result. Here are a few examples of the questions for employers to ask as they explore offering advice:
- What legal issues do I need to be concerned about? How do fiduciary issues affect this decision?
- How far do we want to go beyond offering education about plan benefits?
- Are we willing to support personalized analysis of individual situations and presentation of alternatives but not recommendations? Are we willing to support recommendations and advice?
- Do we want to limit analysis and/or advice to investment issues, or are we willing to include broader retirement questions like how much money do I need to retire, can I afford to retire, and how am I affected when I claim Social Security?
- Going further, would we be willing to help an employee think about important financial issues like debt management and whether to pay off a mortgage?
- Should we offer tools? How do we get them? What questions should they answer?
- Should support be limited to company benefits or will it consider other household assets and matters?
- What qualifications apply to individuals who are providing services?
- What legal standards apply to them? Are they fiduciaries?
- Do people providing services also sell products? If so, are they insurance agents subject to state regulation?
- How can we understand what answers a service provider would give employees in a specific situation? Can we be assured that consistent information will be provided to all users of the service?
- Do we want to make support available to all employees or just specific groups?
- How can we avoid exposing employees to conflicts of interest?
The Society of Actuaries’ report lays out nine methods of providing decision support, discusses retirement vs. investment advice, provides information to help build a business case for advice, and also offers questions for employers as they are thinking about these options. I believe that supporting better employee decision-making will be increasingly important in the years to come, and that this is an important area for employer focus today. In addition, technology is enabling a growing number of tools and marketplace options, so that employers have more choices available to them to offer decision support. Legal issues, which are in a state of flux, are a very important part of this picture, and are discussed in the background paper. It is extremely important that employers considering these matters consult with legal counsel about what options are prudent for them and how the law affects them.
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