31 May. 2016 | Comments (0) Share Follow @Conferenceboard
Many Americans put most, if not of all, of their retirement savings in plans sponsored by their employers, and many of this group does not have access to independent financial advice. Employer programs are a major source of communication about financial security, information to help employees make better decisions and benefit plans. Aon Hewitt’s Hot Topics in Retirement 2016 results show that nearly all employers (89%) indicated they are very or moderately likely to add tools, services, or communications to expand their financial well-being focus. When asked why they are doing this, 85% said it was the right thing to do. The top three tools to be offered in 2016 are basics of financial markets (43%), budgeting (34%) and debt management (33%). All of these topics illustrate the growing appreciation of the importance of having a good foundation for financial education.
The Society of Actuaries’ (SOA) publication Retirement and Investment Advice: A Guide for Employers identifies a range of approaches that are available to employers to help employees make better retirement decisions. The approaches range from completely personalized approaches and somewhat personalized approaches with target date funds and guidance to general education and plan design, which are not personalized at all. Advice can be in the form of robo-advice, one-on-one or managed accounts. Most of the approaches are helpful to those who are doing it themselves, whereas managed accounts are a “do it for me” approach.
Employers have long been fiduciaries with respect to the retirement plans they sponsored. And as such, they are required to consider the interest of the participants in the management of the plans. The U.S. Department of Labor regulates these plans and it released final rules on April 6, substantially revising the definition of ERISA fiduciary for both defined contribution and defined benefit plans. The new rules, which become effective on April 10, 2017, may accelerate changes in the provider marketplace. Congress has voted to overturn the rules, but the President has indicated he will veto any bill presented to him, so the rules are not likely to be overturned. For a review of the employer issues related to the new rules, see the Plan Sponsor Council of America (PSCA) analysis. The rule is long and complex, and plan sponsors will want to review their strategies with their attorneys.
I have been listening to others and thinking about the new rules and how they might impact individuals and employer offerings of advice. Several key points come to mind:
- Absolutely nothing has changed with respect to the individual’s need for advice, and the level of financial and retirement literacy. The Society of Actuaries’ research regularly has shown that individuals’ retirement planning time horizons are too short and there are major gaps in planning. However, public awareness of the issues surrounding retirement advice as well as employee interest in having access to more help may change as a result of these rules. These issues have gotten a great deal of attention. This is likely to focus more attention on the importance and value of employer -sponsored advice and decision support.
- Many employer-sponsored plans offer good investment options and low fees. Employee interest in leaving their funds in their employer’s plan may increase, and vendors supporting defined contribution plan management may increase their offerings of payout options and support for the post-retirement period. I predict that more money will stay in employer plans longer after retirement.
- Plan sponsors were fiduciaries prior to the new rule and they will still be fiduciaries. There could be some changes in how they execute that duty. At a minimum they will need to make sure that their vendor contracts are in compliance with the new rules.
- Products in the IRA market will get a lot more scrutiny and attention. If people or administrative firms connected to the employer plan are offering IRAs, the employer will likely be interested in understanding the offer and making sure that it is reasonable, that the arrangement is in compliance with the new rules, and that it is well disclosed. I would expect that some IRA products will be modified, new ones will appear, and some will disappear.
- The minimum standards for education and qualification of representatives dealing with IRAs and other retirement matters may well go up. Many of them will be subject to fiduciary requirements for the first time.
- Some companies will change the way they compensate the people who are representing their IRA products.
Remember that many of the methods employers can use to help employees make better decisions and secure good retirement outcomes are unaffected by the change in the rules. Financial wellness programs that help employees understand how to manage their finances but do not involve the sale of any product and are not connected to any financial product offer a good solution to helping employees. And as indicated by Aon Hewitt, financial wellness programs are rapidly growing in popularity.
At a minimum, employers can support employees by helping them ask the right questions, as well as helping them with a path to do the analysis. Some of the employee questions with regard to defined contribution plans include:
- Can I leave my money in the plan after I retire?
- What investment and payout options are available and what expense charges apply?
- Which options offer guaranteed income for life?
- What risks are connected to each option?
- Are they a good deal for me?
- If I roll over my money, what are my investment and payout options?
- What charges apply?
- What payout option is best for me?
- Should I use a combination of several options?
As more employees are reaching retirement age and more attention is being focused on helping them get a good result in retirement, plan sponsors need to think about whether or not they wish to offer advice and how. They also need to revisit what options the plan offers for the retirement period, and whether or not they wish to expand their offerings. The Society of Actuaries’ research report, The Next Evolution in Defined Contribution Retirement Plan Design should be helpful in setting up a framework for the evaluation of plan design options.
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