Holistic DC Expanding the boundaries of retirement planning for plan sponsors

Transcription

1 Holistic DC Expanding the boundaries of retirement planning for plan sponsors The term holistic defined contribution has been bandied around the retirement plan community as a way to help plan sponsors focus their defined contribution plan efforts more around employees goals rather than simply their portfolios. In this roundtable discussion, Drew Carrington, senior vice president and head of institutional DC at Franklin Templeton Investments, Lorie Latham, senior defined contribution strategist at T. Rowe Price, and Rob Austin, director of retirement research at Aon Hewitt, discuss what a holistic approach to retirement means, how plan sponsors take such an approach to their DC plan without becoming overwhelmed and what the future may hold for the industry. DREW CARRINGTON, CFA, CAIA Senior Vice President and Head of Institutional DC LORIE LATHAM, CFA Senior Defined Contribution Strategist T. Rowe Price ROB AUSTIN Director of Retirement Research Aon Hewitt P&I: How would you define holistic DC? Lorie Latham: Holistic DC is really an opportunity for plan sponsors to look at DC in a broader context. So, they are looking at the oversight and the management of a plan, as well as deepening the communication and engagement with participants. Obviously, DC plan sponsors require lots of lenses and perspectives in order to be successful. You have to consider investment design, structure and communication with participants. Every decision that we make for these plans has implications for the broader suite of benefits that the employer offers. The fact that we re thinking of DC in a holistic way is just another point of recognizing DC as no longer just supplemental. It is now core to us as our primary retirement vehicle. Drew Carrington: Rather than saying holistic DC, we might say a holistic approach that includes DC. If we treat employees balances in their current employer s retirement plan as the whole picture, it creates unrealistic expectations about what that DC plan can reasonably do. Instead, let s think about what plan sponsors can do now to address participants needs. In other words, how can sponsors help participants think through challenges that affect a broader financial landscape, which includes not only themselves, but their households as well? Rob Austin: Usually, when we use the word holistic, automatically we re talking about having a much widerangle lens. I think a lot of our plan sponsors fall into two camps when they hear the word holistic DC. We have some plan sponsors that say they already focus a little bit more on that DC component, and they re thinking about looking beyond just accumulation and also looking at de-cumulation. So, instead of just focusing on things like participation rates and savings rates, all of sudden it gets into how are people changing, and how do we make sure people can actually use this for an effective retirement plan. But I would say more plan sponsors think about holistic DC in terms of how does DC fit into a much broader financial picture. Once we have this view, it really becomes much more of a financial wellness discussion. It becomes much broader than just looking at a 401(k) plan or a 403(b) plan, but something that has much longer tentacles and can get into a lot of other financial discussions. P&I: What are some of the key ideas behind holistic DC? Mr. Carrington: If you re going to try to approach participants in a more holistic way, whether we re talking broadly about financial wellness or retirement preparedness, one crucial point is that the plan has to take advantage of available data. Plan sponsors should take advantage of their ability to target their communications and design unique strategies for participants. This means not only moving past a one-size-fitsall approach to investments, but also thinking more strategically about communications, education and engagement. Everybody s happy with the improvement in metrics that automation has delivered, including higher participation rates for plans that have [auto] enroll, more participants saving at appropriate levels, and more participants achieving more effective diversification. However, it s possible that we ve overlearned the lessons of automation and exaggerated our inability to communicate with participants to encourage better behavior. Research shows that groups of participants, at different stages in their careers, different points in their tenure and different points in their lives especially participants approaching retirement are much more open to targeted communication, and much more likely to act on targeted communications. So, as we think about the word holistic we have to recognize that there is no average participant. Ms. Latham: I think that there s a trend of plan sponsors taking a step back and really thinking differently about how they define the success of their plan in the bigger picture, holistically. They are asking: What should I actually be contemplating? Have I set a mission? Do I have objectives? View online at

2 The data suggest that participants across a range of ages are eagerly looking for additional help, education and communication around preparing for retirement. ~ Drew Carrington, Do I understand what I want to achieve with this plan? And how do I want to define success, accordingly? It s really important to set the mission up front, and be clear about what you want to achieve, and then be able to define the success metrics, accordingly. This approach can help sponsors look at how well the current plan design aligns with their specific objectives. There s a different way from what has historically been a pretty myopic look at how we monitor plans. Mr. Austin: It also applies to individuals. So what we re seeing plan sponsors say is that maybe retirement adequacy is the biggest and most important thing. But instead of communicating it in those terms, maybe there s more information about how you start modeling to show what your balance would translate to at different ages. That way the individual doesn t necessarily have those knee-jerk reactions about having inadequate retirement savings. Instead, it s thinking about how it can ultimately lead to retirement income for them, with whatever the retirement needs are for that individual. Mr. Carrington: The measurement question is really important. We have a lot of shorthand heuristics in the DC industry that are binary in nature. You re either on the path to success or you re going to fail. You re going to have adequate retirement income or you re going to have inadequate income. Your savings level is OK or it isn t. We have to develop a richer and more nuanced approach to how we talk about success. And we have to get a lot better about how we talk about preparedness. So, again, it s not this sort of binary on/off approach to retirement readiness. investments, you may need to get more creative to move toward a more holistic approach to retirement planning. It beats a poke in the eye with a sharp stick, but there s much more we can do. We need to be thinking about more aggressive automated design and about engaging people at various milestone dates, because in many cases, even aggressive enrollment and increase provisions may not be enough to prepare participants. We talk a lot about age 50 being the catch-up contribution eligible age, so here is a chance to really communicate directly with a demographic that s ready, willing, and interested in that communication and guidance. Even simple things are useful, such as making it easier for participants to enroll at the same savings level they were at during their prior job. Increasingly, in an auto 401(k) world, people who change jobs will come out of one plan, where they were auto-enrolled and perhaps had their contributions automatically increased over time, only to go into another plan with auto-enrollment and start all over at a low default contribution rate. We want to reduce this roller coaster problem where they start saving at 3%, move to 6% and start back at 3%. If they were already saving at a higher level, we already know they can afford it. P&I: Are there different ways to talk about the components of plan design, investment lineup, plan monitoring and participant engagement within a defined contribution plan, if you re thinking about it and communicating about it in a holistic way? With respect to plan investments, it may be that target date funds are not the ideal solution for your entire population. They may be an ideal default investment option for your younger participants. But as employees get older and have more complex financial situations, larger balances and longer tenures, their paths begin to diverge. So you may need additional investment options in your lineup targeted to those participants who are closing in or are in range of retirement. That runs counter to the trend of streamlining the investment lineup, because it s simpler and easier. However, for this group, a little richer of a lineup gives them more tools and flexibility. Mr. Carrington: If your thinking about plan design extends only to installation of safe harbor, automatic enrollment with the target date funds as default Ms. Latham: The design aspect is without question the biggest lever that a plan sponsor has available. So it s fundamental and foundational to get this right. In terms of

3 By being able to help [plan participants] to understand what s relevant for them, I think we are going to drive much more precise and better outcomes on their behalf. ~ Lorie Latham, T. Rowe Price auto features and taking steps on behalf of participants, it certainly results in increased participation and a host of other benefits, such as enhanced diversification and the potential for higher savings rates. That includes all the elements such as auto features, auto-enroll and autoincrease. We also need to think about how we address broader issues that might be impacting a participant s ability to achieve their retirement goals, such as budgeting and emergency preparedness. There are a lot of elements that fall into the concept of holistic DC, but the most important point is driving participant outcomes and getting to the right endpoint. So, I think those features need to really be talked about in terms of making sure that we re advancing the primary goal and that s increasing participation, increasing savings rates and improving diversification. P&I: What are some of the common hurdles that prevent sponsors from approaching DC plans in a holistic way? Mr. Austin: A lot of plan sponsors feel overwhelmed when they start to think about holistic DC. As you know, most companies really have a very diverse workforce. Plan sponsors are sometimes a little paralyzed and end up throwing their hands up in the air saying that there s no possible way they can create a scenario that s going to cover everybody. We know the cliché that one size does not fit all, and we also know that there s a lot of items that are available in small, medium, large, and extra-large. I think it s OK for plan sponsors to build out a suite that maybe starts with one piece and then bring in the others later. Ms. Latham: There has been a historical breakdown between human resources and benefits owning certain components of plan oversight and treasury and finance owning investment components. This is starting to evolve as sponsors begin to think more about DC in the broader context of financial wellness and outcomes. These groups need to come together and agree, and uniformly set the mission of the plan. It s not always easy to align these groups but we re seeing some movement, though it s slower than it probably needs to be. Mr. Austin: Yes, I agree. And it s not just treasury and finance. It s also the well-being person, the person that s in charge of physical well-being tools. So now it s much more of a mixture of people from different backgrounds, a mixture of people from different lines of business that HOW COMPLETE IS YOUR PLAN S TOOLKIT? No two participants are the same. That s why our strategies move past a one-size-fits-all approach to serve the diverse retirement needs of your participant population. Learn more at ftinstitutional.com/dc All investments involve risks, including possible loss of principal Franklin Templeton Distributors, Inc. All rights reserved. Any views or opinions expressed by an individual in this material are his or her own and may not reflect those of ( FTI ) as a whole. FTI does not endorse or recommend any views or opinions expressed in this material. 1 13/09/16 14:05 FTI USEN_DC_TOOLSET_7x10.125_PI_0916.indd does not provide legal or tax advice. This material is general in nature and is provided for informational and educational purposes only. Nothing herein shall be construed to constitute investment, legal, accounting or tax advice, or an investment recommendation within the meaning of federal, state, or local law. This material should not be relied upon as a basis for making an investment decision. Information is current as of the date of this material and obtained from sources deemed reliable, but there is no representation or warranty as to its accuracy, completeness or reliability. Because market and economic conditions are subject to rapid change, the information, analysis and opinions provided in this material may change without notice, and FTI disclaims any responsibility for updating this material. FTI accepts no liability whatsoever for any direct or indirect consequential loss arising from the use of, or any tax position taken in reliance on, any information, opinion or estimate herein. All financial decisions, strategies, and investments involve risks, including possible loss of principal, and may not achieve the desired results. For Financial Professional and Plan Sponsor Use Only/Not for Use with Plan Participants

4 SPONSOR DIRECTORY One Franklin Parkway San Mateo, CA Drew Carrington, CFA, CAIA Head of Institutional Defined Contribution T. Rowe Price 100 E. Pratt Street Baltimore, MD Michael Davis Head of U.S. Institutional Defined Contribution Plan Specialists are working together. And that s a good thing. You don t want to have just one particular part of the business s viewpoint on this. Mr. Carrington: Some companies wrestle with the notion that participants are going to push back if they re too paternalistic, whether that s increasing the auto enrollment default contribution percentage, implementing auto escalation or carrying out a plan re-enrollment. But the data suggest that participants across a range of ages are eagerly looking for additional help, education and communication around preparing for retirement. You don t have to be precisely right for every participant. You have to be directionally correct. We can do better than one-size-fits-all, not only when we design plans, but also when we offer investment choices. All of this can help participants think about their broader financial wellness and retirement readiness. Ms. Latham: This whole idea of financial wellness being geared to the participant is really behavioral financecentric. We need to make sure that we re being relevant to the end participant. So it s seeking participants out where they are directly and meeting their specific needs. We want to be able to tailor those communications to segment populations and think about more innovative ways to drive how they re able to respond and act, by truly personalizing the discussion that we re having with participants. By being able to help them to understand what s relevant for them, I think we are going to drive much more precise and better outcomes on their behalf. P&I: What does this understanding of defined contribution mean for investment policy/menu selection, monitoring, participant engagement and the vendor selection process? Ms. Latham: Delivering holistic DC plan oversight is complex, and plan sponsors simply can t do it alone. So when they are selecting vendor partners, plan sponsors need to set priorities and outline the service profile and relationship needs in advance. It s also important to ensure a well-documented process. When we re talking about integrated financial wellness, it s not just a theme or a concept. It needs to be integrated thoughtfully into messaging as part of the working platform. The messaging needs to be across all content including meetings, call centers and communications. There are a number of benefits competing for a participant s time and dollars, so helping with the framing and prioritization is essential. Plan sponsors really need to be thoughtful about whom they re partnering with to get this done. Mr. Carrington: When we evaluate whether or not our efforts to improve retirement outcomes have been successful, there s a tendency to shorthand the evaluation of success, often in terms of how many participants took advantage of something that was offered. So if you offer a new fund, you tend to look at what percentage of participants utilized the fund and then determine if it was worth the effort of evaluating the fund, putting it on the lineup, and sending out all the communications. But in the holistic arena, in an environment where we are thinking about being more granular and targeting specific demographics, that s no longer the right metric of success. So, if I m targeting participants over 50 for catch-up contributions, the only metric that matters is if I was able to get participants over 50 who were not already making catch-up contributions to take advantage of the feature. It s a subset of your total population. Similarly, if I m going to add new investment options for a specific demographic within my plan, then my measure of success is participation within that demographic, not the total plan. That s different from the sort of shorthand or heuristic method that we often use. Mr. Austin: Regarding vendor selection, as plan sponsors are rolling out different types of holistic messages and different types of financial wellness programs, it s really important that there be a natural connection point for the workers. You want it to already be something that the people are naturally accustomed to using, not something that s brand new and novel and would be slow to update. Thinking about this from a data sharing perspective, we re dealing with some information that s highly sensitive. So, you want to make sure that there are good processes in place. If there s already some company that you re dealing with that can expand this and talk about a much more holistic message to your workers, and they already have the data, then you don t need to worry about having that go between with different vendors. It probably makes it a little bit easier for plan sponsors to share that information and to build this out in a much more unified way. P&I: What does the future hold in some of these areas? What might plan sponsors think about what s coming down the pike in new developments? Ms. Latham: With respect to retirement income, there will be growing recognition that it is absolutely not a onesize-fits-all area. I would call it a multitude, or a spectrum of solutions. We ve got to really think about the end participant needs, because every participant s going to have a different need, in terms of how they want to go about using those assets and what that ultimately should look like. This is more than an investment question. We need to think about the participant experience that will facilitate the transition from accumulation to withdrawing income throughout retirement. In terms of what does the future hold, I think that it s a big question mark. We ve got a long way to go. There s the recognition of need, but there s very limited action underway. I think that an important part of where we need to be spending our time as industry participants is to really help identify what the solution set should look This sponsored round table is published by the P&I Content Solutions Group, a division of Pensions & Investments. The content was not produced by the editors of Pensions & Investments and and does not represent the views of the publication or its parent company, Crain Communications Inc.

5 More plan sponsors think about holistic DC in terms of how does DC fit into a much broader financial picture. ~ Rob Austin, Aon Hewitt like and encourage plan sponsors to think of it as a spectrum of needs vs. a single one-size-fits-all product that goes into a plan. Mr. Carrington: There is the search for the perfect solution, and an unwillingness to do anything until the perfect solution is found. That kind of thinking can be a real challenge. Maybe this approach to holistic DC, thinking about financial wellness more broadly, gets us moving. Part of the problem is that we almost always want to simplify it. We think that because we have the data on what participants have in this plan and what their income is and how old they are, we know all we need to know. But we probably don t. So we need to change the perspective and think about this in the broader landscape. It s liberating, and it means we can address them in a much more relevant way. In that kind of setting, you re going to need a lot of tools to address a variety of needs. So we ve got to step back and think about it more broadly. Mr. Austin: Right now, plan sponsors can really only see in the DC plan what the individual has in that particular DC plan. That totally synchs up with our viewpoint that this is very complex. It s very individualized, from the person and even the extended household. So where this leads us is going to be toward something that brings in all of these other parts of a person s financial picture. It s not just what s happening within the DC plan, it s what s happening with prior accounts. It s what s happening with a checking account, or maybe it s a savings account or an emergency savings account. Maybe it s the HSA (health savings account) or it s a DB plan that s out there. It s something that can take all of these different, apparently disparate, pieces of financial information and bring them into one sort of umbrella. That, ultimately, is where I think we re headed, and I think it is going to be very beneficial to individuals. Ms. Latham: What will hopefully become second nature to us is making the participant lens of the retirement journey central and our focus will be on the whole lifecycle of retirement assets.v