How does our retirement plan compare to others?
This is a common question when an organization evaluates key characteristics of its defined contribution (DC) retirement plan. Plan sponsors and their advisors often benchmark their plans against industry averages to see how they measure up. But, is that what they should strive for—being average—or should they aim higher? At Russell Investments, we believe DC plans should strive for excellence.
Consider that a company with 1,000 DC plan participants spends $3 million annually on DC employer matching contributions.[i] That’s a big spend! It’s no surprise that plan sponsors often worry about how to get their employees to better appreciate the value of their DC plan.
Excellent DC plans are valued more by employees than average DC plans. And, in many industries, the competition for talent is fierce and excellent DC plans can make better workforce management tools than average DC plans[ii].
American workers need DC plan excellence now more than ever. Today, a DC plan often serves as the primary source for retirement savings, but changing work habits can put a damper on savings. The gig economy is booming and a career is no longer a defined path, rather, it’s more of a jungle gym. Russell Investments has quantified the impact of frequent job changes and has found that it can result in significantly less retirement savings accumulation.[iii]
The DC market isn’t known for embracing rapid innovation, but you don’t have to in order to offer an excellent DC plan. Excellence is taking the extra step on what you’re likely already doing—small incremental changes that can yield big results. Heightened fiduciary sensitivity to litigation and regulatory risk should not be a barrier to becoming an excellent DC plan. While there still is a need to periodically evaluate and benchmark the plan, these prudent actions need not lead to a retirement plan committee mindset of striving for average. Here are the key attributes that excellent DC plans are implementing and the actions you can take to make sure your plan is positioned for excellence.
Attribute #1 – A retirement income mindset
Establish and measure the right objective
- Establish income replacement as the DC plan’s objective. Develop a Target Replacement Income (TRI) goal for the plan and design the default and company match rates with this TRI in mind.[iv]
- Monitor success with periodic replacement income studies conducted by your recordkeeper, consultant, or fiduciary provider.
- Use the results to make targeted plan design changes or provide targeted participant communications to address shortcomings.
- Work with your recordkeeper to enhance your plan’s statements so they place the focus on retirement income and not on wealth accumulation.
Attribute #2 – A thoughtfully designed plan menu
Reduce the number of complicated investment decisions for plan participants
- Identify the number of investment decisions the typical plan participant (who is not invested in the plan’s default option) needs to make to arrive at an age-appropriate, diversified asset allocation.
- Consider offering a limited number of broad multi-manager and multi-style funds as core options.
- Consider giving the funds descriptive names that help participants use them appropriately (i.e., an asset class name).
- Consider offering a brokerage window to provide more choice for the minority who desire that level of involvement.
Attribute #3 – Majority of plan assets in a professionally managed asset allocation solution
Take advantage of participant inertia
- Consider an automatic QDIA re-enrollment campaign, giving both short- and long-tenured employees the same opportunity to benefit from the diversification and age appropriate asset allocation delivered by the plan’s default option. Offer this re-enrollment during your open enrollment cycle to capture your participants’ full attention.
- Evaluate your plan’s current default option and consider opportunities for enhancement. Ensure your plan’s default options align with the retirement income replacement needs of participants.
- Consider whether a customized target date fund or managed account solution can provide additional benefits beyond a one-size-fits-all target date option. The benefit of offering a managed account in place of a target date fund is that, instead of only placing participants in a national average, one-size-fits-all vehicle, specific information, such as age, gender, contribution rate, and account balance can be used to create an asset allocation that is more customized to them, and adjusted for changes in capital markets and some of the participant’s unique circumstances.
Attribute #4 – Double-digit contribution rates
Give participants the best chance of success
- Determine a targeted savings rate. Structure the company contribution formula (i.e., instead of matching $0.50 on the first 6% of participant contributions, match $0.25 on the first 12% to encourage a total contribution rate of 15%), provide a choice of default options and plan communication around the default.
- Consider using tools such as higher default rates, opt-out automatic escalation in 2% increments, and automatic catch-up contributions to put participants on the path of successful savings behavior.
Attribute #5 – Encourage retiring/terminating employees to keep their money in the plan
A win/win for the sponsor and the participant
- Provide educational communications to departing participants to help them decide what to do with their retirement assets. Inform participants about their ability to remain in the plan post-termination and the factual benefits of doing so
- Plans may also wish to offer features that are more attractive to retirees such as lifetime income options, access to financial advice and the ability for terminated employees to take partial withdrawals from the plan and repay loans.
Attribute #6 – Provide post-retirement options
Help your participants spend appropriately in retirement
- Consider if your plan menu offers enough tools (i.e., social security optimizers, retirement calculators), communications (i.e., catch-up contributions) and post-retirement investment options (i.e., income, managed payout, laddered bond funds, insurance solutions, inflation protection) for participants planning for retirement or who wish to remain in the plan post-retirement. Do plan provisions allow for things such as partial withdrawals and loan repayments for former participants?
- Begin incorporating investments and tools targeted toward retirees and pre-retirees.
- Consider formally designating a Retirement Tier on your DC plan menu.
Attribute #7 – Integrated financial wellness
Focus on changing behavior
- Not all financial wellness programs are created equal. Offer a financial wellness program that helps employees work toward financial health in all stages of their lives.
- Apply the concepts and principles of effective behavioral change that are likely already being used for health wellness.
- Make sure accessing your financial wellness program is quick and painless, and seek to make it an enjoyable and motivating experience.
We strive for excellence in every aspect of our lives. Excellent DC plans do not happen by accident; it takes a process starting with the end in mind, as well as the fortitude and persistence to achieve excellence. We have laid out several steps you can take this year to help move your plan from average to excellent.