Investment insights from Capital Group
Even with a diverse workforce and diverse needs, can a universal plan still provide the right opportunities for defined contribution (DC) plan participants to achieve retirement security? During a recent plan sponsor consortium, Capital Group met with DC plan sponsors to discuss how to better understand their participant base to help think through their employees’ differing needs for retirement success.
Different companies, different demographics, same plan
A common issue raised by plan sponsors is how a single plan can meet the needs of a diversified workforce. For example, a company’s workforce may skew older, but still need to address the needs of younger employees who are just starting out on their retirement savings journey. Other plan sponsors are wrestling with addressing a diversity of job roles and incomes among their participants. A hospital’s DC plan has to encompass workers as divergent as physicians and orderlies. Or an insurance company’s plan needs to work for a labor force that ranges from actuaries to call center employees. And even more complex is recognizing and embracing the diversity of the workforce relative to gender, race, ethnicity, culture and other factors.
As a start, the plan sponsors we met with spoke of ways to bridge these differences through plan design features and a range of investment offerings. From a plan design perspective, offering access and flexibility is key. But a key to success is using the “auto” features afforded by the Pension Protection Act of 2006. One plan sponsor articulated how effective this has been for their plan. This plan has auto- enrollment and auto-escalation in place, allowing tenured participants to lift savings rates as plan design changes may have positively impacted new enrollees, leaving established participants behind. But in an effort to increase participant savings, this plan sponsor also adopted a stretch match concept: the more a participant saves, the better the company match.
From an investment perspective, some plan sponsors offer a mix of passive and active strategies in their lineup. Over time, the simplification of plan investment menus has allowed for better institutional pricing, greater definition of investment offerings as well as more focused participant engagement. One such sponsor we spoke with diversifies their offerings through four tiers: A target date offering; two passive funds covering broad equity and fixed income; three active options including equity diversified by sector and geography, global fixed income and stable value; and a brokerage option.
Creative ways to engage and address savings shortfalls
Plan sponsors also engage with participants in different ways. Traditionally plan sponsors have relied on generic communication or plan design to engage, but in recent years, plan sponsors have discovered inventive ways to encourage and engage with participants in an effort to meet suspected savings deficits. One plan sponsor who attended our event saw great value in their recordkeeper’s “nudge” strategy with participants.
Their partner utilizes artificial intelligence (AI) and other machine learning technology to observe how participants interact with the recordkeeper through the call center, mobile app, emails and/or regular mail, allowing the recordkeeper to create a profile for each participant. That profile determines how to best engage with participants; the recordkeeper also uses that intelligence to facilitate a “nudge” campaign to induce participants toward saving more for retirement. The algorithms also create a hierarchy and path for participants based on their parameters and where they fall in relative to major life events.
The result is more than 10,000 custom paths with automated gentle prods regarding beneficiaries, savings and investments. The employer told our audience that response rates to this program have been “incredible,” as AI even anticipates when plan participants may be on the app and sends them a relevant message to improve retirement savings behaviors.
Creating a retirement destination
Plan sponsors are also struggling with how an aging workforce influences their offerings: should employers to make their DC plans a retirement destination? Do you want participants to stay in the plan after retirement? Do you allow for rollovers from other defined benefit (DB) and DC plans?
Many plan sponsors view this as part of their responsibility to their employees. Some provide retiring workers the ability to roll cash balance investments into their DC plan, which is especially important as fees and expenses may be lower because many plans have access to lower institutional pricing.
Another option for plan sponsors is to consider a managed payout option for retirees. There has been a slow uptake for annuity purchases, but the managed payout plan may be easier to understand and implement for most participants.
With the recent passing of the SECURE Act, a key priority for plan sponsors will be the evaluation and implementation of retirement income solutions. Such solutions may help participants obtain a partial income guarantee upon retirement.
Convincing the committee
How do you take action on great plan sponsor ideas? Interestingly, plan sponsors frequently raised the challenge of convincing their committees to make creative and paternalistic changes to their plans. It really depends on the make-up of the committee and the influencers within that group. As a result, some changes take time to implement.
Despite these challenges, plan sponsors are evaluating best practices in plan design to meet the diverse needs of their participants. They are exploring the emergence of AI to help nudge plan participants into saving more for retirement and diversifying their assets. DC plans are transforming into retirement destinations as a way to offer employees diversification tools and, in many cases, lower fees than rolling into a retail account.
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