Companies and institutions that sponsor retirement savings plans work hard to develop attractive options that will encourage participants to save and invest for retirement. However, in spite of considerable efforts (and resources spent) to educate plan participants on the fund choices, the value of the benefit and company matches, employees are not taking full advantage of their plan and many are not feeling secure their retirement savings are adequate.
The 2014 annual Retirement Confidence Survey of Americans from the Employee Benefit Research Institute showed that only just over half of the respondents felt confident that they will have sufficient funds for a comfortable retirement. However, 24 percent were not confident.
Meeting Employee Needs
Many defined contribution plan sponsors are trying to figure out what they can do to boost savings levels and employee confidence. Education by itself is clearly not enough. Surveys show participants are looking to sponsors for guidance from start to finish. Those less confident want help from the onset, from enrollment to portfolio selection to determining how much savings would be adequate. Others want help in choosing a diverse portfolio of funds, advice on reallocating later and data on whether they are on track to reach their retirement goals. Others who perceive they know more prefer a do-it-yourself approach, but even they want to know if their retirement savings are on track too.
Here are key actions sponsors can undertake to better address participant needs and wants:
- Improve investment education efforts since one approach does not work for everyone. The most common approach employers take to change employee behaviors around retirement savings is through education sessions. However, studies show that these broad-stroke efforts have not been impactful for all employees and a knowledge gap remains. Only 55 percent of employees who went to 401(k) education sessions found them valuable. Internal review and/or an external expert’s review can be useful in taking a critical look at the state of the education efforts.
- Do not make assumptions about what employees need to hear. Different populations and different situations require more tailored approaches. Pew Charitable Trust research showed that for example, on average, those with lower education levels and lower-income are less likely to be financially literate than other employees. In a large education session, they may be hesitant to ask questions or be intimidated by those perceived to be more knowledgeable. Additionally, some may tune out information that does not correspond with their self-perceived investment expertise.
- To determine the right approach for employees, try surveying and/or conducting focus groups with different employee populations separated by age, income, participation level, etc. Ask each group similar questions to determine what the different groups understood and did not understand about their retirement savings plan and the investment options. Use this information to develop targeted communication efforts with tailored messages going to various populations, such as those contributing nothing or less than the match, those in certain job categories and other groupings.
- Improve saving behavior with automatic enrollment and features. Automatic enrollment and contribution escalation are very effective at allowing inertia to work for participants. The 2016 Defined Contribution Plan Participant Survey found that 43 percent of those automatically enrolled indicated they would not have signed up otherwise, and 17 percent of those whose contributions were escalated acknowledge that they would not have done so on their own. Recognizing that many participants want someone to make investing simple for them, plan sponsors should automatically place contributions, unless otherwise indicated, into a balanced fund or a target date fund. That way, even if participants do nothing further, they will be investing in diverse, already vetted options that will automatically be reallocated over time.
- Offer access to financial advice and tools to gauge whether they are saving enough. Nearly 70 percent of participants in a study backed by Forrester research and commissioned by Betterment for Business indicated that online platforms which provide financial advice and enable them to see all their assets in one place can help them get on track for retirement. They also believe the platforms will help them make better investment decisions for retirement. It should also be noted that increasing employee access to information about their plan and investment options could help reduce fiduciary risk for the plan sponsor.
Plan sponsors expend a lot of resources providing benefits. However, many do not make much effort to ascertain how they are working from the recipients’ perspectives. Plan sponsors should periodically survey employees to gauge their benefit expectations and use this insight to develop better plans. Presumably, the respondents will let the firm know what they think about the available design and investment choices, as well as what information they desire. Sponsors should also consider engaging an independent expert to assess current employee behavior in the plan and provide guidance on plan options and governance.
PlanPILOT is an independent Registered Investment Advisor, not tied to any funds or investment banks. We help clients control their risks in operating retirement plans and deliver the benefits intended. We also review fund lineups and provide scorecards of investments, highlighting any changes recommended. Feel free to contact us if you would like to learn how PlanPILOT can help you.