Month: April 2024

By Mark Olsen, Managing Director at PlanPILOT

Retirement for the American worker is a popular topic today, not only in the financial media, but also in the halls of Congress, where new legislation is continually considered to offer more retirement options, especially in employer-sponsored plans. The Pension Protection Act of 2006 and the SECURE 2.0 Act of 2022 are examples of bills that made significant changes and allowed for new features to be offered in retirement plans.

Bull’s-Eye on the Retirement Year

One of these changes is the increased inclusion of so-called “target-date funds” (TDFs). These investments have become a popular fund selection in employer plans since their introduction after 2006. As an example, Vanguard Funds reported that TDFs grew in their plans as the default choice for new-entry participants from 71% in 2013 to 90% in 2022. 

As about 20% of retired workers leave their accounts within their former employer’s plan, there has been a growing need to address the investment preferences and objectives of retired workers who do leave their money with the employer plan. Given the growth of deferrals flowing into TDFs and many participants continuing to leave their money in the 403(b) plan, some non-profit employers are selecting customized target-date solutions to accommodate the needs and objectives of these former employees.

Understanding Target-Date Funds

Target-date funds are specialized asset-allocation investments designed to relieve the investor of having to decide the asset allocation percentages between equities (stocks), fixed income (bonds), and cash/money market funds. As the investor approaches their intended retirement age, these allocations become automatically more conservative on the premise the investor becomes less risk tolerant. 

Depending upon the desired “target year” selected, the fund is structured and managed to “rebalance” the asset allocation based on the shrinking time horizon, so by the intended retirement age, the fund’s holdings generally reflect a less volatile (less risky), balanced allocation between equities and fixed income/cash. Yet even for the retired employee-participant, this allocation may be appropriate for some, but not others. Some retirees may wish further enhancements or selections to bolster diversification and lower risk.

Enhancing Investment Holdings for Retired Employees

Customization also includes examining the holdings and makeup of the target-date funds themselves. Even though the target-date year (at or near the retirement year of the participant) between two different fund families may be the same, the actual composition of the funds may be significantly different. To address the needs of post-retirement participants, employer plan sponsors are requesting customization of target funds that include non-core investments that may be only available in the particular fund. These include natural resource and other “real” assets, non-core fixed-income assets and other alternatives that may not be prudent to offer all plan participants.

Instead of customization of target-date funds, some plan sponsors have also begun to request more fixed-income investment choices for the plan menu, since most post-retirement participants naturally gravitate toward a greater allocation of less-volatile fixed income holdings as they age and are no longer working. In addition, as the percentage of post-retirement participants in a given 403(b) retirement plan increases, sponsors have recognized the benefits of providing a greater array of fixed income to both current employees and retired former employees.

Providing Secure Protected Lifetime Retirement Income

A significant feature also available today is the ability of the participant to annuitize a portion of their retirement account to create a dependable stream of lifetime income. The SECURE 2.0 Act allowed and encouraged employers to incorporate in-plan annuities as a feature of retirement plans.

Studies cited by Fidelity Investments (by the Employee Benefits Research Institute 2021 survey) indicate that 78% of workers would be interested in such a feature to ensure they don’t outlive their savings. Studies by notable retirement research specialists, such as Professor Wade Pfau, have demonstrated benefits of including a “protected lifetime income” can lower longevity risk and other risks of retirement finances. In a research paper on the benefits of annuities, Dr. Olivia S. Mitchell, Executive Director of the Pension Research Council at the Wharton School of Business, states that “most people would be better off if they had access to deferred income annuities in their …accounts….”

Implementing These Enhancements May Be Complex

Customization is an enticing concept, but usually also requires advanced expertise as to the pros and cons of implementing these features into an employer-sponsored retirement plan. With the increased focus on the plan sponsor’s fiduciary responsibility to participants, employers who lack such expertise are encouraged to utilize the knowledge and experience of retirement plan specialists to help design and implement these enhancements. 

At PlanPILOT, our company is uniquely positioned to help you with these objectives. If you’re ready to upgrade to a new standard for your benefit planning, reach out to us at (312) 973-4913 or send an email to mark.olsen@PlanPILOT.com to learn more about how we can customize our services and your plan to fit your unique needs.

About Mark

Mark Olsen is the managing director at PlanPILOT, an independent retirement plan consulting firm headquartered in Chicago. PlanPILOT delivers comprehensive retirement plan advisory services to 401(k), 403(b), and 457 plan sponsors. His specialties include plan governance, investment searches, investment monitoring, and plan oversight. Mark is recognized as a leader in the industry and speaks at national conferences, including those organized by Pensions & Investments, and CUPA-HR.

By Mark Olsen, Managing Director at PlanPILOT

When Shoeless Joe whispered, “If you build it, he will come…” to Ray Kinsella in the movie Field of Dreams, he was talking about a baseball field, not a retirement plan. Fortunately for Ray, it all worked out well—but not so much for many plan sponsors and their retirement plan participants today. In a 2022 study by LIMRA, a financial services research institute, 60% of retirement plan participants in the study felt that communications about their plan were “ineffective.” This lack of productive communication may lead to lower enrollment, indifference about plan benefits, and perhaps contribute to overall employee apathy, morale, and productivity issues.

Plan sponsors may feel that open enrollment lunch presentations, printed brochures at the HR office, or the occasional email message are sufficient, but how would they know? Are these employees showing up just for the free lunch? Do they scroll past the email amongst the hundred others they receive? How do you know you’re successfully reaching these participants in a way they understand and is meaningful to them about their retirement plan?

Get Started by Understanding Your Audience

Communications are the most effective when plan sponsors “meet employees where they are.” This means understanding different literacy levels and demographics of employees and structuring the mediums to match the comprehension levels of participant sub-groups. For example, how you might communicate with younger employees today (email, interactive video), may be quite different from methods used with senior employees (verbal, PowerPoint presentations, and printed literature). In addition, even participants within a group process information in different ways. Some are better suited to verbal explanations, others by illustration, video demonstrations, or graphic diagrams.

Experienced experts suggest using a multi-channel approach to reach as many participants within a diverse employee base as possible. Simultaneously utilizing webinars, email messages, videos, and live in-person presentations allows all participants the opportunity to engage with the plan representatives or consultants in a medium they understand and normally use in daily life.

Build Trust With Frequent Direct Communications

According to senior communication consultants, ineffective communication can leave employees confused and apprehensive about utilizing retirement plans and other benefits. In fact, behavior economists Richard Thaler & Cass Sunstein, in their book Nudge: The Final Edition (p. 13), suggest that people often make poor choices in a context where they are inexperienced, not well informed, and communication is slow and infrequent. 

The annual enrollment meeting or occasional email isn’t usually enough. Frequent communications, such as a monthly newsletter, may be more productive in allowing employees time to process information, follow up with questions or inquiries, and develop a greater comfort level with the materials and provisions. 

Other recommendations include establishing online focus groups or chat rooms, where participants can ask questions and receive input from other employees as well as discussion moderators. Such methods resemble social media threads or other online methods that employees use frequently. Moderators or plan sponsors can also monitor discussions to detect common and frequent questions; this can indicate areas where a lack of awareness or misunderstandings are prevalent and therefore where further explanation or clarification in plan materials is warranted. 

Measure Effectiveness

Plan sponsors may implement improved modes of communication with the best intentions, but knowing whether these initiatives are productive is crucial to success. As mentioned above, monitoring discussion group threads and encouraging feedback from participants could result in further insights. Monitoring and quantifying the actions participants take in response to communications (and whether appropriate choices were made) could help plan sponsors measure demographic trends, deficiencies in materials or messaging, and whether the information conveyed is fully understood by the employee audience and if the end objective is attained (e.g., emphasizing the benefits of long-term saving and investing in the retirement plan results in greater enrollment and payroll deferrals to the plan afterward).

Implement Modern Communication Techniques

As mentioned, people absorb and process information in different ways. While glossy fact sheets and brochures may still have their place, consider incorporating digital presentations with animation and graphics, interactive tools, and videos, all of which should be accessible via smartphones. Employees may not necessarily have personal computers or tablets, but they most likely have and use their smartphones. 

Consultants state that just like schoolchildren, adults may learn and assimilate information more easily if it’s presented in a fun, creative manner, and using elements found in social media could be useful as well. Other suggestions include using individual “life events” (work anniversaries, birthdays, or promotions) to send targeted messages about benefits that may be appropriate to that occasion.

Use the Team Approach

Oftentimes, plan sponsors or HR departments lack the technical information to properly disclose and explain specific plan features to employees in an understandable manner. Plan sponsors often state they’re the “employer,” not the benefit expert. Partnering with benefit consultants, who can provide the knowledge and skill and can simplify “jargon” into more common language, examples, and bite-sized snippets, may be an efficient means of ensuring the message gets across.

We’re Here to Help

For more information on retirement plan benefits, call us at (312) 973-4913 or email mark.olsen@PlanPILOT.com to discuss how we can help you implement or improve your retirement plan benefit program.

About Mark

Mark Olsen is the managing director at PlanPILOT, an independent retirement plan consulting firm headquartered in Chicago. PlanPILOT delivers comprehensive retirement plan advisory services to 401(k), 403(b), and 457 plan sponsors. His specialties include plan governance, investment searches, investment monitoring, and plan oversight. Mark is recognized as a leader in the industry and speaks at national conferences, including those organized by Pensions & Investments, and CUPA-HR.