America’s 401(k) Plans are Working…

Increasing Worker Access to them is Critical;
Financial professionals are key to making this happen

by Doug Dubitsky

Mr. Dubitsky is Vice President of Product Management & Development for Retirement Solutions at The Guardian Life Insurance Company of America. Connect with him by e-mail:

Anxiety about the worrisome state of American workers’ retirement readiness remains a constant thread that runs through our national political and economic dialogue, and in particular there is much hand-wringing over the effectiveness of the 401(k) for small businesses and their employees.

While much of the debate remains centered on fees and other structural issues associated with 401(k) plans, the biggest impediment to a secure retirement for most Americans is the basic lack of access to an employer-sponsored retirement plan. Highlighting this is the fact that roughly half of the workers without a retirement plan are not at all confident about their financial security in retirement, compared with only about one in 10 with a plan who are similarly ill at ease. In addition, 73 percent of people without a plan say they have less than $1,000 in total assets, according to the Employee Benefit Research Institute’s (EBRI) 2014 Retirement Confidence Survey.

Additionally, based on a recent study conducted by Guardian Retirement Solutions™ (The Small Plan 401(k) RetireWell Study SM: What’s Working and Not Working for Small Businesses (April 2014)), it’s clear that when 401(k) plans are offered they are delivering the goods to employees and employers alike. It’s also clear that financial professionals play a critical role in the overall success of these plans.

Overall, the vast majority (98 percent) of small market plan sponsors in the RetireWell Study say they are either “very” or “somewhat” satisfied with their 401(k) plan. Sixty-one percent of employers say their plan succeeds in helping recruit employees and 58 percent say their plan helps with employee retention. Fifty-seven percent say the plan helps employees retire with an adequate and secure income and at least half say their plan is very successful when it comes to making retirement savings easy, providing employees with retirement income planning tools and supporting and encouraging disciplined, systematic savings by employees.

While overall satisfaction with 401(k) plans is nearly unanimous, that’s not to say the system is perfect. Plan sponsors consistently cite cost (including the cost to match employee contributions), how well participants understand and manage their investments, fees, the time constraints of plan management and their own fiduciary exposure as potential disadvantages. Among employers who don’t offer any type of retirement plan (46 percent of all small businesses surveyed), perceived costs, fiduciary responsibilities and confusion about what type of plans are available and suitable are the biggest barriers to entry.

Still, most of the employers surveyed in the RetireWell study who don’t currently offer a retirement plan are at least receptive to the idea, with 58 percent interested in establishing a 401(k) plan in the next three years. This represents a huge opportunity for financial professionals because for small business owners the best way to accomplish this is to work with a professional who can help them pick the right plan and help them identify the best service providers to help keep the plan healthy, in compliance and successful.

Advisors are crucial to the process

Financial professionals are not only key to helping plan sponsors, they are a powerful and positive force in the small-plan market overall. Nearly three-quarters of small-plan sponsors work with a financial professional, generally either life and health insurance agents or accountants. These sponsors’ plans are strikingly more successful than plans without a financial professional in practically every measurable dimension. Plan sponsors with a financial professional are much more likely to be “very satisfied” with their 401(k) plan overall – 61 percent compared to 40 percent of sponsors who don’t use a financial professional – and plans that use a financial professional are consistently more likely to employ advanced plan designs than plans that don’t. Advanced plan features include things like auto enrollment, managed accounts, participant education tools and calculators, target retirement date funds and employer matching contributions.

Additionally, financial professionals are able to mitigate many of a sponsor’s fears about plan management. Financial professionals active in this part of the 401(k) market can and should coordinate the complex web of service providers required by these (often unbundled) plans. Third-party administrators, fiduciary support providers, record keepers and the like all work in concert to ensure that the plan is as successful as possible and the sponsor and participants are kept informed, educated and on the right track.

it’s clear that when 401(k) plans are offered they are delivering the goods to employees and employers alike. It’s also clear that financial professionals play a critical role in the overall success of these plans

When TPAs are involved, in fact, financial professionals often get credit from the plan sponsor for providing services, which points to the significant value in working with a local TPA. Also, financial professionals seem to receive a “halo effect” in many areas of the 401(k) plan. Success metrics such as:

  • How well the plan helps plan sponsors recruit and retain employees
  • Keeping the organization competitive when it comes to benefits
  • Helping employees retire with adequate & secure income
  • Providing tax advantages to the organization

Plans that work with a financial professional see an almost 15 percent increase in perception of success for each of these items versus those plans who are not working with a financial professional.

Perhaps not surprisingly, confusion about fiduciary issues runs deep among plan sponsors. Barely six in ten sponsors recognize that they are in fact a plan fiduciary on their own plan and 30% do not have have an investment policy statement. More than half say they select the lowest cost service provider they can find even as they misunderstand or misinterpret their fiduciary responsibilities and the importance of recognizing value and plan needs when selecting service providers.

Understanding the meaning of ‘fiduciary’

The broad lack of understanding around what it means to be a fiduciary is understandable in the small plan market. Unlike larger plans that typically have benefit committees and personnel dedicated to administering the plan, small business owners often lack these internal resources. This is a big opportunity for financial professionals to help educate sponsors about their responsibilities and review best practices and solutions that can help mitigate fiduciary risk (like outsourcing investment monitoring and selection to a third-party independent registered investment adviser).

For all the challenges confronting defined contribution plans in the public policy arena, there is powerful evidence that 401(k)s are doing the work they were designed to do, even in small companies where employee benefits aren’t necessarily a top priority. Despite the tendency for some in the national debate to incorrectly view the 401(k) as flawed, nothing in our history has helped promote retirement savings more than workplace defined contribution plans.

To be sure, there is some confusion among sponsors who either don’t offer a 401(k) but would like to or who are offering plans but aren’t maximizing the plan benefits, but financial professionals can and do help. Not just when it comes to fiduciary issues, but in every aspect of designing and servicing a plan and, as mentioned above, those sponsors working with a financial professional are happier with their plans than those who do not.

Because the use of retirement plans is linked so closely with retirement confidence, this represents a huge opportunity for financial professionals in the small-plan market who are well positioned to deliver effective solutions to small business owners. And it’s difficult to overstate the role that financial professionals can play when it comes to helping American workers close the retirement savings gap. The key is to promote access to workplace retirement plans overall, equip financial professionals with the tools and resources to help sponsors select the best plans for their workforce and then maintain those plans so they perform to their maximum potential.
The Guardian Retirement Solutions’™ The Small Plan 401(k) RetireWell Study SM: What’s Working and Not Working for Small Businesses online survey was conducted by Brightwork Partners between Nov. 12 and Dec. 14, 2013. It is based on interviews with 451 senior executives from for-profit organizations with 25-249 employees that have been in business three years or more and who are involved in the selection and evaluation of providers of employee benefits such as health and retirement plans.

Guardian Retirement Solutions™ refers to the administrative support services, including participant recordkeeping as well as marketing, enrollment and educational materials, provided by GIAC in conjunction with the individual and group retirement products issued by GIAC.

This article is not intended by The Guardian Life Insurance Company of America, The Guardian Insurance & Annuity Company, Inc. (GIAC) or any of its employees or agents to be considered as investment, tax or legal advice.