Developing a careful balance of retention and retirement readiness
by Ron PressmanMr. Pressman is responsible for leading TIAA Institutional Financial Services, which helps institutional clients manage and solve their financial challenges and help provide a lifetime of financial security to their employees. In this role, he has oversight of TIAA’s Institutional Retirement and growing endowments and foundations business. Pressman also oversees institutional product management, TIAA’s Client Services Group, the firm’s retiree healthcare savings business, and the TIAA Institute. Visit tiaa.com
Positioning employees to achieve financial success in retirement is no small feat. Plan sponsors are tasked with designing and offering a retirement plan that encourages workers to save regularly, while simultaneously navigating a changing regulatory landscape and dealing with the challenges associated with administering a plan.
At the same time, employees are looking to their employer to provide personalized advice as they attempt to sort through competing financial priorities and figure out a way to save strategically for retirement.
Amid all these pressures, one thing in particular is keeping plan sponsors up at night, and that’s employees’ retirement readiness. According to TIAA’s first Not-for-Profit Plan Sponsor Insights Survey, more than half (64 percent) of not-for-profit plan sponsors fear that employees will delay retirement because they do not have enough money saved, and 59 percent are concerned their employees will run out of money in retirement. These concerns outweigh the 38 percent who are worried about meeting responsibilities as a plan fiduciary, even given the uncertainties surrounding the Department of Labor (DOL) fiduciary rule.
Expertise need in four key areas
While the survey reveals 86 percent of plan sponsors have a plan advisor, these challenges reinforce the need for even more support from plan advisors. In particular, there are four key areas where they can offer their expertise:
- Support all employees
Many plan sponsors recognize the crucial role personalized support and advice play in improving retirement outcomes, but they may need help understanding which programs and strategies empower employees to take action. The survey shows 81 percent of plan sponsors offer one-on-one financial advice services, yet 71 percent said getting their employees engaged in the plan is a significant challenge.
Advisors can help plan sponsors identify new methods to engage employees. For example, the survey finds 50 percent of plan sponsors believe financial education designed specifically for women is effective, but only 14 percent offer it. Advisors and plan providers can play a role in helping employers design an education program specifically geared toward this audience. Collectively, these moves can help spur more engagement in retirement planning and boost confidence among employees. In addition to a strong education program, plan advisors can encourage plan sponsors to offer customized financial advice to help participants better evaluate their financial needs and develop concrete savings goals.
- Access to lifetime income
More than half of plan sponsors offer a guaranteed income option that can provide employees with income for life. Of those not providing a lifetime income option in their plan, 34 percent say participants can access annuities outside of the plan and 21 percent believe fees are too high. Plan advisors can help dispel these myths by educating employers about the benefits of in-plan annuities. In fact, lifetime income options offered within a workplace retirement plan can provide benefits that employees may not be able to find through retail solutions, and, in many cases, have lower fees.1 Individuals need to be prepared for a retirement that may stretch multiple decades. By providing monthly income for life, annuities can help with essential expenses.
- Set up for success
When setting goals with plan sponsors, advisors can help define the best measures for plan success. More than half (55 percent) of plan sponsors consider it difficult to measure the success of their retirement plan. Twenty-seven percent cite participation rates as the most important metric, with 52 percent tracking these rates. Another 21 percent say participant income replacement rates/retirement income adequacy is the most important measure, but only 14 percent track these rates.
These points reveal an opportunity for advisors to help plan sponsors think differently about what factors constitute plan success. Tracking how many employees are participating in a retirement plan may seem like the best way for plan sponsors to gauge success, but plan advisors can encourage a more holistic view of plan success by tracking the metrics that reveal whether employees are on track to replace enough of their current income in retirement. As a general rule of thumb, experts recommend individuals be able to replace between 70 percent and 100 percent of their pre-retirement income.
- Commit to fiduciary practices
Plan advisors play an important role in helping plan sponsors navigate the changing regulatory environment. In particular, they can recommend and help plan sponsors undertake a thorough review of their plans on a yearly basis, looking closely at plan fees, investment menus and overall plan design. They should also ensure plan sponsors have an Investment Policy Statement in place that outlines their investment monitoring and selection processes.
The good news is employers are leveraging advisors’ expertise already: plan sponsors who report having an advisor are significantly more likely to plan on conducting formal reviews of their plan in the next 12 months than those without one, and they’re twice as likely to review investment fees (41 percent compared to 20 percent).
Plan sponsors rely on plan advisors for fiduciary support:
- of those with a plan advisor, 57 percent report the advisor provides investment recommendations to the plan sponsor or trustee and shares fiduciary responsibility,
- 29 percent report the advisor has full fiduciary responsibility as it relates to the investment of the plan and 13 percent report the advisor serves as the plan administrator and is responsible for daily operations. Clearly, committing to strong fiduciary practices can help ensure plan sponsors stay compliant while offering employees a world-class retirement plan that can set them up for success.
Plan advisors can serve as a valuable partner in helping employers shape their retirement plan, and ultimately can have a direct impact on employees’ retirement readiness. These four areas present many opportunities for advisors to engage with employers and help employees work toward their desired retirement outcomes. ◊
1. TIAA-CREF Variable Annuities’ prospectus net expense ratios as compared against those of U.S. Variable Annuities Subaccounts in their respective Morningstar Categories. Source: Morningstar Direct 1/1/16. Excludes accounts with the highest expenses (top 1 percent).