Mercer study shows defined contribution plan sponsors need to consider broader financial issues that may be impeding retirement readiness
Defined contribution (DC) plan sponsors are advised to move beyond a retirement focus for their plans and meet the needs of employees, says Mercer, a global consulting leader in advancing health, wealth and careers, and a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC). A recent Mercer study shows that in an evolving, volatile market, companies with DC plans should shift to address their employees’ broader financial needs.
Mercer’s survey, Inside Employees’ Minds, highlighted that younger employees are more concerned with current financial challenges and making ends meet rather than saving for retirement. A mere 10% of millennials are worrying about retirement, whereas nearly 30% of baby boomers are worried about retirement savings. Many approaching retirement have debt levels that will be a drag on their retirement income.
“All these findings demonstrate that employers need to consider broader financial wellness rather than only employees’ and retirees’ ability to achieve a target income replacement ratio,” said Betsy Dill, Financial Wellness Advisory Leader, Mercer. “No longer can we only push the ‘contribute more or else’ agenda because many individuals dealing with immediate needs feel they have to focus more on reducing debt than they do on making extra retirement contributions. Employees will receive far more value from receiving help in making the best decisions to suit their own financial circumstances — not necessarily focusing solely on their retirement plans.”
Mercer encourages employers to question their current retirement and financial offerings to their employees, with the following areas of focus in mind:
1. Are the programs offered to help employees address their financial needs understood and used? Many large employers, in addition to their defined contribution (DC) plan, offer employees the ability to access financial advice, tools that calculate retirement income, algorithms to recommend asset allocations, health advocacy for dependents and parents and assorted voluntary benefits among other options. Often, these programs go underutilized. Employers need to assess which employee segments would benefit from these programs and how to connect those employees to benefits in optimized ways.
2. How different is the retirement experience of men and women likely to be in your organization? Women face a myriad of challenges in the workforce including lower salaries, more employment gaps, and longer life expectancies. Women also typically have retirement balances that are 30%–40% lower than those of men. Employers need to use analytics to understand the differences and develop targeted communication or support strategies to address these realities.
3. Is your investment lineup working for your employees?
Employers are encouraged to review their analysis of the retirement plan’s participant demographics and investment behaviors and assess how appropriate your investment lineup is for your participants. For example, custom multimanager options may provide participants access to greater diversification without adding complexity to the investment decision-making process.
4. Does your retirement plan maximize tax efficiency and do employees understand what that means?
The youngest employees in your workforce could potentially benefit from Roth contributions rather than a pre-tax election. Also, the ability to offer in-plan Roth conversions can increase opportunities for tax diversification and efficiencies, especially in combination with traditional after-tax contributions. Consider what makes sense for your plan, and then ensure that your employees have access to information that allows them to understand the current landscape.
5. What is the appropriateness of your plan’s default investment alternative?
A Government Accountability Office report from September 2015 reiterates the importance of selecting and monitoring the retirement plan’s default and recognizes many of the challenges that plan sponsors face in the process. Ensure that your plan’s default is still a good fit for your participant base; use analysis of participants to determine the appropriate default.
6. What challenges result from having retirement assets in multiple places?
Lifetime employment is extremely unlikely these days. Are you encouraging participants to consolidate their balances into your plan? We believe that many participants would benefit from having all retirement assets in one place: it would make managing retirement assets less complex and in-plan investment fees are typically far lower. In addition, higher assets within a plan drive down costs for everyone through economies of scale.
7. When did you last review your plan’s capital preservation option?
Round two of money market reform will take effect in October 2016. The recent reforms have reduced the expected returns and made them less customer friendly, as well as caused potential implementation challenges for DC plans. Consider whether a money market fund remains a suitable option or whether other alternatives — such as stable value — better meet objectives.
8. Are you helping participants make better decisions at retirement?
“At retirement” optimization can provide significant benefits to retiring participants. This includes making social security elections, medical coverage decisions, tax optimization and decisions on when to draw from which retirement product.
9. Are environmental, social, and governance (ESG) factors a consideration for your investment lineup?
This issue is being raised more often, particularly by younger participants, as many are interested in sustainable investing. Recent US Department of Labor guidance has clarified the use of ESG factors in selecting plan investments. Potential responses can range from explicit responsible investing/impact investing options to the consideration of ESG as a key factor in the selection of investment managers.
10. Are loans really deteriorating the financial wellness of your participants?
Many sponsors are deeply concerned by participants taking out loans on their plan assets. But we must not be quick to judge — as some alternatives like credit card debt or payday loans exist at far higher interest rates. It is important to monitor loan activity, but it’s also critical to understand the reasons behind the need for participant loans.
“Overall, employers need to realize that their employees’ financial needs are evolving, so their approach and offerings need to evolve in tandem to meet those needs,” said Betsy Dill, Financial Wellness Advisory Leader, Mercer. “Empowering employees to make better financial choices through education and programs can boost employees’ morale, productivity and focus.”
Mercer will host a webcast to expand on this topic on Thursday, January 14, 2016, 2-3pm Eastern Standard Time.
Mercer is a global consulting leader in talent, health, retirement and investments. Mercer helps clients around the world advance the health, wealth and performance of their most vital asset – their people. Mercer’s more than 20,000 employees are based in more than 40 countries and the firm operates in over 130 countries. Mercer is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), a global professional services firm offering clients advice and solutions in the areas of risk, strategy and people. With 57,000 employees worldwide and annual revenue exceeding $13 billion, Marsh & McLennan Companies is also the parent company of Marsh, a leader in insurance broking and risk management; Guy Carpenter, a leader in providing risk and reinsurance intermediary services; and Oliver Wyman, a leader in management consulting. For more information, visit www.mercer.com. Follow Mercer on Twitter @Mercer.