Providing a one-size-fits-most retirement solution is difficult — every employee’s financial circumstances are unique.
Advisers and plan sponsors can help employees prepare for retirement with a strong plan design, says Joel Lieb, director of the defined contribution division at SEI Institutional. To do that, they need to be able to answer five key questions, he says. Those include:
1) What is the objective of your DC plan?
As employers shift from a system that includes both DB and DC plans to a DC-only system, they need to consider if they will take the same approach, Lieb says. “Your view of your DC plan today may change over time,” he says. That’s why he recommends plan sponsors conduct annual assessments of their plan.
In addition, taking a goal-oriented approach is a good strategy, Lieb says, instead of solely focusing on investment returns.
2) What are the demographics and behaviors your employees?
Employers must consider the age of the employee population. Older employees with a frozen DB plan are much different from new employees enrolled in a DC plan, Lieb says. Plan sponsors need to ensure employees who are new to the plan are setup to accumulate as much savings as possible, he says.
3) Do you want employees to remain in your plan after they retire?
“Participants can remain in plans for more than 30 years after retirement, adding scale and potentially lowering fees, but ongoing maintenance costs may outweigh the benefit,” Lieb says. “Sponsors need to determine if they are better served focusing on in-plan or out-of-plan solutions.”
If a plan is shrinking, it could make sense to keep participants in the plan as long as possible, he adds, whereas a growing plan might not need retirees. Ultimately, it’s up to the employers, who have varying views on the subject. “Some companies tend to be more paternalistic than others,” Lieb says.
4) If you provide a retirement income option, does it need to provide “guaranteed” income?
“Guaranteed income offers better piece of mind, but comes with a higher price tag,” he says. “Sponsors should determine which type of plan makes the most sense for their employees.”
5) Do you already have a retirement income option in your plan?
Employers occasionally overlook the payout aspect of retirement income when they become too focused on the guaranteed component, Lieb says. Target-date funds are one solution that is worth investigating, he says. For those who already offer TDFs, employers “should revisit this offering to ensure TDFs are meeting employees’ income needs in retirement,” Lieb adds.
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