After a generation of telling defined contribution participants to look after their own investments by providing them the tools, advice, education and myriad investment options, the arc of the DC plan progress has come full circle.
A new study by Mercer entitled Securing Retirement Outcomes for the Employee: Why The Employer Should Intervene? discusses the need for employers to get more involved and argues that “employers are uniquely positioned to address retirement income needs of employees and intervene in meaningful and positive ways.”
Amy Reynolds, Partner and U.S. Defined Contribution Leader with Mercer, says we are seeing the evolution of DC plans. In the early stages of DC plan design, “employers were facilitating access as opposed to trying to influence behavior,” she adds. That evolution, combined with the decline of the defined benefit (DB) plan in America, it can be argued that employers were not doing all they could do to ensure a reasonable retirement for their workers.
But, Reynolds notes, factors such as the Pension Protection Act and the increase in automatic enrollments have been the genesis of a new way of thinking for employers and employees of DC plans.
“Our point with this is, it’s a start. If you think about this in the retirement context we need to engage people in the savings process and accumulation phase. But we don’t think it is effective to then walk away and ignore. There is still a significant period of time with which employees need to manage these assets without giving them some type of vehicle to help accomplish that,” explains Reynolds.
Reynolds does not go as far to say that DC programs themselves have failed but says the objectives have changed.
Part of the thinking behind the Mercer report has to do with how confident employees will feel upon retirement and what their employers can do for them once they have left their jobs. Says Reynolds: “In order to facilitate people out of your workforce, they have to feel that they are in a position to be successful in retirement. If you don’t help them to get to that comfort level you’re not going to be able to facilitate them out of your workforce.”
Not helping employees at that stage might drive costs higher for the employer and/or make it difficult to attract younger workers.
Reynolds explains that often it has been left up to the employer to educate workers about retirement finances and the role of the financial planner will be important from a support perspective. Employers will have to make choices and appropriate due diligence related to who they are offering up to workers. “For the advisers who work to develop an offering that is competitive and comprehensive, there is a role for them going forward,” notes Reynolds.
Employers can help employees choose retirement solutions consciously rather than relying on a default retirement savings and investment program. Specifically, the employer can help by:
- Offering a retirement income menu;
- Providing assistance such as retirement readiness seminars, planning tools, access to individual advisors, and guidance offered by financial institutions;
- Outlining how employees may put all their wealth to work;
- Helping employees understand how to manage market and longevity risks;
- Leveraging the employer’s buying power (group purchase vs. retail cost of retirement products); and
- Helping employees understand and thus avoid too-rapid income drawdown.
Joel Kranc is Director of Kranc Communications, focusing on business communications, content delivery and marketing strategies. He has written and worked in the retirement and institutional investment space for 17 years covering North American markets, large institutional pensions and the adviser community.
