Building a Retirement Plan for Today and Tomorrow
Retirement plan fiduciaries have experienced significant changes over the last decade. We can attribute some of those changes to the Department of Labor’s regulatory and enforcement agenda, including the impact of increasing fee transparency, expanding the definition of fiduciary, and emphasizing the importance of cybersecurity. We can attribute additional developments to successful class action retirement plan fee litigation, including two significant cases the United States Supreme Court resolved in favor of Plan participants.
However, from a practical perspective, there is one clear, leading cause of the last decade’s changes: employees have changed. Even before the COVID-19 pandemic, employees began to switch jobs more frequently, more openly discuss financial stress, and confirm they targeted “financial independence” even more than “retirement readiness”. Then they encountered the pandemic, a crazy labor market that provided employees a ridiculous amount of power and leverage, and a shockingly steep inflationary environment. They need, want, and expect more now.
At QPA’s 15th Annual Qualified Plan Fiduciary Summit in April, retirement plan industry thought leaders explored Congress’s efforts in the SECURE 2.0 Act and focused significant attention on employees’ evolving needs and wants. The Summit confirmed that the old way doesn’t work. Organizations, their executives, and their fiduciaries are focused on ensuring they can offer the retirement plan demanded by today’s – and tomorrow’s – workers. The keys to doing so fit into three particular categories.
Ten years ago, employers would attempt to distinguish their retirement plans by focusing on one primary feature: the employer contribution. Today, employers think much more expansively about the number of potential plan features that reflect an employer’s commitment to its employees’ financial futures. A recruitment flyer, employment onboarding guide, or employee handbook might emphasize the plan’s inclusion of the following plan design features: (1) a safe harbor formula; (2) easy-button automatic enrollment and escalation features; (3) Roth contributions; and (4) one of various other after-tax options, including in-plan Roth conversions or after-tax contributions eligible for emergency savings and mega backdoor Roth conversions.
The SECURE 2.0 Act provides employers additional features to tout, including: (1) matching student loan debt repayments; (2) a formal in-plan “Emergency Savings Account; and (3) employer Roth contributions. Taken together, an employer can paint a much more comprehensive picture of how its plan meets employees’ short-, mid-, and long-term financial needs.
Participants’ utilization of – and dependence on – target date funds had already begun to rapidly accelerate a decade ago. Participants also had begun to use model portfolios and managed accounts, but target date funds dominated plan asset breakdowns. Fast forward to 2023, and we see two trends among 401(k) and 403(b) plan participants: (1) they want greater customization; and (2) they are worried about making their retirement savings last.
As the Summit’s presenters confirmed, participants and plan fiduciaries are solving for the greater customization demand through advisor managed account (AMA) services. Target date funds are age-based. They treat all participants of the same age in the same manner. Model portfolios are risk-based. They provide more customization than target date funds, with an emphasis around an individual investor’s risk tolerance. AMA services are goals-based; they take into account far more data points and result in an account management service that provides asset allocation, dynamic asset management, contribution recommendations, and distribution recommendations. The next generation of AMA services will incorporate lifetime income solutions, which help a participant in both the “accumulation” and “decumulation” stages of their retirement journeys. Again, plan sponsors that make available AMA services are building that feature into any retirement plan description contained in employee recruitment and retention materials.
Finally, participants have increased their appetite for information that will help them to improve their retirement readiness and broader financial wellness. Employers are well-served to understand that different groups of employees need educational offerings tailored to their groups. An impressive panel of strong female financial industry professionals made the case for education teams to include more females, and for plan sponsors to use employee surveys and automatic plan features as the foundation for an effective female employee communication and education strategy. Other panelists explored the financial and non-financial challenges late-career employees face as they prepare to transition from being an employee with clear purpose to a retiree facing the unknown.
Effective financial wellness programs blend an understanding of those specific needs with person-to-person meetings and technology. Employers that implement a wellness program with that combination are in a position to better show their employees that they truly care about their financial wellness and are offering personalized services that reflect their personal needs.
Consider the difference between the following two approaches:
- 2013: “You should want to be in our plan because we have a generous 401(k) match.”
- 2023: “You want to be a part of this organization because we care about our employees. Our retirement program is one of the many ways we show how much we care. We have built our retirement plan services to provide you the savings, investment, education, and one-on-one financial advisor services you’ll need to feel comfortable with your current financial situation and your family’s long-term financial stability.”
Now, read back through those examples. When you read the first one, be as creative as you can in considering how you might describe a matching formula. Even if it’s quite generous, there’s only so much heart and soul in a number. Now, read the second example and consider how you could elaborate on all of these additional services. Consider, for example, how the SECURE 2.0 Act provides additional tools to reach out to recent college graduates to help with their student loan repayments or your employees who have never built up a short-term emergency fund. The retirement plans of today have so much more to offer your employees. Is yours up-to-date to meet today’s expectations and to compete for tomorrow’s talent? For organizations that want to win the battle for talent, the answer had better be yes.
– Matthew Eickman, J.D., AIF®