At TWM we’re taking both a top down and a bottom up approach to the problem of retirement readiness. Our hope is that these combined approaches result in progress on the original mandate of 401(k) plans, and the ultimate goal of any retirement plan: retirement readiness through income replacement.
From the bottom up, we are creating marketing strategies to effectively sell participants on the necessity of having a plan, understanding how much replacement income will be needed in retirement, how much needs to be saved, while providing tools to track progress. Our specific outreach in one on one meetings with participants is to encourage and help them to complete the online retirement tools offered by the provider. The data is then updated automatically with future contributions and changes in investment value, and participants can see their retirement readiness each time they log on.
To make progress, it is critical that we enlist plan sponsors to help communicate, indeed market, to participants the importance of tracking their retirement readiness.
Whatever tools or tactics are used to help improve retirement readiness, it’s important that plan sponsors be able to measure their effectiveness in achieving desired results from the top down. Most plan providers can measure factors such as participation rates, balances and deferral rates. But these are only activities, and do not measure the ultimate goal of the plan: retirement readiness.
This performance measurement should apply not only to the plan, but to the plan’s advisor and provider as well. Only measurement can uncover what process improvements might be needed and determine which tactics actually lead to improved retirement readiness.
To assist plan sponsors, we’ve begun to incorporate Participant Success Measures in our annual plan benchmarking reports. We’re comparing plan-level metrics with data provided, for example, in Vanguard’s annual report from the DC plans they administer. We can compare factors that contribute to success, such as costs, deferral rates, plan balances, asset allocation, trading/turnover, ratio taking advantage of automatically diversified investment options and automated rebalancing, how often logging into accounts, etc. We are also working toward the capability to report how many participants have a retirement savings goal and how many are on track to reach the goal.
In effect, we are working toward being able to produce an individual “plan outcome assessment” -- a “score” of the participant’s retirement readiness. This data, in turn, can be aggregated up to the group level so plan sponsors can see how retirement-ready, on average, their participants are.
The kind of measurement and benchmarking capability described here can also support the sponsor’s fiduciary responsibilities. Much attention has been paid in the past few years to the costs and value of the plan. But without assessing participants’ ability to use the plan effectively to enhance retirement readiness — which is the most meaningful measure of value — fiduciaries and sponsors cannot objectively assess whether their providers’ products and services are providing significant value to the plan. And that is a key aspect of fiduciary responsibility.
Benefits of retirement advice at two universities
At both Rice University and the California Institute of Technology, benefits administrators weren’t satisfied that employees were doing enough to prepare for their retirements.
Both universities started with comprehensive workshops and seminars to educate participants on the basics of retirement planning, with each tailoring its “pitch” to a specific constituency. At Caltech, for example, the program was branded as the “Science of Benefits”, a metaphor designed to resonate with the school’s technical faculty and staff.
Both plans followed their initial high-level guidance with specific advice offerings. These were structured as one-on-one sessions in which TIAA-CREF, the school’s retirement-plan provider, gave employees concrete advice about asset allocation – providing specific fund recommendations for rebalancing existing portfolios and adjusting allocation of future savings – as well as integrated guidance on savings goals and starting or increasing retirement plan contributions .
The efforts worked. For instance, 24% of those attending meetings with an adviser at Rice initiated retirement contributions or increased their existing contributions. Caltech participants also did more to prepare for retirement: Eighty-four percent of attendees reported that their sessions prompted them to take action. Participation in the plan increased 11% and the dollar amount of contributions doubled.
What is a fiduciary?
ERISA defines several types of plan fiduciaries. Here are brief Definitions of some of them.
Named Fiduciary: Internal or external individual responsible for “running” the plan – including controlling, managing and administering the plan.
Plan Administrator: Files all the forms, disclosed all the information, hires plan providers if necessary.
Trustee: Individual or group with exclusive authority and discretion over the management and control of plan assets. The named Fiduciary often serves as a trustee too since they have responsibility for the overall plan – not just the assets.
3(38) Investment Manager: a fiduciary with full discretionary powers for selecting, monitoring and (if necessary) replacing the investment options. Could outrank the Trustee is appointed by the Named Fiduciary.
Investment Advisor: No explicit discretionary authority over the operation of a plan, but may exercise effective discretion through its influence upon others.