Speaker at upcoming Health & Benefits Leadership Conference shares new, creative
approaches to encouraging employees to save more for retirement.
Getting Them Ready
HEALTH & BENEFITS LEADERSHIP
Any plan sponsor will tell you it’s critical to get employees enrolled in a retirement plan. However, it’s merely the first step in helping
them build a big enough nest egg to confidently
segue from their working years to their golden
years. In his presentation at this year’s Health &
Benefits Leadership Conference in Las Vegas,
Beyond Participation: Actionable Tips for Driving
Better Retirement Outcomes, David Blanchett, head of
retirement research at Chicago-based Morningstar,
will discuss creative approaches that can be taken to
get employees to play a more active role in saving for
retirement. HRE Writer Julie Cook Ramirez recently
spoke with Blanchett in a Q&A about the need for plan
sponsors to move beyond boosting participation to
implementing strategies for increasing savings rates.
Will you give us a sneak preview of your HBLC
This is a collection of thoughts and things we’ve done
looking at how to create better outcomes for retirees—
things like rethinking the plan defaults, how to better
structure plan savings rates to maximize participation
and overall savings rates, the impact that defaults have
on savings rates and how to build better equipment.
Would you say employers focus too much on just
getting the number of participants up and don’t
focus on the critical details beyond that point?
I would. Things like automatic enrollment have
both helped and hurt defined-contribution plans. It’s
improved participation over voluntary enrollment
schemes, but it’s really hurt average deferral rates.
The most common default is 3 percent, but that’s
nowhere near where you need to be saving for a
successful retirement. We did some analysis and found
if the default for a plan is less than 6 percent, you are
actually hurting the average savings rate … . That may
change if you have things like progressive savings
kicking in, but it really behooves plan sponsors to
think about what default rate is right for their plan.
What would be the solution? Raising the default?
Auto-escalation? Encouraging employees to play a
more active role in their retirement investments?
From my experience, those who play an active role
would play an active role regardless. They are the
ones who will select their own savings rates, rather
than accepting the default. Some plan sponsors will
say, “Once I get them in the plan at 3 percent, I’ll notch
up the savings rate by 1 percent a year and they’ll
be at 10 percent in seven years.” The problem is the
average turnover among employees today is four or
five years. If people aren’t there a long time, you won’t
get them to an adequate savings rate. There’s been a
lot of research done and there’s very little impact on
We found plans that use managed accounts as the
default tend to have higher savings rates. There are many
reasons why. They are being provided information about
how they are doing for retirement, so it becomes real, or it
could be because the plan sponsor has shown interest or
engagement toward participant outcomes.
With respect to the core menu, people have the
wrong perspective these days. The core menu was
a very important part of the way individuals created
portfolios 10 years ago. Now, the defaults are more
important, so what is your default? Is it a target-date-fund managed account? You should design your core
menu knowing that most participants, especially the unengaged ones, will enroll via the default and therefore,
the core menu should exist to help participants who
want to build high-quality effective portfolios.
A lot of plan sponsors have heard the statistics
that, if you have way too many options, it reduces
participation. I agree with that, but I think we’ve seen
some go too far. Some only have five investment
options in the core menu. That’s too few for those folks
who actually want to build portfolios and maybe take
into account what they have outside the plan.
Many plan participants are concerned they may
outlive their resources once they retire. How can
plan sponsors help give them a better chance
that won’t happen?
The most obvious way is by incorporating guaranteed
income into the DC plans and you can do that different
ways. You can have it as part of the default, but there is
this very large reluctance on the part of plan sponsors,
in my experience, to add annuities in-plan. It’s impossible
savings decisions when
moving from 3 percent
to 6 percent. I think
6 percent should be
the new base that plan
sponsors look at when
figuring out … the right
default for the plan.
What about auto-
I think it’s a great
things like annual
whatever you can do to
make the path of least
resistance a better path,
you’ll end up with better
outcomes on average.
You say you’d love
to see employees
playing a more active role. What more could plan
sponsors do to encourage active participation?
Years ago, I was all about engaging folks to do more
for their DC plan, but I don’t know if that’s going to
have the best result on average. If you want to have a
meaningful outcome for participants, it’s really about:
What are the defaults for the plan and then you can
send reminders, you can have fairs, you can do things,
but it’s tough to engage folks who don’t want to engage.
Beyond the defaults, are there any effective
strategies for getting employees to play a
more active role or is there a segment of the
population that’s always going to fall into that
category, which leaves playing around with the
defaults as the only way to help them achieve the
kind of retirement savings they’re going to need?
Certain individuals want no involvement whatsoever
in their DC plan, but there are things you can do to make
retirement more real. Providing meaningful information
about where they are in terms of creating a retirement
nest egg is useful. I really like the idea of annual re-enrollment, forcing someone every year to make an active
decision. What you hope is that individuals who say
they won’t save for retirement in year one, if you come
back to them every year, eventually, they’ll say, “This
year, I can save,” when they other wise wouldn’t have
thought about it if they didn’t have to make a decision.
Your synopsis mentions plan enhancements,
rethinking the core menu, implementing
innovative features that boost savings. Tell me
about your findings in that realm.
David Blanchett, head of retirement research at Chicago-based Morningstar.