US Snapshot

A Limited View

Because of the modern career experience, often a mosaic of past jobs, patchy defined contribution (DC) plan participation and a scattering of savings, retirement readiness blind spots exist for employers and employees alike.

For sponsors, their limited view is reflected by their estimates for employees’ replacement income ratio: 43% anticipate that participants will have less than 10% of their current income available to them in retirement and 26% expect replacement ratios between 10% and 30%.

However, despite this dismal forecast, sponsors are optimistic about their participants’ ability to retire at retirement age (79% express confidence) and afford their current lifestyle once in retirement (more than 50% are confident in affordability outcomes for the majority of their participants).

How do sponsors reconcile these conflicting insights? Perhaps employers are relying on the assumption that employees have access to sufficient retirement income outside of the workplace savings plan — from past employer plans to Social Security to real estate and investments to spousal income and benefits. But staying anchored to this assumption may lead sponsors to miss the opportunity to help participants optimize wealth accumulation.

Do the Right Thing

Despite having an incomplete picture of participants’ preparedness, employers are eager to support employees by choosing plans that deliver low costs to the saver, a thoughtful investment selection and features that are a combination of intuitive and automatic.

As the era of defined benefit plans wanes, facilitating access to financial advice specific to retirement becomes an important dimension of plan design. However, sponsors are split on who sources and pays for advice, responses that may be driven by fiduciary concern and organizational constraints versus a lack of commitment. 

Active legislation to enhance and evolve DC, including enabling plan access through a multiple employer plan system, increasing auto-escalation limits and offering fiduciary safe harbor around retirement income options, will further sponsors’ goals of altruism.

Target Date Trends

New flows to the default, specifically target date funds (TDFs), continue to grow among new, younger participants. By 2021, these strategies are predicted to capture 85% of participant contributions, according to Cerulli Associates’ 2016 US Defined Contribution Distribution report.

Respondents help to reconcile the industry impression that TDFs dominate with the reality of asset distribution across the core menu. Forty-three percent believe that the majority of their participants are invested in the default. This leaves nearly 60% suggesting that a different AUM distribution, split with or shifted toward the core menu, is in place. But with time and in keeping with Cerulli’s forecast, this distribution is likely to change.

According to sponsors, for those participants who are new to the plan and not automatically enrolled, there is a 31% uptick to otherwise steady interest in target date funds. It’s reasonable to infer that the next generation is seeking the sort of “point and click” simplicity in retirement saving that can be found in other facets of life. Sponsors would agree — 69% believe the increase was due to TDFs’ attractive simplicity, and 54% believe that younger savers joining the plans are driving the change.

Simplicity Rules

Given the lead role the participant plays in navigating the retirement saving and spending experience, simplicity has become a defining dimension. In fact, sponsors ranked “simplicity and ease of use” as the plan dimension that participants most valued — followed fast by the “ability to access advice.”

While respondents ranked investment design as a lesser priority to participants, they closely evaluate investment range as part of provider selection, suggesting that sponsors see their responsibility as offering a strong investment menu, even if participants are less attuned to its value. This logic may also apply to the placement of low cost on the priority list, given that sponsors are generally confident that they’ve negotiated a cost-effective plan, making the issue of cost important, but invisible to the participant experience.

Finally, when it comes to environmental, social and governance (ESG) investing, sponsors expressed middling interest; 52% cited ESG as an important plan investment consideration, compared to 71% in the UK and the 69% average across all five countries surveyed. While currently lagging the European markets in adoption, ESG in the US continues to be an area to watch as interest and traction slowly gain.

Education and Automation are Essential

Employers and employees may find themselves stymied by an incomplete financial view but buoyed by the ease of the default in the current DC landscape. For the issues that fall in between, education and automation may be the answers.

Respondents were asked to identify the top three challenges they see to participants being retirement ready:

Unsurprisingly, not saving enough (74%), lack of understanding (57%) and debt (40%) were the leading drivers to savings shortfall. Savings sufficiency can be addressed through auto-enrollment, auto-escalation and participant education and engagement campaigns run by employers. In fact, 60% of respondents said they altered their messaging to participants in the past 12 months in order to focus on short-term goals, with a focus on saving.

The stress of trying to cover deep debt in retirement creates the same financial unease that today’s employees can face — and this unabated anxiety is anything but healthy. By setting a strong foundation for financial wellness, employers can support participants in getting grounded long before retirement, with financial management tools and techniques that could serve them for a lifetime.

Seeing the Big Picture

Employers and employees agree that the participant owns the responsibility of retirement readiness. However, sponsors have less insight into, and therefore less confidence in, employees’ actual saving sufficiency. That’s important because while participants own their journey, sponsors believe they are responsible for supporting it. Therefore, brokering insight into a full financial picture is a meaningful goal for both employer and employee and will lead to greater financial wellness (and its cascading bottom-line benefits).

The future of retirement is upon us, from regulatory to policy changes — some implying increased access and others state autonomy — to evolving retirement income solutions. To navigate this new landscape, particularly the technical terrain, employers and employees would both benefit from an expert guide. Building insight and acumen with the help of an investment manager or financial advisor will help participants and sponsors to better engage with each other, seeing the future more dimensionally, differently, together.