Across Defined Contribution (DC) plans, the default reigns supreme in terms of enrollment; however, 72% of DC assets actually lie in the core index options.1 Who is largely utilizing them? Participants over 50, some driven by inertia, others by choice. Regardless of how they got there, these participants’ ability to retire depends on them investing intentionally and knowledgeably. Here we offer sponsors tips for engaging, evaluating and supporting pre-retirees invested in the core, including:
Knowledge and needs assessment
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Last year, a colleague and I represented State Street Global Advisors at a client’s participant retirement fair. It was your typical setup: three or four investment manager booths adorned with a company banner, and well-suited, well-heeled experts standing behind each table ready to share high-level knowledge, fund fact sheets and logoed tchotchkes. Plan managers and HR staff expected employee attendance to be well in the hundreds. It was early September, and not only were they embarking on open enrollment season, they were making major changes to their plan that involved, among other things, a total re-enrollment into target date funds. As manager of a majority of the client’s core menu options, we weren’t expecting to see many people at our table.
Boy, were we wrong.
At one point, our table became flooded with employees — and they weren’t just eager for State Street-branded fidget spinners. Many wanted to understand the existing and new core options being offered. They asked questions about past performance. They asked for, and took with them, the printed fund fact sheets we’d brought along. They were older, and appeared to be highly engaged.
And they’re not the only ones.
While the majority of DC plan participants are invested in the default (usually a target date fund), most of the plan assets are held in the stand-alone core index options; a phenomenon that can largely be attributed to participants over 50 (Baby Boomers and older Gen Xers).2 So why does this group — the pre-retiree crowd — favor building their own retirement portfolio via core menu index funds over investing in a “set it and forget it” target date fund? With an increasingly short time horizon to save, pre-retirees may feel an added urgency to catch up using a more aggressive investment approach and may look to an a la carte menu. Or, maybe it’s a case of inertia. Or, they just don’t understand target date funds. Whatever the reason, it’s important to recognize that for any participant, and especially pre-retirees, sole use of the core menu could have unfavorable implications for retirement readiness if proper education and engagement are not instilled.
That’s not to say a DIY approach to retirement investing is a “bad” thing: After all, a typical DC core index fund lineup features the same asset classes found in a target date fund — a mix of US and non-US equity funds, fixed income and maybe a cash option. So it certainly offers the building blocks that a participant might need to create a diversified, risk allocated retirement portfolio — provided participants know what they’re doing.
With financial literacy in the United States at an all-time low, however, many are not investment-savvy enough to act as their own portfolio manager. If a large percentage of people cannot identify the difference between a single stock and a stock mutual fund,3 it’s reasonable to assume that many also lack the know-how to allocate across asset classes or rebalance those allocations — two crucial functions in retirement investing. As it is, the average number of funds participants use when investing in the core menu is only 2.5, indicating a serious lack of diversification.4
These realities don’t bode well for pre-retirees — a cohort that is both heavily utilizing the core menu and, on average, significantly underfunded for retirement. In 2014, one-third of Baby Boomers had no money saved in retirement plans,5 and a 2017 study revealed that the median retirement balance for Gen Xers was only $35,000.6 These sobering statistics present an opportunity for targeted plan sponsor intervention. Consider the following actions:
Find out what they know and what drives them. Why not survey the “DIY”ers? With the help of their recordkeeper, sponsors could identify those participants who are solely invested in the core menu and conduct a survey to ascertain their general financial knowledge, understanding of the plan (including the various menu options) and investing rationale.
Build an ongoing outreach strategy. Participant survey results can help inform themes for targeted engagement and educational content. Open enrollment is a prime time for outreach because benefits are top of mind and participants are weighing decisions and taking action. Sponsors might consider offering targeted education to core menu users on topics such as target date fund basics; investment concepts like asset allocation, risk and diversification; or a comprehensive plan overview. Ideally, this would be done in person, classroom style or via webinar so participants can ask questions in real time.
Conduct a re-enrollment. For the sake of the less savvy and less intentional core menu users, sponsors can offer a savings lifeline through re-enrollment into the default. Whether it’s a risk-based balanced fund, managed account or target date fund, the default, as a professionally managed, risk adjusted, automatically rebalanced option, removes the burden from participants who have neither the time nor the financial acumen to oversee their own portfolio. Anyone, including the more sophisticated core loyalists, can always opt out if they wish to remain in the driver’s seat.
Offer an outlet for advice. Personalized advice can help participants understand their entire financial picture and determine the most appropriate in-plan tools that might work for their unique situation. According to State Street’s 2018 Global Retirement Reality Report (GR3), half of US employees would like to receive retirement planning advice from their employers; however, of the retirees who did so, only 1% found the employer guidance useful.7 In cases where participants look to and trust their employer for such resources, plan sponsors have the opportunity (and participant demand) to offer professional advice channels through their plan.As retirement becomes more real, many pre-retirees are taking a more active interest in their savings options and are eager for guidance — trends we’ve witnessed through our benefits fair experience and GR3 research. Whether participants are invested in the core menu or the default, sponsors have the chance to engage this uniquely receptive audience with the right tools and education to drive strong outcomes as savers near their professional finish line. For self-directed investors in the core who are exposed to more possible pitfalls, this level of sponsor support is critical and can be differentiating.
1 According to 2019 data from the Employee Benefit Research Institute. 2 Ibid. 3 State Street Center for Applied Research, “The Folklore of Finance,” 2014. 3,744 investors, investment providers, government officials and regulators were surveyed nationally. 4 Invesco, “The Core Menu Conundrum,” Shifting DC Times, Winter 2018. 5 Stanford Center on Longevity, “Disentangling Differences in Retirement Preparedness Between Baby Boomers and Silent Generation,” October 2018. 6 Allianz Life, “Generations Ahead Study,” September 2017. 7 State Street Global Advisors Global Retirement Reality Report, 2018. State Street conducted an online survey, in conjunction with YouGov, across eight countries representing a range of retirement systems. We queried 9,451 people at every stage of the retirement spectrum, from those new to the workforce to those later in retirement, to better understand the milestones and inflection points across the whole savings journey.
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