Goal-Oriented Savings

Give employees a GPS for retirement savings

Your clients set goals for their employees at work. Why shouldn't they do the same for their retirement?

When retirement plans were introduced as tax-deferred savings programs, there were few behavioral studies or tools to help employees determine how much they needed to save.

Over time, a wealth of information has been gathered on saving habits and retirement income needs. What has been discovered is that savers have difficulty seeing themselves 15, 20, or even 30 years from now, and often find the concept of retirement income too abstract to grasp when they don’t have defined goals.

Goal-oriented savings allows employees to set and monitor progress—just as they do at work—and can help them better prepare for retirement.

Providing access to an online retirement calculator is an easy way to encourage goal-oriented savings. This often involves a simple interview that steps employees through a few key questions to let them set up and track how they’re doing in terms of their retirement savings. These questions include:

·         What is your current annual salary?
Determines how much employees need to save annually to meet their retirement goals and what their annual income needs might be when they retire.

·         What are your retirement goals?
Establishes when employees want to retire and how much income they’ll want annually during retirement.

·         How much are you saving for retirement?
Records the percentage of current income that employees are saving for retirement each year, including any amount that your clients are contributing.

·         How much have you saved for retirement?
Includes savings from employees’ current plan, along with any other savings that are specifically for retirement, such as an IRA or a retirement plan from a previous employer.

·         What investment return do you expect?
Captures the return that employees expect to earn on their retirement savings before retirement begins.

Once this information has been collected, goal-oriented savings tools like the Ascensus online retirement calculator below can provide real-time information as the contribution rate, retirement age, income percentage, and rate of return are adjusted. 

This allows employees to fine-tune their goals and see what steps they should take to better ensure that they stay on track to meet their retirement goals. If their personal circumstances change, they simply update the calculator to get an instant update on how their retirement planning is affected.

Experts believe that providing a visual reminder for retirement savings via an online retirement calculator can help employees become more retirement ready.

“The very act of thinking about how to do a task makes you more likely to follow through and do the task,” says Annamaria Lusardi, Denit Trust Distinguished Scholar and Professor of Economics and Accountancy at the George Washington School of Business. “Saving more is hard, and if people don’t do the calculations and see the numbers, they don’t save more.”¹

When clients express concern about their retirement plans due to low employee contributions or interest, talk to them about the possibility of implementing a goal-oriented savings tool like an online retirement calculator. Through interactive planning, participants can build a better retirement strategy based on realistic expectations and goals.

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¹Source: Novack, Janet. Forbes, "These Calculators Can Raise Your Odds of Retiring Well." January 9, 2013. http://www.forbes.com/sites/janetnovack/2013/01/09/these-calculators-can-raise-your-odds-of-retiring-well/.

Targeted Communications

Help your clients tell employees a story they can relate to

As your clients’ financial professional of choice, you recognize that retirement plans represent a great way to help their employees save for retirement.

As such, you've taken the necessary steps to design the best plans possible.

However, low participation rates and contribution levels could negatively impact employees’ retirement savings goals and can lead to potential compliance issues.

In many instances, the fact that employees don’t fully understand how the plan can work for them is the primary reason for low participation.

In the past, employers provided generic retirement scenarios that assumed contribution rates, savings, and nest eggs to drive participation. It wasn't all that surprising that employees had a hard time relating to these stories. 

Today, advances in technology can help your clients encourage savings and participation among employees by customizing retirement scenarios for each individual.

Targeted communications are a series of educational materials designed to explain the advantages of saving for retirement through illustrative employee scenarios. Each focuses on a specific audience, allowing readers to gain a better understanding of a particular message.

Depending on the individual situation, these communications demonstrate the benefits of:

• Enrolling in the plan
• Contributing enough to maximize a company match
• Increasing contribution amounts to maintain a desired lifestyle in retirement

Ascensus has witnessed the positive results of targeted communications firsthand: Employees who chose to enroll in a plan after receiving a targeted communication deferred, on average, nearly 6% of pay.¹

Targeted communications are good for your clients, too.

By helping their employees save more and feel better about their retirement planning, they can generate higher participation and ensure the success of the plan for everyone.

In addition, these communications help fulfill your clients’ fiduciary responsibility, providing ongoing education to all employees—not just those who are already participating in the plan.

With the primary responsibility for retirement planning now in the hands of employees, getting an early start on saving for retirement is critical to helping them reach their retirement goals. Think about incorporating a targeted communications strategy in your clients’ plans to get employees involved sooner and encourage them to take full advantage of their program.

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1 As of April 2013.

Professional Investment Management

Outsource account management

As we mentioned in our previous blog about qualified default investment alternatives (QDIAs), investing can seem complicated to employees. Many individuals struggle with investment concepts such as diversification, asset allocation, and rebalancing. They can also be overwhelmed by the responsibility of selecting and monitoring their investments.

As such, the traditional approach of providing educational materials detailing every aspect of investing in a retirement plan can be ineffective. Instead, many of your clients’ employees simply want someone or something to do the work for them.

This has resulted in the development of “do-it-for-me” solutions that shift or outsource that responsibility to another party. These solutions include risk-based (or lifestyle) investments, target-date (or lifecycle) funds, and managed accounts.

Risk-based investments can place an individual’s contributions in a mix of funds based on personal risk tolerance—the greater the risk tolerance, the more aggressive the investment strategy.

Target-date investments can place an individual’s contributions in a mix of funds based on the amount of time until retirement—the closer to retirement, the more conservative the investment strategy.

If market activity impacts the investment strategy, both types of investments will automatically rebalance the individual’s account to return it to the intended mix.

Risk-based and target-date investments have become especially popular as QDIA selections in defined contribution plans with automatic enrollment. According to Cerulli Associates, target-date funds are used as the QDIA in these plans 69.8% of the time, while risk-based funds are used 10.6% of the time.¹

Typically, there is no additional cost to your clients or their employees for risk-based or target-date options.

Managed accounts provide another alternative for the hands-off investor. Individuals can choose to pay a fee to have a professional money manager step in to analyze their personal profile. The manager then uses this information to select appropriate investments, make savings rate recommendations, allocate assets, and provide ongoing account oversight and maintenance.

Managed money solutions are garnering more and more attention among fee-based advisors. According to a Cogent Reports study from Market Strategies International, 76% of fee-based advisors now use a managed account solution. This accounts for 61% of their total assets under management, on average.²

Offering your clients and their employees access to managed accounts allows for the greatest level of customization and personal attention. In addition, the money manager will also act as a 3(38) fiduciary, taking on fiduciary status with respect to the employee. This approach satisfies the needs of a plan’s “do-it-for-me” investors without interfering with the preferences of “do-it-myself” investors.

When your clients mention “do-it-for-me” investors in their plans, talk to them about how their employees might benefit from professional investment management. Risk-based investments, target-date funds, and managed accounts can be extremely useful to participants who have neither the time nor the desire to become investment experts.

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1 Source: Cerulli Quantitative Update, U.S. Retirement Markets 2012.
2 Source: Advisor Trends in Managed Accounts™, quoted in Fallon, Anne. "Cogent Reports: Managed Account Use Expected to Grow Three Times Faster for ETFs than Mutual Funds." Market Strategies International, November 14, 2013. http://www.marketstrategies.com/news/2291/1/Cogent-Reports--Managed-Account-Use-Expected-to-Grow-Three-Times-Faster-for-ETFs-than-Mutual-Funds.aspx. 

QDIAs

Make investing easier with a default option for growth

Retirement plan participants sometimes struggle with figuring out how to invest their contributions. Perhaps that is why recent trends have seen many individuals forgo making these decisions themselves, opting instead to use professionally managed investment options.

According to data published by Vanguard, 36% of all Vanguard participants had their entire account balance invested in a single target-date fund, a single target-risk or traditional balanced fund, or a managed account advisory service in 2012 (compared with just 17% in 2007). The company believes that the growing popularity of these options demonstrates “a shift in responsibility for investment decision-making away from the participant and back to employer-selected investment and advice programs.”¹

To make investing easier for participants, all of the investment options mentioned above can be used as qualified default investment alternatives (QDIAs) within a retirement plan.

A QDIA is an investment fund that can keep your client’s plan running smoothly if employees enroll but don't provide investment direction for their assets. Contributions are automatically invested in this fund unless employees make an alternative investment election.

The following investment types have been approved by the Department of Labor as acceptable default investments that may meet QDIA requirements:

• Balanced Funds – designed to meet the needs of participants with a balanced mix of stocks and bonds
• Lifecycle Funds – designed to meet participant needs based on participant age, a target retirement date, or life expectancy
• Managed Accounts – accounts managed by an asset allocation service
  
  

It used to be that the default investment option for employees enrolled in their company’s retirement plan generally focused solely on capital preservation. Unlike “cash equivalent” savings instruments like money market funds that struggle to keep pace with inflation, QDIAs are growth- and diversification-oriented investment alternatives that today’s employers can put in place for employees who don’t feel comfortable allocating assets on their own. Knowing that their money will be invested in a diversified, professionally managed fund can help them feel better about their contributions.

A QDIA can be especially helpful for employees who have been automatically enrolled in a retirement plan, as it provides an instant, disciplined investment program. PLANSPONSOR’s 2012 Defined Contribution Survey revealed that 82% of plan sponsors use a QDIA as the default investment for participants who are automatically enrolled in their defined contribution plan.²

Despite this number, there are still opportunities to make plan sponsors aware of how a QDIA can encourage better long-term savings rates for participants while providing fiduciary protection for employers. “I am still surprised by how many plan sponsors are unaware of these protections,” says Kathleen Connelly, executive vice president of Client Service at Ascensus. “The amount of education that a plan sponsor has on this subject definitely influences its decision on whether or not to use a QDIA with its plan.”³

You can help your clients understand how a QDIA can work for them by presenting it as a win-win situation. For example, by selecting a QDIA as the default investment for their plan, they not only help their employees invest for retirement, but they are also relieved of fiduciary liability related to the fund's performance. Further QDIA benefits are listed in the table below.

QDIA Benefits

Employer	Participant
Easy to implement	Provides a simple way to start saving
Simplifies plan management	Ensures that assets are invested in a qualified fund
Includes fiduciary protection	Provides automatic diversification and a better risk-reward balance

A QDIA may be the answer for clients looking to help employees get invested, whether they are automatically enrolled in a plan or if they feel that they aren’t knowledgeable enough to pick funds from a plan lineup. Talk to your clients about how these funds give employees a default investment option to start and grow their retirement savings.

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1 Source: Vanguard, "How America Saves 2013: A report on Vanguard 2012 defined contribution plan data." June 2013. https://pressroom.vanguard.com/nonindexed/2013.06.03_How_America_Saves_2013.pdf.
2 Source: PLANSPONSOR 2012 Defined Contribution Survey, quoted in Yoon, JooHee. "Feature: Safe Harbor Investments." PLANSPONSOR, July 2013. http://www.plansponsor.com/MagazineArticle.aspx?id=6442494057.
3 Source: Yoon, JooHee. "Feature: Safe Harbor Investments." PLANSPONSOR, July 2013. http://www.plansponsor.com/MagazineArticle.aspx?id=6442494057.