Retiring employees might get a handshake, a gold watch or even a goodbye party. But for DC plan members…is it enough?
DC pension plan sponsors have spent a lot of time and effort over the last few years helping their members prepare for retirement.
While employee engagement has been the focus, retirement readiness—both financially and emotionally—has been pushed to the forefront. Now, DC industry stakeholders at all levels are asking if it’s really goodbye at retirement or if plan sponsors should be taking on more responsibility during the decumulation phase.
“As the DC industry continues to evolve, pension plan sponsors are recognizing that their members are getting closer to retirement and that their previous focus of just helping their employees save enough for retirement needs to expand,” says Sue Reibel, senior vice-president, business development, group benefits and retirement solutions, with Manulife Financial. “Still, I don’t believe that means the employer wants to retain accountability for that employee after they retire.”
Reibel recounts a story where, three years ago, she was in a room with 50 different Manulife employer clients as part of an annual professional development session. The employers were asked if they felt any obligation to support their employees in retirement. Only three senior HR executives put up their hands. The employers were also asked if they felt the need to provide their members with any financial planning advice in preparation for retirement. Reibel says maybe 30% said yes.
At last year’s annual session held in October, the same question was asked. This time, closer to 70% of the employers said they felt the need to offer financial planning advice to their employees.
As Reibel points out, this represents a dramatic shift in attitude over a relatively short period, and it shows that plan sponsors want to help set their employees up for a successful retirement. Still, she doesn’t believe that many employers feel Jack the need to make sure their employees remain okay in retirement.
“I don’t think we’ll see this rush of employers wanting to maintain DB-like accountability for their employees because it’s about more than just retirement dollars,” explains Reibel. “It’s about health benefits, too. And we’re seeing most employers in the private sector go the opposite way on those retiree benefits: employers are trying to get away from being responsible for the health benefits of their retired employees.”
Reibel believes the DC industry, as a whole, needs to move toward offering a variety of post-retirement options that satisfy both the pension plan sponsors that want to take on more responsibility for their employees post-retirement and the retirees who don’t have that support.
Now We’re Talking
According to Tom Reid, senior vice-president, group retirement services, with Sun Life Financial, DC plan sponsors recognize that their workforce is aging, and this has prompted them to become more engaged than ever in post-retirement discussions.
“In fact, I’d say a lot of our clients running these pension plans are themselves starting to enter the retirement corridor, and this has given them pause for thought to consider whether they’re really doing enough for their employees post-retirement,” says Reid. He adds that this ramp-up in post-retirement discussions has led to increased focus on three main areas in the DC arena: education, advice and plan design.
Educating employees about retirement certainly isn’t new, but it has become more of a focus for sponsors—especially with plan members who are nearing retirement. Reid says more than half of Sun Life’s education resources are deployed toward 22% of the plan members it serves (i.e., those age 55 and older) in response to sponsors recognizing that they need to do more to prepare their employees for retirement—and make sure they actually retire.
“Employers are concerned about on-time retirement, recognizing that if employees aren’t financially or emotionally ready to retire, they’ll remain in the workforce,” he explains. “Employers have a desire to create new opportunities and bring in fresh talent. If employees stay on longer toward the end of their career, it hinders the employer’s ability to do that.”
Education is one way to address this concern, but it goes beyond just making sure that employees have enough money to retire. It also includes broader non-financial matters such as health and lifestyle discussions, as well as helping employees to envision what their retirement will look like. Reid notes thateven a few years ago, these topics wouldn’t have been part of the dialogue.
With education and advice as the foundation of helping employees to reach a successful retirement, plan design—and, specifically, guaranteeing income in retirement—has become another trend in DC discussions.
“Employees don’t want to outlive their savings and are looking for some form of annuity-like options,” says Reid. “The accepted wisdom used to be that when someone retires at 65, they should buy an annuity. But some people don’t want to annuitize. As a whole, people aren’t doing it as often as they should.”
And this post-retirement discussion— how retirees should manage their money and how to offer DB-like guaranteed income in retirement—is a concern for some plan sponsors. In fact, it’s an issue for which the DC industry as a whole is struggling to find solutions.
As a quick example, Reid says, rather than have an employee retire at age 65 with $500,000, one variation might be to have his or her pension plan automatically take half of the accumulated savings at age 55 and invest them toward an annuity over the next 10 years. So, instead of being left with a lump sum of $500,000 at retirement, the employee gets a lump sum of $250,000, with the other half already invested in a life annuity to provide some level of guaranteed income.
“This is just one variation of what can happen, but it’s these types of plan design discussions that some sponsors are now talking to their pension committees about,” Reid explains. “My gut is saying we’re probably a couple of years off from seeing this type of thing, but we service a lot of larger employers that are the trendsetters. They’re actively discussing different options, so there is a possibility we might see something sooner.”
The Innovation Gap
Shawn Cohen, director, relationship management, with MFS Investment Management, says these discussions and early product efforts are a start—but, by and large, sponsors, recordkeepers and money managers have to partner together to develop new products.
“Sure, the discussions are being had, but we, as an industry, need to do more,” says Cohen. “At the end of the day, it’s going to take a major stakeholder—and preferably a partnership between stakeholders—to really take the lead and come up with the solutions that speak to both pension plan sponsors and their participants.”
He says plan sponsors are in a tough spot: there just isn’t much variety among post-retirement options and products, and the ones that are available don’t meet the needs of every investor. So sponsors are left in limbo, caught between managing their business and trying to help their employees prepare for and manage their retirement.
Despite believing that all of the industry players, collectively, aren’t doing enough, Cohen says the DC industry is still trying to figure out who should ultimately be responsible for managing post-retirement solutions. Is it the recordkeepers, since they have the market for variable annuities? Is it the money managers, because they’re the ones investing the assets? Or should the responsibility fall to the plan sponsors, because they’re the ones that really know their plan members and have an active interest in making sure their employees actually retire? The solution likely involves partnerships among all of these stakeholders.