Much more than meeting their responsibilities as a fiduciary, not-for-profit plan sponsors are concerned that employees will delay retirement because they do not have enough money and that they will run out of money in retirement, TIAA reported Wednesday.
TIAA based its report on a survey conducted by KRC Research via phone among 835 plan sponsors in the not-for-profit sector from mid-January to mid-February.
Thirty-eight percent of respondents said meeting their fiduciary responsibilities was their top concern, while 31% cited the Labor Department’s fiduciary rule (delayed for 60 days earlier this month) and 24% criticism about administrative and investment fees.
Topping those concerns were worries about employees’ readiness for retirement. Sixty-four percent of plan sponsors were concerned about participants delaying retirement for lack of enough money, and 59% worried that their employees would run short of money in retirement.
These worries are not unfounded. Recent research showed that Americans are not very confident about the state of their financial readiness for retirement.
Income for Life
The survey highlighted changes that could help increase employees’ retirement preparedness and ease employers’ concerns. Fifty-four percent of not-for-profit plan sponsors said they offered a plan with a guaranteed lifetime income option, and 87% of those said they would keep it.
Of sponsors that do not provide a lifetime income option in their plan, 34% said participants could access annuities outside of the plan, and 21% believed fees were too high.
TIAA countered that these responses reflected common myths about annuities. It said lifetime income options offered through a workplace retirement plan can offer benefits that employees may not find through retail financial solutions—and most often with lower fees.
“With many people living 20 years or more in retirement, a successful retirement strategy may benefit from a source of income for life,” TIAA’s chief executive of institutional financial services Ron Pressman said in a statement.
“And we’ve seen that employees who contribute to an annuity through their retirement plan over time can generate more retirement income than those who simply purchase one upon retiring.”
TIAA also said plan sponsors’ expectations for how employees will draw down their savings may need rethinking. Thirty-five percent of survey respondents said they expected their employees to generate retirement income only through systematic withdrawals.
It pointed out that although taking steady withdrawals could be part of a larger retirement income strategy, relying on this method risked outliving one’s savings.
In addition, it said, plan sponsors may be overlooking a critical feature for employees who do not think they have enough knowledge or interest to choose investments on their own.
Only 48% of sponsors had a designated default investment option, which can provide unengaged employees with a convenient way to invest for retirement.
TIAA said plan sponsors could consider making an investment with a lifetime income option their plan’s default option, but 56% of those surveyed were uncertain whether they would adopt such an option.
They could be overlooking the fact that default investment options offering an income for life feature are designed specifically to help improve retirement outcomes.
TIAA said this was especially important given that 35% of individuals in its 2016 Lifetime Income Survey who held target-date funds (the most common default option) expected them to guarantee a monthly income check for the length of their retirement.
In December, the Labor Department authorized use of delayed liquidity fixed annuities as a non-qualified default investment alternative in employer-sponsored target-date funds.
What Sponsors Can Do
The survey results also found that plan sponsors recognized the importance of personalized support and advice in employee outcomes, though many were unsure how best to engage their employees.
Eighty-one percent offered one-on-one financial advice services, yet 71% said getting their employees engaged in the plan was a significant challenge.
TIAA said that may be because of a gap between the methods plan sponsors think are effective and what they have in place.
Some two-thirds of sponsors believed financial education designed specifically for different age groups or life stages was effective, yet only a third offered it.
And half believed financial education designed specifically for women was effective, but only 14% offered it.
“Plan sponsors can work with their providers to offer a comprehensive employee engagement program and identify services that may be most effective for their specific employee populations,” Pressman said.
Fifty-five percent of plan sponsors said measuring the success of their retirement plan was a big challenge. Asked about the most important measure of a plan’s success:
- 27% cited participation rates, with 52% tracking these rates for their plan
- 21% said participant income replacement rates/retirement income adequacy, but only 14% tracked these rates
“Participation rates are important, but they are just a starting point,” said Pressman. “The true measure of plans’ effectiveness is whether employees have adequate income throughout their retirement, and feel secure in knowing they won’t outlive their savings. The yardstick for plan success should reflect these goals.”
TIAA said ongoing tracking of income replacement rates better enabled employers to know whether their workers were on track for retirement.
It said most experts recommend that employees aim to replace 70% to 100% of their preretirement income during retirement. However, 47% of sponsors surveyed thought their employees should target an income replacement rate of 70% or less.
Last year’s introduction of the DOL fiduciary rule heightened attention to fiduciary practices, and were top of mind for many for many survey respondents. However, these concerns still ranked below core plan goals, such as getting employees through retirement.
TIAA said that may be because many plan sponsors reported strong and disciplined plan management practices, such as conducting formal reviews of their plan options and services. Over the next 12 months, many plan sponsors said they would conduct a formal review of their administrative fees, investment menu, investment fees and plan design.
TIAA said it was generally a good idea for plan sponsors to formally review their plans every few years to help ensure they are offering competitive services and are meeting their plan obligations.
Sixty-five percent of respondents said they had an Investment Policy Statement in place to guide their investment monitoring and selection process, and 12% expected to create one in the next one or two years.
Sponsors looked to experts for support as well. Eighty-six percent reported having a plan advisor and of those, 88% said the advisor was a fiduciary.
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