Roughly 70% of workers in employer-sponsored retirement plans will need to make some kind of decision about what to do with their money once they retire, said David L. Wray at a meeting here.
Many will have lump sums available from their plans, explained Wray, who is president of the Profit Sharing/401(k) Council of America, Chicago, Ill. That includes not only 401(k), 457 and 403(b) plans but also defined benefit plans, many of which he said now permit lump sum payouts.
As a result, the workplace increasingly is becoming the focus for retirement income solutions for the mid-market, indicated Betty Meredith, director-education and research for International Foundation for Retirement Education, in the Ann Arbor, Mich., office.
Wray and Meredith were speaking in a one-on-one public conversation during the annual Retirement Industry Conference co-sponsored by LIMRA, LOMA and Society of Actuaries.
The mid-market historically has been difficult to serve with retirement income solutions, Meredith said. Yet, at the employer level, opportunity exists to reach workers and to do so at a reduced cost.
Wray said most large employers already are offering automatic enrollment of workers into defined contribution benefit programs. “You’ll see more auto-escalation programs, too,” where employee contributions rise gradually to the employer match.
He cited these as examples of things that employers already are doing to help ensure employees have funds available at retirement.
Roughly 70% of workers are accepting auto-enrollment, he noted. That is not advice, he allowed, but it does show that workers are willing to let the employer make the decision.
It wasn’t always that way. In 1995, Wray recalled, people wanted to do their own investing and retirement planning. There was even talk of offering brokerage opt-out programs for 401(k)s, he recalled.
No one wanted advice with their plans, Wray added, and, if it was offered, “no one used it.”
Employers were hesitant about advice programs, too. This was due to perceived fiduciary risk, Wray continued, noting employees might get mad at the employer if something went wrong with an advice-related activity. At the time, employers saw “all cost and no benefit,” he said.
But after the recession in the early 2000s, this changed. Today’s workers want advice to be sure their funds are managed properly, he said. And companies are starting to offer it–via Internet services, telephone call centers and on-site advisors.
The advice provided so far is investment advice, Meredith noted, but legislation now in Congress would allow a broader approach, including retirement planning and advice.
What will drive such advice is the arrival of health savings accounts, predicted Wray. These and ancillary products are “very complex,” he said, and employers that are offering HSAs want results, not just structure. That is, “it is very important to employers that HSAs work,” he said.
If HSAs don’t work, there will be “trouble in the company.”
Therefore, HSAs could be the trigger that takes worksite advice to another point–to retirement planning, he said.
There will be a massive education challenge regarding retirement, he predicted. Concerning today’s increased longevity, for instance, “our institutions are not set up for it. People don’t expect it. People certainly are not prepared for it. People don’t understand it and our institutions don’t teach it.”
Third-party experts will be required to help, he concluded.
“Some people can’t read,” he reminded the audience, or at least they cannot read the plan materials they are receiving.
Systems will need to be in place, accompanied by advisors, Wray stressed at another point. Employers will have to step up to the plate, too, he said.
Regarding annuitization, he noted that people generally do not want to annuitize all their plan assets. “They see they have a one-time shot at it, so they are hesitant,” he said of plans that offer such options. They also see it as expensive in comparison to the benefit they get at the back end, he said.
“We need new types of products” to meet this need, Wray continued. He called for products with flexibility and suitable pricing.
At one point, he suggested workers avoid using fixed products early in the working career, when maximizing investment return is critical. But, when people reach their 50s, they should start transitioning to the income side of life, he suggested. By age 85, their income should be “set,” he added.
Wray said, “We need an army of people” to help with the retirement process, to customize plans to individual needs.