Record keeping continues to be a competitive industry as vendors invest in technology and look for ways to differentiate themselves. Many of the product innovations we’ve already seen (and expect to see in the future) are being driven by the trends discussed below. When evaluating a vendor’s performance or conducting a vendor search, we believe plan sponsors should look beyond fees and consider whether their participants have access to new products and services.
To learn more about these trends and innovations benefiting plan participants, download the full article above.
1. A Focus on Retirement Income
When defined contribution (DC) plans first emerged, participants were encouraged to take advantage of the tax-deferral opportunity and potential market growth. Over time, these plans increasingly became the primary retirement income source for many employees, and the message transitioned to saving “enough.” Vendors began referring to a broad minimum savings rate and attempted to quantify the lump sum needed at retirement (for example, as a multiple of a participant’s final pay). Participants have now been contributing to DC plans for decades, and as they approach retirement the logical question they are asking has become “How do I know if my balance will meet my retirement income needs?”
In response, vendors began focusing on the issue of retirement income adequacy. Lumpsum balances were translated into a hypothetical monthly income, and online tools were developed that incorporate additional data (outside assets, lifestyle requirements, anticipated medical expenses) in order to help participants understand whether their income stream would meet their particular needs. We have also seen tools offering advice on when to access different sources of money, including Social Security, to maximize income and minimize taxation.
In recent years there has been a lot of discussion about the use of in-plan annuities.
In-plan annuities are available in virtually all not-for-profit 403(b) plans by law, but the same cannot be said for corporate 401(k) or public 457(b) plans. In addition to plan sponsor interest, in 2018 there has been a good deal of discussion among legislators about further supporting retirement income and annuity safe harbors. As demand increases, and if more legislation is written, we expect providers to look for opportunities to incorporate these products into their service models.
At Aon we believe in the importance of retirement income and will continue to help our clients evaluate plan design for the potential role of annuities within their DC plans.
In 2018 there has been a good deal of discussion among legislators about further supporting retirement income and annuity safe harbors.
2. New Ways to Engage Participants
There was once a time when every plan participant received the same communications. When that proved ineffective, vendors eventually began using demographic data to target distinct audiences. As an example, employees who were 100 percent invested in a single fund (particularly a money market fund or company stock) would receive communications emphasizing diversification. Now vendors are able to generate communications that are personalized to each individual, such as an illustration of how one’s monthly retirement income would increase if the current deferral rate were increased.
Behavioral finance continues to be a contributing factor. To begin with, positive messaging has been demonstrated to be more effective than dire warnings about never being able to retire. Even more dramatically, the success of automatic enrollment and escalation has proven that participants will make better decisions if they are “nudged” in the right direction. Vendors now present participants with a specific actionable suggestion—“If you increase your deferral rate to 6 percent you’ll receive the maximum match”—along with a quick and easy way to implement that suggestion, often with just one click. Many participant websites now prominently feature this type of messaging right on the welcome page.
We hear a lot these days about how baby boomers, Generation X and millennials behave differently, and vendors are actively considering how best to engage with these various demographic groups. Account transactions and messaging need to be conducted via the participant’s preferred method, whether that be the website, mobile applications, text, Snapchat, or whatever technological innovations are yet to come. The requirement to send some legal disclosures via traditional methods has presented a real challenge, not just from a cost perspective but because valuable information may be going unnoticed or ignored.
At Aon we believe that DC plan participants respond best to messages that resonate with their own individual experience, behavior, and motivations. Plan sponsors should use technology to segment their populations and “nudge” them to make good decisions.
Account transactions and messaging need to be conducted via the participant’s preferred method.
3. Financial Wellness
“Financial wellness” has been a buzzword in the industry for several years now, but what this means from a practical standpoint hasn’t necessarily been clear to plan sponsors. The concept, of course, is that saving for retirement competes with other financial needs like paying off student loans, putting children through college, or even just paying the monthly bills. Therefore, if we really want participants to retire successfully, we may need to help them manage other financial demands at the same time.
A smart financial wellbeing program should work alongside the DC plan and other employer provided benefits.
Many vendors have posted articles on their websites and offered employee education sessions on topics such as budgeting, but access to actual tools and services is not yet the norm. We expect that online resources will explore a broader range of topics, such as writing a will or determining insurance needs, while services that prioritize the payment of financial obligations will be offered more and more frequently. In-person financial planning resources may become more prevalent as well. However, plan sponsors still need to consider their fiduciary responsibilities when offering these services.
We believe a smart financial wellbeing program should work alongside the DC plan and other employer-provided benefits—offering a range of tools, services, communications, and interventions at each stage of an employee’s financial life, both before and through their retirement years.
A smart financial wellbeing program should work alongside the DC plan and other employer-provided benefits.
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