Scott Matheson, CFA, CPA
Senior Director | CAPTRUST Defined Contribution Practice Leader
For a working definition, we define “retirement readiness” as the degree to which an individual has accumulated enough savings to provide income in retirement that maintains his or her pre-retirement standard of living. If you’ve been to a retirement industry conference over the past few years, you have certainly heard retirement readiness mentioned; you may have even attended a keynote address or two on the topic. All this talk about retirement readiness reminds me of a famous quote often attributed to Mark Twain: “Everybody talks about the weather, but nobody does anything about it.” In point of fact, the quote was written by Twain’s contemporary, friend, and neighbor Charles Dudley Warner — a novelist, essayist, and editor at the Hartford Courant. Regardless of its source, this timeless maxim provides a perfect metaphor for today’s retirement landscape in the United States. Nonetheless, the CAPTRUST team aims to do more than just talk about the weather; we fully expect to do something about it.
We believe that broad retirement readiness is achievable with the right mindset and set of tools, and, equally important, a commitment from plan sponsors to go above and beyond what has historically been required. Our experiences over the years have led us to believe that plan sponsors who invest more in bettering their employees’ retirement readiness will stand out as true fiduciary leaders.
In support of reaching this goal, we have developed an approach we’ve coined Fiduciary Leadership™ to help plan sponsors assess their defined contribution plans and identify specific, tactical opportunities to help truly improve employee retirement readiness. The ideas captured in Fiduciary Leadership™ have been gleaned from clients, industry colleagues, academic literature, and common sense, then synthesized into a straightforward, action-oriented framework.
Applying the Fiduciary Leadership™ mindset to defined contribution plans includes a review of what we believe are the five key areas of successful plan management:
1. Plan design
2. Participant engagement
3. Investment menu
4. Fiduciary process management
5. Vendor management
A successful defined contribution plan provides its participants with the highest likelihood of achieving retirement readiness. In order to enhance your participants’ likelihood of retirement income adequacy, you must shift your focus and mindset toward achieving outcomes. This is conceptually simple, but in practice it’s key to get the “basics” right before leaping into the world of outcomes.
We think about the path to outcomes in a defined contribution plan much the same way American psychologist Abraham Maslow described the path to individual “self-actualization” — as a pyramid of needs that builds layer upon layer from foundation to apex. The base of a successful defined contribution plan pyramid is built on the basics: diverse investment options, daily pricing, online participant access, and recordkeeper or third-party administrator relationships. Once the basics are in place, the pyramid builds upon itself to a focus on the “three Fs” — or funds, fees, and fiduciary best practices. Here, you as the plan sponsor have invested time, effort, and often capital into building a plan with proper investment options, reasonable fees, and a tight fiduciary process (e.g., committee process, investment policy statements, and periodic fee benchmarking). Once this second layer is in place, we can shift the focus to outcomes.
Plan Design, Participant Engagement, and Investment Menu
Outcome-focused plan sponsors care primarily about three things: getting employees into the plan, getting them to save enough, and getting them invested well. Our experience tells us that crafting a plan that integrates a plan’s design, participant engagement strategy, and investment menu is the key to accomplishing these seemingly daunting goals. Fiduciary Leadership™ provides a framework to organize these tools in such a way that plan sponsors can pick the right ones for their plan. To buy into this organization, however, is to challenge the status quo.
As an industry, we have been trained to solve for the ever-elusive average participant. However, workforces are hardly homogeneous, and employee diversity means that averages can be misleading. As a simple example, think about a workforce of two: perhaps a doctor and an administrative professional. Solving for the average of these two individuals yields a participant that simply doesn’t exist. Building a retirement plan around this average may lead to unsatisfied employees and less-than-desirable outcomes. We propose a new way to think about your participants — one that views your participants across a spectrum of engagement in saving and planning for retirement, rather than potentially misleading averages.
This spectrum ranges from those less engaged — even disengaged — employees who delegate key saving and investment decisions to hyper-engaged, self-reliant employees actively and personally engaged in retirement planning. Delegators either implicitly turn over their saving and investment decisions to you as plan sponsor when they allow you to automatically enroll them in the plan and place them in the plan’s Qualified Default Investment Alternative (QDIA), or explicitly delegate by selecting investments like target date funds. Meanwhile, hyper-engaged employees are easy to spot; they are the ones asking for self-directed brokerage options and gold funds. In between these two extremes are the “emerging savers.” Emerging savers are moderately engaged and exhibit many of the right savings behaviors. They often just need a nudge to continue making good decisions or an incentive to step it up a notch.
Let’s now apply this spectrum of participant engagement to our outcomes framework to create a matrix for organizing common plan design, participant engagement, and investment menu tools.
As you can see in Figure One, each of these three employee groups can be influenced using different tactics intended to drive retirement readiness. For delegators, auto-enrollment and auto-escalation can help get them in the plan and saving enough; the right QDIA can get them invested well. For emerging savers, a stretch match formula combined with a retirement income gap analysis and one-on-one consultations can reinforce their good behaviors. Meanwhile, even the hyper-engaged may benefit from access to managed accounts or targeted advice on how to know when it’s time to retire.
Vendor and Fiduciary Process Management
Vendor and fiduciary process management, the final two Fiduciary Leadership™ pillars, wrap around all the others and are enablers of successful defined contribution plan management. Fiduciary Leadership™ requires active vendor management, continuous oversight of vendors to ensure that services contracted for are appropriate, rendered on a timely basis, and that fees charged are reasonable. As part of this oversight, fiduciary leaders will formally benchmark these vendors as a way to assess reasonableness and competitiveness of fees and services over time. This last point is especially relevant given the rapid pace of innovation and retirement industry evolution.
As it relates to fiduciary process management, plan sponsors should develop, document, and follow consistent processes to ensure compliance with their obligations. Fiduciary leaders, however, strive to go beyond the minimum to stay ahead of the curve on behalf of their participants, staying alert to regulatory and legislative threats, and leveraging technology to improve process management.
Over the past three decades, participants have been increasingly overwhelmed by the burden of their retirement savings and investing shifting from their employer to them, rising healthcare costs, extending life expectancy, and, for the most recent decade, disappointing capital market performance. As we explain later in this issue in an article titled “Buying High and Selling Low,” participants are further hindered by a number of behavioral biases that challenge their ability to invest well. All of these issues pose challenges to getting participants into the plan, saving enough, and invested well.
Nonetheless, whether your focus on outcomes is driven by paternalism or workforce management, the framework for Fiduciary Leadership™ provides an intuitive approach to managing your plan and participants to successful outcomes. We look forward to discussing Fiduciary Leadership™ with you and working together to do more than just talk about improving outcomes for your participants. Together, we believe we can do something about it.