Financial wellness is one of the hottest topics in the retirement industry today and at top of mind for many plan sponsors. Increased media focus on the retirement crisis, just within the past year alone, is heightening awareness that most people are simply not saving enough money for retirement. The reasons for this are many, including higher consumer debt and the challenges of saving for a college education. Yet, despite growing concerns and attention, only 1 in 5 plan sponsors has adopted a formal financial wellness offering outside a standard DC education savings plan to help employees save effectively for retirement, according to a Plan Sponsor Council of America survey.
A shift in demographics has heightened the need for more holistic financial education. Millennials — who are now the most populous demographic in the American workforce — tend to have sizeable debt and may struggle to save for the long term. Meanwhile, Gen X and baby boomers are still in the workforce for many reasons, including not having reached retirement age, not having saved enough to retire, or because they need a retirement drawdown strategy.
When offered in conjunction with an employer-sponsored qualified retirement plan that optimizes best practices in automated plan design, a financial wellness program can help both groups of employees address emergency savings, debt management and budgeting to build a firmer financial picture that can result in more successful retirement savings.
According to Aon Hewitt’s 2016 Hot Topics in Retirement study, "nearly all employers (89%) indicated they are very or moderately likely to add tools, services, or communications to expand their financial well-being focus." The time is ripe for advisers to talk to their existing and prospective plan sponsor clients about how a financial wellness program can address the financial well-being and retirement readiness of their employees.
Over the past 10 to 15 years, when advisers sat down with plan sponsors to develop a participant education plan, they likely focused on three primary objectives: increase participation, increase deferrals and help participants with proper asset allocation. Fast forward to today and the results of the most recent PSCA survey reinforce those same objectives — sponsors believe that the top two measures of success for an education program are participation rates (91%) and deferral rates (81%). The opportunity is still there, in a very substantive way, for advisers to expand their services and deliver value-add services to retirement plan participants and sponsors.
With recent innovations in both plan design and investments, accomplishing those three objectives has never been simpler.
Auto-enrollment. Used by roughly half of our plan sponsor clients, auto-enrollment has had a huge impact on participation rates. Ninety-six percent of participants who are auto-enrolled remain in their plans, according to statistics from plans that participate in T. Rowe Price Retirement Plan Services.
Auto-increase. When used as an opt-out service in conjunction with auto-enrollment, auto-increase can increase deferral rates over time. In fact, the most common cap on auto-increase we see with our clients is 20% (much higher than the traditional 6% or 10% cap).
Asset allocation products. Target date funds provide participants a way to invest in age-appropriate asset allocation strategies. In our experience, 96% of participants who remain enrolled in their plans are in target date funds.
While automated features and asset allocation solutions have helped create better participant behaviors, they haven't solved the overall wellness problem — numerous surveys find that Americans still say financial issues are the number one cause of stress in their lives and they don't have enough savings to cover a $1,000 emergency. This creates an opportunity for advisers to be proactive with sponsors about financial wellness initiatives.
Financial wellness brings benefits to both sponsors and employees.
For sponsors, a financial wellness program provides potential cost mitigation (health care, workers' compensation, payroll); increased worker productivity and less absenteeism or tardiness due to financial stress; and a more attractive benefits package to recruit and retain top talent.
At the employee level, benefits include the opportunity to manage and pay off debt, build an emergency fund and rein in spending; a path to setting — and achieving — short- and long-term savings goals; and potential for less overall stress and better physical health.
David Eikenberg is head of U.S. investment services- financial institutions, retirement at T. Rowe Price Group Inc.