Retirement, and the retirement plan industry, are both in flux, as workers struggle to save enough, employers look for ways to make them more successful at doing so and regulations change the way retirement plans and advisors work.
According to retirement plan provider Fidelity, conversations with employers and analysis of employee behaviors have led to expectations of the following 7 chief trends in workplace benefits that it expects to see in 2017.
7. Changes in Washington: DOL and ACA
One of the most anticipated (or dreaded) sources of change to affect the retirement plan industry is the implementation of the Department of Labor’s fiduciary rule, and one of the groups that may feel as if it’s most in the rule’s crosshairs is advisors.
Where advisors fit in while providing advice, and how they’re compensated for doing so, are prominent in the rule’s purpose—to protect workers saving for retirement and to make sure that those who advise them have their best interest at heart—and current compensation systems vary substantially, not just from firm to firm but also from the investment options contained in a plan.
Fees for 401(k) advisors depend a great deal on the different rates at which different funds compensate them.
However, Fidelity said that it has observed advisors migrating to a flat payment approach, in which no matter which investments are offered in a plan, the compensation and fees are the same.
Another focus for change is the Affordable Care Act, which will change how employers provide health care benefits—and likely also affect the scope of those benefits.
How employers will deal with the changes, and how those changes could affect their businesses, are other areas of prominence for the coming year.
Any changes they make along either of those lines will undoubtedly insert additional uncertainty into any change processes that may be underway—particularly concerning the future of health benefits, the number of people who are insured and how effective their coverage may be.
6. Designing workplace plans with a focus on retirement income
Employers are taking a closer look at how much employees are saving for retirement—they’re worried that workers aren’t putting enough aside to be able to retire when the time comes. Of course, it’s not all altruism that has them so concerned; if older workers don’t retire, there’s no place for younger workers to come in—and lots of employers perceive older workers as less efficient and less productive, despite numerous indications to the contrary.
However erroneous that perception may be, employers are increasingly focused on how to boost employee retirement savings, and that interest is resulting in a lot of changes to plans that were never originally designed for lifetime income but were only intended to supplement traditional pension plans.
In fact, in a report by The Wall Street Journal, Gerald Facciani, former head of the American Society of Pension Actuaries, was quoted saying, “The great lie is that the 401(k) was capable of replacing the old system of pensions. It was oversold.”
Even now, workplace savings plans haven’t typically been designed with an income replacement goal in mind, although that’s changing. Since a 2006 law made it easier to use such features as auto enrollment, employers have been adding more and more “auto” features, as well as higher default deferral rates.
And Fidelity said that almost one out of every five employers now designs its plan with a target-specific income replacement rate, compared to only 4 percent of employers in 2013.
5. The growth of “do it for me” 401(k) options
Fidelity also says that 2017 also should bring an increase in the use of target-date funds and managed accounts. More than 45 percent of 401(k) participants have all their plan assets in a target date fund, the firm said; that’s up from just 20 percent in 2010. And when it comes to younger participants, that’s even more the case: 65 percent have all their assets in a target-date fund.
In the case of managed accounts, the number of employees using them has nearly tripled over the last two years.
Fidelity saw this coming last August, when it reported that not only were employees saving more, they were increasingly relying on do-it-for-me features of their retirement plans. Plan participants in 401(k)s, it said then, were using target-date funds and managed accounts in record numbers, with the percentage of Fidelity customers with all of their 401(k) assets in a target-date fund or managed account topping 45 percent at the end of Q2.
These investors, the firm said, were less likely to react to market swings and economic events. That lessened the likelihood that they’d “buy high and sell low” as they relied more on features than on “gut feelings.”
4. Stricter guidelines around 401(k) loans
One threat to retirement is the 401(k) loan, because many times those loans are not repaid—or plans that require cessation of contributions when a loan is taken interrupt workers’ efforts to save.
Also, they can be like potato chips: you can’t have just one. Fidelity research shows that while most people who take 401(k) loans do so for needs such as home repairs, medical bills and unplanned expenses, half of those loan-takers get another loan, or even more than one more.
Of course, loans from 401(k) plans aren’t the only threat to adequate retirement preparedness.
In fact, in a report last fall, the Government Accountability Office wrote, “401(k) loans, which sometimes are criticized as a significant source of retirement savings leakage, actually account for the smallest amount of preretirement savings loss.” That said, it never hurts to seek to find ways around employees’ need to borrow from funds that they’ve put away for retirement.
And that’s what many employers are doing; Fidelity found that employers are putting stricter rules around loans and are using data to determine where proactive education may be needed to help avoid the cycle of repeat borrowing.
Additional attention devoted to financial wellness could help with that, since if an employee’s financial well-being is in better shape, the odds are that he will not be as much in need of a loan from money meant to last him, and his family, through retirement.
3. “Health meets wealth” and total well-being
Along those lines, Fidelity said that benefits programs are evolving into total well-being platforms.
Not only are many employers devoting more attention to employees’ health care, they’re also focused on workers’ financial well-being and helping employees transitioning into retirement ensure their retirement savings isn’t depleted by health care costs.
How are they doing that? In part by educating workers on the value of health savings accounts (HSAs) and offering financial incentives for participation in wellness programs (weight loss, smoking cessations, etc.).
They’re not united in how they approach the matter, however. Rising health care costs are bringing a range of different responses as employers don’t just inject themselves into better employee retirement preparedness, but also continue to try to contain those escalating costs.
The Transamerica Center for Health Studies found that 19 percent of employers say they will likely change their plan offerings in the next two years, while 31 percent say they do not anticipate making any significant changes to the benefits they offer. In the middle, 31 percent say they plan to retain their existing plans but make changes to them.
Wellness programs, Transamerica found, are now solidly mainstream, with 55 percent of employers report offering some type of wellness program. Employees may not agree, however, since a separate survey of employees found that only 46 percent of workers believe their employer offers one—so work remains to be done in that area.
2. More online and on-demand benefits education
Fidelity says that attendance at its live Web education sessions is up 52 percent, while use of on-demand seminars is up 62 percent since 2012. In addition, the “take action” rates for on-demand seminars are consistently higher than both virtual Web sessions and in-person seminars.
Employees of all ages, Fidelity says, are gravitating to the sessions, which range from the basics such as impact of increasing savings, to the complex, such as Social Security claiming strategies.
But while it’s clear that employees are looking for more education on their benefits, that doesn’t necessarily mean that everyone is happy to seek out help via the Web. In fact, according to a study from Fisher Investments 401(k) Solutions, one of workers’ big complaints—about their 401(k)s, anyway—is the help they get, or don’t feel that they get, from their employers in educating themselves about their plans.
Half of the respondents to the Fisher survey said that they don’t currently receive any one-on-one help from their 401(k) provider, but an overwhelming majority wished they did.
And if there’s one area in which employees need help, it’s in understanding their benefits.
But employees don’t think their employers do a good job at providing them with that understanding. A study from the insurer Guardian found that the percent of workers who say “my employer does a good job of educating me about my benefits” fell from 66 percent in 2014 to 47 percent this year.
And that’s not good for anyone, employer or employee.
1. Increased focus on financial wellness
Financial woes follow people around. They don’t just deal with the stress of money worries at home, but also at work, where they’re likely to be distracted, zoning out as they worry about overdue bills or even fielding phone calls from creditors as they try to keep the wolf from the door. And when they’re doing that, they’re not working.
As employers increasingly realize the toll that employee financial stress takes not just on employees, but even on productivity and the business’s bottom line, they’re adding tools to help with budgeting, debt management, prioritizing savings goals and managing life events such as a wedding or buying a new home.
As an example of how much employees need help on the road to financial wellness, Fidelity pointed out that its online financial wellness experience has received more than one million visits since April by those needing information.
It’s such an important factor these days, with so many employees dealing with financial problems, that Financial Finesse has developed a tool to calculate the effect on an employer’s ROK of employee financial wellness—or the lack thereof.
And an Aon Hewitt study found last year that more than half of employers currently offered an employee financial wellness program, with 75 percent of large and mid-sized companies were expected to do so by the end of 2016 in at least one of such topics as budgeting, debt reduction, health care and home purchases.
And that’s a trend that’s likely to continue.