1st Quarter 2009
The combination of dramatic changes taking place in retirement plans and demographic forces have brought new risks and responsibilities for individuals, with many at risk of falling short in their retirement income needs. This article describes those changes, shows how many employees have not met the challenges they now face, and discusses how employers have responded through their retirement plan designs. The basic challenges of employee responsibility remain, but new tools, resources and approaches emerge to address barriers to retirement readiness.
The Pension Protection Act (PPA) opened the door to new features that enable employers and employees to manage their retirement savings risks. This article gives an overview of the defined contribution plan design changes that PPA has brought, including automatic enrollment, automatic contribution increases and default investments. The author provides plan sponsors with information about potential fiduciary liabilities and suggests best practices for ensuring fiduciary compliance in the current post-PPA environment.
Since the 2006 Pension Protection Act paved the way for target date funds to be a safe harbor default investment option within defined contribution (DC) plans, adoption of such funds has exploded. Unfortunately, there have been no widely accepted objective benchmarks or analytical methods for comparing and analyzing differing target date solutions. This article explores key tools necessary for performing a complete target date fund analysis, including the creation of a consensus glide path index. The authors find that all target date funds involve a series of trade-offs, and that it is not enough just to look at any one performance variable to make a determination about the appropriateness of a target date series for a given DC plan.
Organizations have made important strides in helping employees accumulate money for retirement. But the looming challenge for a vast nation of retirees will be to effectively manage the spend down of those funds—and it is vital that the retirement community play a strategic role in helping them succeed. This article describes the challenges facing retirees and recommends an action plan to address retirees' longevity risk and their spend-down challenge.
A new generation of products designed to address retirement plan participants' postemployment investment issues and offer them a stream of income for life are on the market. If plan sponsors decide to offer participants such products, a well documented process is necessary for meeting fiduciary responsibility and mitigating potential liability. This article explains how analyzing program goals, reviewing options in the marketplace, evaluating and monitoring the plan, and helping participants make the right choices can aid plan sponsors in mitigating fiduciary risk in this rapidly evolving marketplace.
Plan sponsors and financial institutions, buttressed in some cases by legislation, have developed features and services to help employees manage the impact caused by the shift from defined benefit (DB) plans to defined contribution (DC) plans. Seen as a whole, these efforts have been referred to as the “DB-ification” of the DC plan. This article describes common design techniques used to help bring DB plan features to DC plans, including ways to ensure benefits adequacy; mitigate investment, longevity, disability and lifestyle risks; and lower investment costs. Together, these techniques should help employees better manage the challenge of securing adequate retirement income in the years ahead.
In light of increasing life expectancies and shrinking sources of guaranteed lifetime income, using income annuities as a tool for providing secure retirement income is an idea whose time has come. This article dispels common myths about income annuities and discusses why employers should play a leading role in providing retirement income security by offering income annuities as a source of guaranteed lifetime income. Employers can bring annuities to their company-sponsored pension plans without adding burdensome costs or administrative headaches.
Automatic enrollment (AE) 401(k) plans are an increasingly common plan choice for employers. This article reviews regulatory and legislative actions related to AE, as well as the literature relating to traditional 401(k) plan participation, AE and financially vulnerable workers. Using 2001 SIPP data, the authors examine the reasons why 401(k)-eligible workers decline to participate and lay out their econometric model and its subsequent estimates of who is most likely to stay in, and to opt out of, an AE plan. They find that workers under the age of 30 are the most likely group to stay enrolled in an AE plan, with older individuals, those with annual earnings under $30,000 and blacks more likely to opt out. The authors discuss policy considerations raised by these findings.
2nd Quarter 2009
Offering voluntary benefits can help further important objectives for both employers and employees. Voluntary benefits—such as dental, long-term care and life insurance—can improve employers' employee retention and cost-control objectives, while also addressing employees' growing concerns about a variety of financial issues. This article reviews recent research about employer and employee concerns, explains how voluntary benefit offerings can help meet those concerns, and gives employers information about what steps they should take to strategically implement a successful voluntary benefit program.
Changes in the landscape of employee benefit plans—including higher benefit costs, the shift to personal responsibility and the expansion of voluntary benefit offerings—are making effective employee communication about the value of employer-provided benefits more important than ever. A worksite communication program that offers one-on-one education and guidance from a specialized team of financial professionals, at the worksite and on company time, can meet the needs of both employers and employees.
All evidence points to corporate America being on the cusp of an explosion of flexibility. This article makes a business case for workplace flexibility and describes the current roadblocks to its expansion. It provides employers with tips about how to best overcome those obstacles and develop a solid strategy to reap the benefits of workplace flexibility. Employers that “get” the business case for flexible work arrangements will reap the rewards through increased employee engagement and loyalty, which in turn will drive their business to even higher levels of performance and productivity.
With the shift away from traditional defined benefit (DB) plans putting increasing pressure on defined contribution (DC) plans such as 401(k)s to be the primary source of retirement income, employees need education and advice about the “decumulation” stage of retirement. As plan sponsors review their plans to comply with the Pension Protection Act (PPA), now is an ideal time to consider the value of completing their DC plan by adding guaranteed lifelong income as a distribution option. With an income annuity, employees get all the benefits of a DB pension plan, without the liabilities and costly administration for employers.
Many factors have led to greater numbers of reductions in force (RIFs) and mass severance programs as announced by employers. Following the right human resource path in these instances can be the quickest way for a company to successfully emerge from a difficult period of reorganization and downsizing. This article provides a brief historical background about severance programs in the United States and recommends 12 important steps employers should be taking with their severance programs in the current economic and legal environment.
As patterns of work and retirement are changing, changes are needed in societal patterns, legislation and regulation to give workers and employers better options. The primary focus of this article is creative working arrangements. The author argues that creative work options are important and that phased retirement helps meet the needs of both individuals and employers. She provides practical information to employers and encourages improvements in the environment to make these programs easier to implement and utilize. The article is based on testimony provided to the ERISA Advisory Council in July 2008, as well as other continuing work on phased retirement.
It is highly unlikely that many new defined benefit (DB) plans will be established under the current DB plan system, which is unfortunate given a DB plan's ability to provide retirees with predictable retirement income that will not run out. This article provides a blueprint for what could be a sustainable new DB plan system. The goal is to devise a new DB plan that will experience less cost volatility, the hope being that if plan sponsors know that costs will be stable from year to year, they may be more inclined to sponsor a DB plan (or keep one going).
3rd Quarter 2009
The Society of Actuaries has undertaken a significant number of integrated research efforts to identify risks associated with the postretirement period, understand the general public's awareness and perception of those risks over time, and determine approaches used to manage them. This article reviews the categories and specific types of risks identified, observations from Society of Actuaries research about the extent to which they are recognized and acted upon, and challenges that gaps in financial literacy create for managing them. Recommendations to improve financial literacy through employers and others providing benefit guidance are also discussed. The recommendations draw upon testimony presented to the Employee Retirement Income Security Act (ERISA) Advisory Council in 2007.
Today's financial realities underscore the importance of having a good handle on personal finances. Yet when a bit of planning can make a huge difference in bringing some sense of control over an otherwise seemingly out-of-control world, many people operate in reactive mode. In 2008, Tiffany and Company launched its “Take 5” campaign to proactively provide financial education, tools and resources to employees. As Tiffany's communication consultant, Buck Consultants assisted the company's human resources staff in creating and producing print pieces to support the campaign. This article provides background and practical steps to follow in planning and launching a relatively low-cost financial education campaign for employees.
The human resources world is buzzing about literacy— specifically, financial literacy and health literacy. Yet if employers truly want their employees to take action based on that literacy, then employers must add motivation and process simplification to their benefits equation. This article provides employers with things to keep in mind in order to deliver content that improves employees' benefits literacy, and makes taking desired actions both relevant and easy for employees.
The national evidence is clearer than ever in today's economic crisis that plan sponsors need to do a much better job to help us avert a national retirement catastrophe. If employers are serious about changing employee behavior for the better, then employer-sponsored financial education programs must have a measurable positive impact on employee behavior when it comes to the basics of personal financial planning. This article challenges employers to shift to a more proactive and even aggressive mode of employer-driven prevention and intervention. After discussing the guiding principles and critical components of this bold and controversial model, the author introduces its two most significant components: targeted individualized interventions and the positioning of employee financial behavior within employee performance reviews.
The authors establish an empirically based lifecycle model to gauge savings and replacement rates for maintaining a steady living standard over life. They consider a variety of scenarios and demonstrate that savings rates vary substantially with individuals' economic and demographic situations as well as retirement plan provisions. This result highlights that meaningful retirement planning must be specific to individuals or households and be based on a comprehensive knowledge of living means and needs.
Financial planners who understand the details concerning the qualified plan contribution and deduction limits will be better prepared to avoid pitfalls for their clients and to take advantage of tax-saving opportunities. The authors of this article demonstrate through defined contribution plan examples why planners need to go beyond the numbers of the salary deferral limit, catch-up contribution limit, annual additions limit and the 25% limit on deductible contributions that applies to defined contribution plans. They illustrate why financial planners need to be acquainted with several other rules that may have the impact of limiting contributions. These rules present many exceptions, traps and opportunities, especially when a client has two jobs at the same time or switches jobs during the year.
4th Quarter 2009
An electronic medical records (EMR) system is a key information technology that will help lead to management information systems that go a long way in attacking health care inflation. This article explains some of the ways EMR can be used to drive these efficiencies, especially given the recent shift in workforce demographics. These efficiencies include increasing prescription drug compliance, reducing gaps in care and providing safe redirection from the emergency room to other more appropriate care settings. The authors assert that even though the larger role of information technology is not so easily heard amid the ongoing private/public debate about U.S. health care reform, it nonetheless is essential to controlling health care costs.
A debate about target date funds has emerged in the industry. Should a target-date fund glidepath be constructed with the assumption that retirement is the end date (“to retirement”), or should a glidepath be designed to last effectively until the presumed end of a participant's life (“through retirement”)? The authors provide various investment simulations under two glidepaths to address the different impact on income replacement ratios of managing glidepaths “to retirement” versus “through retirement.” They find that one size does not fit all plans in target-date investing any more than it does in other types of investing, and that the vast differences in target-date fund glidepaths can be viewed as a virtue.
Global mobility risk, a huge component of the broader area of business risks triggered by globalization, is closely tied to the human resources (HR) function and one of the business environment's most underrated types of risk. As the world continues to become smaller, the potential impact of global mobility risk on an organization is likely to grow even larger. This article explores three major risks associated with an international assignment program: talent management, compliance and accidental expatriates. It then lays some groundwork for risk mitigation and demonstrates how investing time, effort and money in risk management now can forestall the potentially exorbitant future costs of inaction.
It's a whole new world for 403(b) plans. Many nonprofit retirement plan sponsors are scrambling to figure out how to make their 403(b) plans comply with new Internal Revenue Service regulations and guidance. This is a complex undertaking and represents sweeping changes for 403(b) plan sponsors. Compliance is made even more complicated by the fact that not all 403(b) plans are structured alike. Plan sponsors must take different actions depending on the structure of their plan. This article explains the new rules, helps plan sponsors sort through the various options specific to their respective types of plans and concludes with a short list of key action items to help plan sponsors navigate the new 403(b) frontier.
The human resource (HR) function within an organization can be the biggest and fastest growing cost the organization has to manage. Employer responses to HR costs during the recent economic downturn have varied, but many focus too quickly on changes that directly affect their employee populations. Instead, the focus should first be on transparent cost-saving opportunities— those that are nondisruptive to the employees' understanding of their program of benefits. Once transparent and minimally disruptive approaches are considered, employers may want to assess the competitive level of their benefit plans. This article gives examples of the type of savings these approaches can achieve, all without significant disruption to the employees' benefit design.
A total rewards strategy is a focused game plan that allocates resources and tailors activities to achieve a target performance level within a prescribed timetable. It must be unique to the organization that develops it and, when done effectively, will help drive sustainable, competitive advantage in the ever-tightening market for key talent by carefully considering the full list of potential sources of value to employees. This article resolves common areas of confusion over total rewards strategies and provides some potential value drivers for consideration. A total rewards strategy can drive differentiation from the competition and allow for cost-reduction steps that save needed dollars but do not have a commensurate negative impact on employee appreciation and engagement.