As the burden shifts to employees, outsourcing providers can help.
By Jeff Miller
The turbulent economy of recent years and the ongoing uncertainty of global markets have led us to focus with increasing concern on the current and future states of pension plans. For plan sponsors, the financial burden and liability of offering these programs combine with the complex challenge of managing and administering them is a clarion call for benefits outsourcers to step up with truly end-to-end, seamless solutions.
For employees, pensions have always been a highly valued component of the benefits package. But as more and more defined benefit (DB) plans are being frozen, there’s increased pressure on employees to ensure an adequate retirement through defined contribution (DC) plans and other forms of employee-directed savings and investments.
In other words, both employers and their workforces have heard the pension wake-up call, and all of us are looking for guidance. Fortunately, there is some. Several pieces of recent Mercer research indicate a growing acknowledgement on the part of employees that they need to be more engaged and more accountable for their retirement benefits than ever before. And as employers and service providers, we need to continue to promote that accountability in every way.
For example, Mercer’s latest What’s Working survey—conducted from Q4 2010 to Q2 2011, and extending to nearly 30,000 workers in 17 markets worldwide with more than 100 survey questions covering pay, benefits, and careers—reveals that retirement benefits matter more to U.S. employees than they have in years. In fact, they are now the second-most important element of the employee value proposition, behind base pay. However, employees are still expressing concern about being ready for retirement financially; only 4 in 10 employees feel they or their employers are doing enough to help them prepare for retirement.
It’s clear enough that several factors are fueling these concerns. For one thing, there’s the widening pattern of DB plan freezes, terminations and corporate cutbacks, which are exacerbated by the fact that the past decade has been among the worst for equities market performance. At the same time, the vast generation of baby boomers has become increasingly focused on pending retirement—or, in many cases, the inability to retire as a result of the financial setbacks of the recession. Combine all that with the heightened media attention to retirement issues and the possibility of changes to social security benefits, and it’s obvious that retirement adequacy is very much on the minds of employees.
This sentiment is strongly underscored by the 2011 Mercer Workplace Survey, a nationally representative sample of 1,507 active 401(k) participants who are also enrolled in their employers’ health plans. With data trending from 2003, the survey has consistently shown that tough financial times typically result in poor retirement and health-benefit planning behaviors.
But that’s changing dramatically: The 2011 survey shows that on both the retirement and healthcare fronts, employees are taking on more personal responsibility and accountability for managing their health and retirement readiness. How? By increasing contributions to company-sponsored retirement plans, participating in employer-sponsored wellness programs, and even showing markedly greater appreciation for their company-sponsored benefits. Positive 401(k) account management behaviors have increased sharply year over year, with contribution increases and reallocation of both existing portfolios and new contributions. In fact, the percentage of employees under age 50 expecting to max out their contributions in the year ahead is up six points from 2010 (to 13 percent).
This heightened level of engagement offers an unprecedented opportunity for employers to provide solutions and resources that help employees make informed decisions and take charge of their retirement and healthcare planning. The survey findings also underscore a specific and timely need for communication and education around the impact of healthcare reform and how 401(k) plan fees work, especially since the U.S. Labor Department has issued its final rules requiring disclosure of 401(k) retirement plan fees. They require companies that administer 401(k) and other DC plans to disclose administrative and investment costs to employers who sponsor the plans. Already, plan sponsors and employers have responded with lower-fee options.
Obviously, that’s an opportunity for those in the outsourcing community to enable employers—and empower employees—by providing the most comprehensive technology and competitive service models. Those would include integrated communication solutions and decision support tools that make retirement planning easier.
But with so much emphasis on the DC side of the retirement equation, it’s important to keep in mind that outsourcing providers can play a large role in helping employers focus on the DB side as well. Beginning in 2012, more favorable regulations for determining interest rates for lump sum payments of pension benefits go into effect in the United States.
Thus, plan sponsors may seek to offer voluntary lump-sum payment options to terminated vested participants, which is generally less expensive than buying annuities. This also reduces the ongoing cost and mitigates the administrative burden of maintaining the plan. However, it is important to keep in mind that there are some plans for which lump sums will not get cheaper in 2012—i.e., plans that have chosen to grandfather in a more generous lump-sum provision that was in place prior to the regulatory changes taking effect. As for employees, the lump-sum solution allows them to gain access to and exert greater control over their retirement income, but it’s important that they be as well educated as possible about their choices and the risks involved.
In order for this to be a true win-win for employers and employees, plan sponsors should be able to count on their outsourcing providers to make it all work—by providing expert, up-to-the-minute guidance on regulations, options, as well as educational components and the seamless technological infrastructure required for such high-stakes decision making.
Indeed, in this era of economic challenge and heightened awareness—when employees are finally embracing greater accountability for their retirement—employers and their benefits outsourcing providers must hold up their end of the value proposition. It’s time for us to focus on the future with the utmost capability and commitment.
Jeff Miller is president and group executive, outsourcing at Mercer, based in Norwood, Mass. He may be reached at firstname.lastname@example.org