To mark National 401(k) Day on September 8, 2017, Betterment for Business hosted and moderated a panel discussion featuring members of its Board of Advisors and the press to discuss the current state of American retirement savings.
National 401(k) Day is an annual celebration sponsored by the Profit Sharing/401k Council of America that spotlights the importance of employer-sponsored retirement plans and draws awareness to the increasing need for American workers to save for retirement.
The panel discussion, moderated by Betterment CEO Jon Stein, highlighted the importance of closing the retirement savings gap, and the panelists explored ways to improve savings behavior and ensure that financial advice is unconflicted.
The group also discussed insights from the new Betterment for Business consumer retirement survey, the State of Consumer Retirement Advice.
Addressing the Retirement Savings Gap
401(k) plans were created almost 40 years ago as a tool to help people save for retirement, yet systematic coverage issues still plague many Americans. In fact, according to a study by The Pew Charitable Trusts, more than 30 million full-time, full-year private-sector workers ages 18 to 64 are not covered by a retirement plan.
“If you’re covered by a plan, you save more,” explained advisory board member Judy Mares, a former Fortune 500 Chief Investment Officer and policy expert. Mares also noted that 93 percent of self-employed workers are not covered by a retirement savings plan. “We’ve got a system that’s centered around employers.”
Laraine McKinnon, the founder of strategic consulting firm LMC17, noted that technology can play an integral role in improving the level of coverage and bolstering plan sponsors’ satisfaction and employees’ engagement with their 401(k) plan.
“Technology can tell the plan sponsor if the participant is on track,” McKinnon said, mentioning the role that timely notifications can play in plan administration. “It can give the plan sponsor the oversight they need, and the guardrails.”
401(k) providers that leverage technology can ease the administrative burden on plan sponsors in key areas like investment diversification and regulatory reporting. “We’re starting to see a trend of outsourcing retirement planning and investing responsibilities to professionals rather than handling it all in-house,” said Tom Clark, a partner at The Wagner Law Group, a law firm specializing in ERISA & Employee Benefits.
Smarter technology can empower human resources and financial executives to run a top quality 401(k) plan, even if time and resources are limited.
Encouraging Better Savings Behavior
The panelists discussed strategies for improving a plan’s accumulation of retirement savings, and highlighted some actions plan sponsors and employees can take to drive better retirement outcomes.
John Casey, Director of Global Benefits at Google, Inc. highlighted the role that “personalized nudging” can play in helping people save more. He suggested that cues for adjusting allocation or deferral elections can be integrated into a technology platform, and can also be facilitated by plan sponsors to help set employees up for success.
“We need to bring the 401(k) above the siloed approach of several different benefits,” Casey said, noting that when employers take a more holistic approach to employee benefits, employees gain a clearer picture of their overall wealth and retirement readiness.
Additionally, 401(k) plan participants that are married can strengthen their retirement outcomes by having conversations about retirement planning with their spouse.
“401(k) plans are developed for the individual, but married people have two accounts,” said Clark. “Being able to bring in all accounts gives a more global picture,” Clark noted, and 401(k) providers should consider tools like aggregation for participants to facilitate conversations with their spouse.
The panelists emphasized the integral role that automatic enrollment can play in increasing plan participation and driving better retirement outcomes.
McKinnon spoke about the extensive behavioral science research that shows there are benefits of auto-enrollment, but she pointed out that a rate of 3 percent is no longer enough to prepare people for retirement. She noted that many large employers across the country are moving to a 6 percent default auto-enroll rate and are including an automatic escalation up to 12 to 15 percent.
Automatically enrolling employees at a rate that’s proven to prepare them for retirement is an important step to help close the retirement gap, too. “The concept of a 401(k) works in the first place because money is being diverted,” McKinnon said. “There’s never that feeling of loss.”
Research also supports the value of automatic enrollment. 94% of the State of Consumer Retirement Advice survey respondents that are in a 401(k) plan with auto-enrollment currently make contributions to their plan. For those who remained enrolled, 49% of respondents increased their contribution rate.
Advocacy and Transparency: Consumer Interests Come First
In an effort to help accelerate a shift toward unambiguous public good, Betterment for Business has engaged in discussions around the fiduciary rule and provided input directly to the Department of Labor that helped shape core components of the revised rule.
Judy Mares is a member of the Department of Labor leadership team that developed the Fiduciary Rule, and shared her insight on the importance of unconflicted advice.
“Participants assume that everyone that touches them is acting in their best interest, but that’s not always true,” Mares said. “It’s not the rules of the game.” She noted that the new rule is so crucial because it will expand people’s access to non-conflicted advice and improve transparency in the industry. “What company wants to stand up and say that they don’t want to act in customers’ best interest?”
“The intended consequence of the rule was to expand the definition of fiduciary, and this has caused the industry to change behavior,” said Clark. “Part of the genius of the rule is having the industry police itself.”
The State of Consumer Retirement Advice survey revealed that there is still room for improvement related to consumer fiduciary awareness. Less than half—42%—of respondents correctly identified the definition of a fiduciary, and 27% did not know what a fiduciary was at all.
Of the respondents that are aware of the Department of Labor’s Fiduciary Rule, 84% have taken no action (such as asking their advisor if they are a fiduciary) based on their understanding of the ruling. However, of those who have taken action, 48% found a new financial advisor.
The survey results also underscored the desire for on-demand advice, specifically through digital channels. 53% of respondents reported that they receive no advice on their retirement investments. Respondents expressed a preference for receiving advice as often as they have questions, rather than through employer-sponsored information sessions that often occur once a year.
The panelists’ expert insights, coupled with the State of Consumer Retirement Advice survey results, points to a clear need for increasing awareness related to key challenges and opportunities in the retirement planning space. With the help of technology and transparent, unconflicted advice, the industry can continue to evolve and work toward closing the retirement savings gap.
As commissioned by Betterment for Business, the State of Consumer Retirement Advice was an online survey conducted by Market Cube in July and August 2017. Respondents included 1,051 consumers who work at small and medium-sized businesses with less than 1,000 employees, have a work email address and currently contribute to their employer-sponsored 401(k) plan.