Financial wellness to play larger role in defined contribution

Defined contribution experts are expecting a stronger effort in 2016 by plan executives to incorporate broad financial and health matters into programs to help participants better prepare for retirement.

“People don't make decisions in a vacuum,” said Betsy Dill, the Los Angeles-based financial wellness advisory leader for Mercer LLC. “People are more concerned about monthly budgeting rather than planning for retirement.”

As a result, more defined contribution plan executives are offering more forms of financial education such as debt management or college-loan strategies through web-based products as well as group meetings and one-on-one counseling.

Employers recognize that retirement planning “is more complicated than retirement savings,” said Winfield Evens, a partner at Aon Hewitt, Lincolnshire, Ill. “For the employees living paycheck to paycheck or who perceive they are living paycheck to paycheck, how can they save for something that is 20 to 30 years down the road?”

In a survey to be published in early January, Aon Hewitt found that more than half of employers offered at least one type of financial wellness education program and more than one-third offered at least three in 2015, Mr. Evens said.

And by the end of next year, the survey found, more than three-fourths of the respondents said they will offer at least one financial wellness program and more than half will offer at least three, Mr. Evens said. The survey covered more than 250 plans - a mixture of clients and non-clients — with nearly 7 million participants.

“The employer is a trusted source of information, so there is a positive and strong affiliation” between the participant and the employer offering financial wellness solutions, Mr. Evens said. “More sponsors are becoming involved. When I have attended industry events, financial wellness is the topic all the time.”

Consultant Robyn Credico said employers are seeking ways to alleviate participants' concerns about financial wellness so they can improve their DC plan participation rates and savings rates. “If people are stressed about their finances, they don't save more,” said Ms. Credico, the Arlington, Va.-based defined contribution practice leader for Towers Watson & Co.

In addition to providing financial planning tools, DC plan executives are addressing participant overuse of loans from 401(k) accounts, said Ms. Credico, adding some of her clients have 25% to 30% of participants taking loans. “They are concerned about people who use the retirement savings plan as a checking account,” she said. Strategies to combat leakage include reducing the number of loans participants can take, asking record keepers to provide more education on loans and extending the waiting period between paying off one loan and taking out another.

Martha Tejera has noticed a greater interest among her clients in educating participants about budgeting, debt management and other financial matters. Record keepers are providing websites that help participants measure multiple financial and health-care factors to help participants plan accordingly, she said.

“There are only so many dollars,” said Ms. Tejera, president of Seattle-based Tejera & Associates, a DC investment and plan-design consulting firm. “As we look at employees to manage more of their health-care costs, they have to decide how much to put into their 401(k) or HSA.”

DC consultants and researchers said other strategies that will grow next year are the tailoring of financial communication and target-date funds to specific needs and demographics of participants.

Record keepers have begun to pay greater attention to “generational and behavior differences, and will then target communications,” said Ms. Dill of Mercer. “Sponsors offer more broad-based communications. Next year, we'll see more organizations thoughtfully engaging different segments of their populations.”

For target-date funds, DC industry researchers and members predict more plans will offer these options with glidepaths built to reflect more than a participant's age. The glidepaths also can incorporate salary, gender, account balance and contribution rate — and they can be off-the-shelf products rather than custom target-date funds, said Jessica Sclafani, associate director of Cerulli Associates, Boston.

“All of the data can be pulled from record keepers, so they don't have to send participants questionnaires,” she said. Although these target-date funds can still be offered in five-year increments within a plan, “the glidepaths would look different for each person.”

Target-date funds “will continue to evolve,” added Sabrina Bailey, global head of defined contribution at Northern Trust Asset Management, Chicago, who predicts custom target-date funds will grow and incorporate multiple factors into their glidepaths, too.

“The unique characteristics” of a plan's demographics will play an increasing role in the development of target-date fund glidepaths, said Ms. Bailey, adding that factors could include tenure rates as well as salary, contribution rates and other benefits.

One topic that may continue having more talk than action is retirement income options — such as annuities — embedded in DC plans.

“I expect to see continued discussion around retirement income solutions and a shift from annuity-based products,” Ms. Bailey said. “I don't see a lot of annuity adoption.”

She said sponsors will look at how target-date funds could be constructed without an embedded annuity product, such as funds that contain more dividend-yielding equities or a mixture of passive and active equities.

Progress on DC plans' adoption of in-plan retirement income solutions is “stuck,” said Lew Minsky, the Jupiter, Fla.-based executive director of the Defined Contribution Institutional Investment Association. “I hope we can get past the thinking of a silver-bullet type of solution. There will not be one solution. There will be a menu of solutions.”

For next year's DC plan investment menus, a recent Cerulli Associates survey of 402 DC plan executives showed the biggest expected change will be the adding of passive investments, at least among plans with $100 million or more in assets.

“Demand for passive strategies is being driven by the mistaken belief by fiduciaries that they can offload or mitigate fiduciary liability,” said Ms. Sclafani, referring to the 38.2% of plan executives who cited adding passive equity and fixed-income investments.