U.K. DC plans move to address financial wellness for participants

Plan executives, their consultants and money managers in the nascent defined contribution market in the U.K. are embracing the fact that one size does not necessarily fit all: Participants need different investment strategies, information and guidance in different phases of life and retirement.

Age already is a key factor in determining asset allocations for different phases of participants' lives. However, DC plan executives in the U.K. as well as their investment managers and consultants are now exploring other ways to create cohorts of investors, including their investment preferences — such as responsible investment and risk appetite.

As such, financial wellness — used in the U.K. to mean achieving better retirement outcomes — is moving up the agenda of plan sponsors. Financial wellness efforts in the U.S., by comparison, have tended to focus on non-retirement assistance in areas such as debt management, student loans or household budgeting. In the U.K., firms are only ​ beginning to build tools to assist participants with financial planning, as a way to help them increase contributions, sources said.

"As we start to get better data, we are on the cusp of investment solutions being more tailored to the needs of the workforce" becoming the norm, said Jonathan Parker, director, DC and financial well-being consulting at Redington Ltd. in London.

Sources said the starting point is to profile participants: managers harvest data on financial circumstances and expectations by surveying employees, with a view to boosting retirement outcomes. That might be by encouraging participants to increase voluntary contributions, refocusing DC default strategies, creating better options outside the default fund, or a combination of these elements.

As plan executives wake up to the need to be smarter with their workforce profiles and default funds, they are increasingly seeking consultants or managers that can conduct workforce studies.

Redington, for example, is designing a new default investment option for an employer in the financial technology arena. Mr. Parker declined to name the company or describe the plan.

"Having first studied the workforce together with this employer, we are now designing a default, which would incorporate more diversification and enable participants access to more active strategies," he said.

One finding in its work was that some participants were willing to pay up to 40% more in fees in order to get better returns, he noted.

However, plan practice in obtaining an accurate and representative dataset still needs to improve before incorporating this information into DC defaults and design can become widespread. DC in Europe is still a young market — the U.K.'s automatic-enrollment rules only became effective in October 2012.

Managers that are actively expanding their DC offerings in the U.K. acknowledged these challenges. Madeline Forrester, managing director-U.K. institutional business at MFS International U.K. Ltd., said one difficulty in acquiring representative information on DC behaviors comes from the fact that some participants might still be counting on a defined benefit fund.

Managers simply do not know enough about DC participants.

"We don't know whether participants in these age groups will keep their DC pots invested or if these participants are planning to support their millennial children, or if they are planning to be supported by them," she said.

But with the U.K.'s mandatory participant contributions increasing in April to 3% from 1% of salary, managers have intensified efforts to get the work done as plan sponsor clients fear some participants might start opting out from the system.

"People overestimate the power of returns and underestimate the power of compounding," said Ms. Forrester, so participants must be encouraged to continue contributing.

Focusing on investment preferences and convictions, rather than age, when plans are designed also is one way to improve participants' financial knowledge and engagement, sources said.

Emma Douglas, Legal & General Investment Management's London-based head of defined contribution, said the firm plans to increase its focus on profiling efforts this year. One option is to open up its ESG fund, which was originally designed with millennials in mind, to other generations. Ms. Douglas said LGIM this year will be launching another fund in its Future World series targeted toward other generations.

Some sources added that profiling might also help plan executives to eliminate excess investment options and help them design better quality investment lineups for plan participants.

"People (tend to) think they are better than the market and they put pressure on human resources to offer more and more options in company plans," said Fernand Grumls, director at actuarial and risk management consultancy firm PECOMA International S.A. in Luxembourg. However, "having more than four to five options makes no sense."

Some participants might also benefit from help in dealing with other financial burdens through debt management solutions — presenting another way for providers to grow their DC business.

For some plans, providing participants with debt management tools might be more useful than a more aggressive investment options, to help give them a better shot at achieving higher voluntary contributions they need for an adequate retirement income.

For this purpose, the National Employment Savings Trust, London, partnered with Vanguard Group Inc. last July to analyze data from NEST participants.

NEST was designed to bring millions of the U.K.'s low- and middle-income workers — who otherwise might not have had access to a workplace plan — into the retirement market, some for the first time. The £2 billion ($2.7 billion) national defined contribution plan set up its NEST Insight unit to understand and help solve the financial burdens faced by its participants. The unit intends to share insights and data with the global academic, financial services and public policy communities.

Gavin Lewis, head of U.K. institutional at Vanguard in London, said: "Financial wellness has not (yet) been explored enough in the U.K. It is not only about investment outcomes for retirement but about achieving life goals for plan participants."

The importance of thinking smartly about participants and their needs, through profiling and the harvesting of data, could in time become part of the fiduciary duty of plan sponsors. "Although not formalized, it is plausible," added William Allport, senior strategist at Vanguard.