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Defined Contribution

With baby boomers retiring, industry girds for change

Bonnie-Jeanne MacDonald with Ryerson University gives the opening keynote at DC East 2019.

P&I conference all about the shifting landscape in investing and regulation

Change is afoot. That's one of the themes that emerged at Pensions & Investments' East Coast Defined Contribution conference in Fort Lauderdale, Fla.

During the nearly two-day event, conversations swirled around topics ranging from demographic shifts that are changing the design of DC plans to the use of health savings accounts for retirement savings.

"We may be on the precipice of real change," Chris Daley, J.P. Morgan Asset Management (JPM)'s head of institutional defined contribution, said during a panel on asset retention in the decumulation phase.

Mr. Daley referred to the wave of baby boomers expected to draw down their retirement savings for the first time, an event that may shrink the size of many retirement plans and force plan sponsors to think about how to retain retiree assets.

Baby boomers are putting downward pressure on DC plans as "they withdraw more money from those plans than what is being contributed through payroll," Mr. Daley said as moderator of the panel.

Panelist Sherry Youngblood, retirement benefits program manager at DENSO International America Inc., described a shift in company thinking when it launched a lifetime income analysis tool to help retirees manage their 401(k) savings.

"We realized we needed to change our plan from a 'to retirement' to a 'through retirement' strategy," she said.

Keynote speaker Bonnie-Jean MacDonald, director of financial security research at the National Institute of Aging at Ryerson University, Toronto, also advocated for industry change as she disputed the conventional approach to determining retirement income adequacy.

"The 70% replacement rate isn't doing the job that it's supposed to do," Ms. MacDonald said. Instead, the industry should adopt the Living Standards Replacement Rate, which she and her fellow researchers developed. The LSRR takes a more holistic approach when determining how much someone will need to save for retirement, like their family situation, taxes and investment income, she said.

The LSRR evaluates how much money a retiree would need to maintain her living standards after retirement by comparing how much money she needs to support her personal consumption of goods and services, both before and after retirement.

Asset retention

The topic of asset retention came up repeatedly throughout the sessions.

Jim Courtney, director of communications and education at the Federal Retirement Thrift Investment Board, noted that the nation's largest defined contribution plan later this year will add new drawdown options beyond the current lump sum or IRA rollover. The Thrift Savings Plan will allow participants to stop, start or change whatever regularly scheduled drawdown payments they select and make ad hoc withdrawals on an as-needed basis. That additional flexibility, he said, should help encourage more participants to leave their money in the plan.

"We think it is in the best interest of most of our participants to stay with us through retirement," he said of the $570 billion plan.

The related topic of retirement income also was popular. Several speakers were skeptical that annuities are viable retirement income products for retirees given their complexity. "They're seen as expensive, opaque and people don't consider them fair," said Joseph Healy, senior vice president, account manager and DC specialist at Pacific Investment Management Co., New York.

Nick Nefouse, head of DC investment strategy and co-head of LifePath at BlackRock (BLK) Inc. (BLK), New York, echoed that view during the panel on asset retention, saying annuities were "illiquid and confusing."

Instead, Mr. Nefouse supported the idea of "auto retiring" people in the same way that 401(k) auto enrollment and auto escalation helped them "on the way up" in accumulating savings. "We need to auto retire them into a decumulation option," he said.

"DC plan participants have no idea what to do with their money," he added. "We give them a lump sum and say 'go on your way.'"

Conference panelists also that noted that few employers offered annuities inside of a plan and those that do fail to get much uptake. "I think a lot of our product development is going to be around developing income options inside a target-date fund series," said Carina Coleman, director of pension and trust investments at Sempra Energy, San Diego.

Other speakers said they have not given up on the products. "A lot of it depends on what happens in Washington with respect to retirement reform," said Kevin Hanney, senior director of pension investments at United Technologies Corp., Farmington, Conn.

Legislative update

In a keynote address, Michael Davis, head of defined contribution plan specialists at T. Rowe Price Group Inc., Washington, and former deputy assistant secretary of the Employee Benefit Security Administration at the Department of Labor, said there might be some movement on federal retirement legislation that has been pending since the last Congress. The Retirement Enhancement and Savings Act, which was reintroduced in the House in February, and the Retirement Security and Savings Act, which was introduced late last year and has yet to be reintroduced, both aim to expand retirement savings options and have garnered broad bipartisan support, he said.

In addition, Mr. Davis noted that House Ways and Means Committee Chairman Richard Neal, D-Mass., has made retirement reform a major focus. "Retirement is an area with bipartisan consensus," Mr. Davis said. "The hope is that that continues and they get something done."

Financial wellness

Employee financial wellness was also top of mind for plan sponsors, with many seeing it as way to boost both workplace productivity and employee retirement readiness.

Plan sponsors discussed incentives to engage employees in financial fitness programs. Best Buy Co. Inc. for example, recently partnered with a credit union to offer employees a high-yield "savings builder" account funded with the first $5. In addition to the $5, the company deposits $100 into the savings accounts of employees who complete at least six online financial education modules through the credit union. It also enters employees who are contributing to the savings account via direct deposit into a drawing to receive one of the four $250 deposits made to Best Buy employee savings accounts each month.

"We're hoping that the incentive is going to create behavior where people want to save and continue to save," said Debra Dennin, senior manager of retirement and wealth benefits at Best Buy, based in Richfield, Minn.

Not all sponsors, however, used incentives to encourage participation in financial wellness programs. Nestle USA Inc., for example, developed several offerings that are free of monetary awards, including the Smart Saving Academy, an educational program featuring webinars and webcasts that are "all geared toward retirement," said Annie Diaz, savings plan administrator for Nestle USA, Solon, Ohio. Once plan participants complete the webinars, they have the "opportunity to sit down with a certified financial planner for 45 minutes to talk about their retirement," she said.

Conference panelists also noted the growing popularity of health savings accounts as employers seek to curb health-care costs and help employees prepare for retirement. Hitachi Vantara, Santa Clara, Calif., for example, became a sole "HSA shop" in 2016, offering employees a high-deductible health plan as its only health-care option, said Susan Ramirez, the company's senior director of total rewards. The company annually contributes half of the deductible amount — or $1,250 for employees with single coverage and $2,500 for employees with family coverage — into employee HSA accounts. As a result, 96% of employees are now enrolled in the accounts with $12.5 million held. Of the $12.5 million, $2.6 million is invested, Ms. Ramirez said.

Hitachi and other employers are encouraging employees to use the HSAs as long-term savings accounts for use in retirement. Reuben Escobedo, manager of financial benefits at Valero Energy Corp., San Antonio, noted that the company is urging employees to use 401(k) accounts "in tandem" with their HSAs so they don't need to dip into their retirement accounts to pay for their medical expenses in retirement.

Cybersecurity and missing participants

Avoiding fiduciary liability was another broad topic that came up at the conference. Of growing concern for plan sponsors is cybersecurity, an area that can result in significant losses if breaches occur, said Mark Bokert, partner of benefits and compensation at Davis & Gilbert LLP, New York, during a panel discussion on the topic.

Sponsors want to make sure their plan is safe from both a practical and legal perspective, Mr. Bokert warned plan sponsors. "Plan fiduciaries owe a duty of loyalty to plan participants and must act with expert prudence," he said.

Don Buben, director of executive compensation, equity programs and FutureBuilder 401(k) at Home Depot Inc., Atlanta, discussed email credential breaches in 2017 that created threats to authentication and access to the company's 401(k) plan. With about 3.6 million online views of the plan's home page, "there's a lot of opportunities for failure and for bad guys to get in," he said.

A separate panel delved into issues when participants go missing, a potential fiduciary breach that can trigger substantial penalties to plan sponsors. Speakers shared non-traditional ways to keep track of DC plan participants. Rebecca Ward, retirement services manager, DC and DB plan administrator at Savannah River Nuclear Solutions LLC, Augusta, Ga., noted, for example, that her company hosts a 25-year retirement dinner and often gets info about location changes there. Companies that make acquisitions should be especially careful when managing the DC assets of the acquired companies.

"The more you can do to find them when you have the original plan … the more likely you are to find those people," said Jodi Epstein, partner at law firm Ivins, Phillips & Barker, Washington.