By offering defined contribution
(DC) plans with features such as auto-enrollment and auto-escalation, plan
sponsors are giving employees a fighting chance to improve the quality of life
they’ll have in retirement. But why stop at a fighting chance when there’s an
opportunity to make a life-changing difference?
For plan sponsors willing to
revisit and reimagine their approach to the core components of DC plan design –
accumulation, decumulation, and purpose—the impact on their employees’
retirement can be profound.
Accumulation: Build the
confidence to stay the course
The primary objective during the
accumulation phase is clear: grow assets. To achieve this goal, plan
participants must understand the long-term growth potential of investing in
equities, and the power of staying invested. Too often, market volatility
shakes confidence and drives participants to sell at the wrong time or stay on
the sidelines for too long. Some may even contribute less to their 401k plan
out of fear of a downturn.
In 2021, the Schroders US
Retirement Survey found that plan participants had approximately 20% of their
assets in cash on average. That’s a significant sum that’s not contributing to
growth, as keeping one-fifth of retirement assets out of the market for any
period of time can have a meaningful impact.
To help participants remain
invested during periods of volatility and uncertainty, plan sponsors should
consider offering growth strategies that provide meaningful diversification
from core holdings such as US large-cap stocks.
Actively managed international
stock portfolios could be one option. Since 2011, an average of 78% of the
highest performing stocks worldwide have been based outside the US.
Due diligence can help identify
active international funds that provide consistent, top-quartile returns, high
active share, and a clear, disciplined approach to finding superior companies.
International funds should also have non-correlating characteristics relative
to US growth stocks to help lessen the blow a correction might have on investor
confidence.
Decumulation: Close the gap
Plan sponsors—along with the rest
of the industry—have made accumulation the highest priority, and with good
reason: turning retirement savings into adequate income requires sufficient
assets.
“Clearly, helping participants
invest their retirement savings with purpose can have a ripple effect …”
But it’s time that the DC
marketplace place decumulation on equal footing with accumulation.
According to the aforementioned
survey, 82% of 401k plan participants are concerned that they don’t know how to
generate retirement income or draw down their assets in retirement. That’s a
significant number of people in or heading toward retirement with no idea of
what to do.
By offering more education on
decumulation strategies, access to advice on drawing down assets, and strong
in-plan retirement income solutions, employers can deliver much-needed help
that can make a difference in participants’ lives.
Purpose: A catalyst for higher
savings
Last October, the US Department of
Labor (DOL) released proposed rules indicating, “climate change and other ESG
factors are often material and that in many instances fiduciaries should…
consider [such] factors in the assessment of investment risks and returns.”
While the DOL is currently
reviewing the feedback they have received on this proposed rule, the cloud of
uncertainty appears to be lifting with regard to ESG funds in DC plans. And
that’s good news for a lot of plan participants.
According to our research, nine
out of 10 plan participants who are aware of the ESG options in their plan said
they invest in them. Even more compelling, nearly 70% of plan participants said
they would consider increasing their 401k contribution rate if they had ESG options.
Clearly, helping participants
invest their retirement savings with purpose can have a ripple effect that
positively impacts society and 401k balances.
Plan sponsors can make all the
difference
Without question, the retirement
readiness of American workers needs to improve. The Schroders US Retirement
survey found that just 26% of workers nearing retirement felt they had saved
enough.
Plan sponsors are in a unique
position to help solve this challenge and improve participants’ quality of life
in retirement by reevaluating their plan’s approach to accumulation,
decumulation, and purpose to ensure their participants have the knowledge,
solutions, and support to meet their goals at and through their retirement.
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