Defined benefit retirement plans are expensive to fund and maintain—but 401(k) plans expose employees to market risk and participants’ neglect.
So how can a responsible employer help employees find security during their retirement years?
The answer lies in the “defined benefit-ization” of 401(k) retirement plans, Scott Knapp, director of retirement investment strategy for CUNA Mutual Group, told 2014 CUNA CFO Council Conference attendees Tuesday.
This approach shifts risk away from employers and helps ensure a steady stream of retirement income for employees.
“Retirement security is contingent on the employer’s decision to offer a well-designed retirement plan and employees’ decision to participate, save enough, and invest appropriately,” Knapp said.
He suggested following seven best practices to achieve those goals:
1. Review plan design frequently. Plan design is one of the biggest contributors to success. “Make sure it stacks the deck in employees’ favor,” Knapp advised.
Ask these questions when reviewing your plan:
- Does it offer incentives to modify participants’ saving behavior?
- Are employee education plans working?
- Do employees understand the plan’s investments?
With self-directed plans, fewer investment choices often is better, according to Knapp. Also, make sure the plan offsets employees’ tendencies toward procrastination and apathy. “Everything in the world changes, but human behavior is very predictable.”
2. Use defaults such as automatic enrollment, automatic deferral increases, and a target income replacement ratio to ensure high participation.
“Don’t ask employees to opt-in to the plan,” Knapp said. “Require them to opt out of it.”
3. Offer personalized guidance—beyond financial education, which has had “mixed results at best," Knapp said.
“The optimal word is ‘personalized.’ Present information that addresses the needs of individual employees,” he continued. “Make it clear where employees stand regarding their retirement readiness.”
4. Annuitize. Assume that accumulated assets will be converted into an income stream at retirement, and make this a prominent piece of employee education. “Make annuitization the default option.”
5. Establish target date funds, which adjust investments automatically as participants approach retirement. This way, assets and liabilities stay in sync, Knapp said.
“Just like the credit union has a balance sheet, employees have balance sheets,” he said. “It’s an asset/liability management concept in a 401(k) setting.”
6. Measure results. Examine the participation rate, deferral rate, forecasted income replacement ratio, and optimal allocation of investments.
“Measure at both the plan and the participant levels,” Knapp said.
7. Keep a clean fiduciary house. Adopt proper governance processes for trustees and committees, and write an investment policy statement.
Document activities and decisions—and seek assistance when internal resources or expertise are insufficient. That’s a legal requirement, Knapp said.
“Take what you do as CFOs,” he advised, “in a 401(k) concept.”