The Corporate Retirement Plan
Key strategies you need to implement now for a diverse employee population

The days of early retirement seem to be more of a fleeting reality these days. Due to increased longevity and double-digit healthcare cost increases, retirement dollars need to stretch further and longer. Likewise, uncertainty is growing about the ability of Social Security and the Pension Benefit Guaranty Corporation to meet the needs of future generations of employees. To bolster their chances for a secure retirement, Baby Boomers are considering a period of part time work or a second career as an alternative to full retirement. 

In this environment, the company retirement plan is taking its place as a significant component of retirement savings. According to a 2007 Employee Benefit Research Institute study, 28 percent of employees expect that their 401(k) will be the largest source of income in retirement, compared to six percent of current retirees.1 Another 11 percent of employees expect that employment will be their largest source of income in retirement; according to the Department of Labor, as many as two-thirds of retirees in their 50’s work in “bridge jobs.” This delay of an individual’s ultimate retirement poses the following challenges to retirement plan sponsors:

• targeting retirement education to multiple generations of employees,
• meeting the investment needs of a diverse employee population, and
• Managing plan design and costs.

Targeting education to multiple generations
As the age range of plan participants expands, plan sponsors face the difficult task of ensuring that every employee receives retirement education targeted to their life stage. Educational materials too often attempt to meet the needs of a broad audience. To be effective, they should address the participant’s life stage so the employee can identify competing demands for their dollar and understand the ramifications of financial decisions. 

Advocate for your participants by asking your strategic partners, advisors and investment companies, for tools that participants can use to determine how much they need to save. Customizable gap analysis tools are becoming more widely available and at a lower cost. Such tools can help young participants realize the benefit of saving early in their careers, while also helping older participants improve their chances for a successful retirement.              

Meeting the investment needs of a diverse employee population
Plan sponsors need to ensure that there are appropriate investment choices available to meet the needs of a diverse employee population. Target date funds can ensure that employees have access to an investment solution that meets their changing risk and return requirements over time. These funds take some of the management burden off of the employee, as the fund invests in multiple asset classes and will gradually reduce its equity exposure as the employee approaches retirement.    
While target date funds seem to provide a simple investment strategy for a variety of employees, employers still need to do their homework. Across fund providers, there can be significant differences in asset class representation in funds geared toward the same employee audience. In a recent sampling of American Century, Fidelity, T. Rowe Price, and Vanguard target date funds, there was a 14 to 19 percent variation in the amount of equities in funds with the same target date (see chart below). As a result, there would likely be significantly different risk and return results for participants depending on which target date fund family was selected.

Source: Morningstar.com data as of June 30, 2007

However, target date funds are well-suited for automatic enrollment plans that designate qualified default investment alternatives (QDIAs) for employees. According a 2006 Hewitt Associates study, 42 percent of companies that automatically enrolled employees into a 401(k) plan used a stable value or money market fund as the default investment.2 Employees who were automatically enrolled into a stable value fund allocated only 31 percent of their assets to equities, while those defaulted into a target or balanced fund invested 67 percent of their assets in equities. This study illustrates that target date funds can mitigate inflation risk for participants who would otherwise take perhaps a too conservative investment approach.

Managing plan design and costs
Finally, plan sponsors need to consider the impact of a diverse employee age group as it relates to qualified plan design and cost. As the number of older participants in plans increases, employers could see significant increases in the cost of defined benefit and age-weighted defined contribution plans, in which employer contributions are age-related. Employers with standard defined contribution plans also need to keep an eye on costs, in the form of their matching strategy. Since older participants tend to contribute more than younger employees, an employer’s matching commitment could grow substantially with the aging of the workforce. It will be up to plan sponsors, with the help of advisors and TPAs, to regularly review the advantages of Safe Harbor provisions and other plan design features relative to their costs.

In the regulatory environment following PPA, plan sponsors face the task of meeting their fiduciary responsibilities for the company retirement plan while addressing the challenges of a new retirement model. Plan sponsors can improve the success of their 401(k) plan, and of their employees, by advocating for customized education tools, implementing target date funds, and monitoring plan design closely.

1 Employee Benefit Research Institute and Matthew Greenwald & Associates, April 2007, EBRI Issue Brief, “2007 Retirement Confidence Survey,” http://www.ebri.org/surveys/rcs/
2 Hewitt Associates, October 25, 2006, “Hewitt Study Reveals Impact of Automatic Enrollment on U.S. Employees' Retirement Savings Habits,” http://www.hewittassociates.com/Intl/NA/en-US/AboutHewitt/Newsroom/ PressReleaseDetail.aspx?cid=3154