Even the best of retirement plans can be improved with just four key strategies, and all of them work best when retirees work with an advisor, according to a new white paper published by Charles Schwab.
For the new report, entitled “Four Strategies to Enhance Plan Participant Outcomes,” two Schwab authors sampled nearly one million participant accounts. They found that employees who make their own investment decisions often over- or under-allocate to equities. That supports the retirement industry consensus that participants are generally better off in professionally managed strategies, where responsible fiduciaries can help participants achieve better outcomes.
The paper was co-written by Nathan Voris, a senior managing director of business strategy at Schwab Retirement Plan Services, and Jake Gilliam, head of multi-asset solutions at Charles Schwab Investment Management Inc.
The first strategy they laid out is for plan sponsors to work with a retirement plan advisor or consultant to pick the right default investment alternatives to suit employee demographics. By picking the proper qualified default investment alternatives, plan sponsors can compensate for investor emotions and behavioral biases, leading to higher plan participation, particularly among older employees closer to retirement, the authors said.
The paper also said that employees’ asset allocations are likely to shift over time, particularly during the critical years leading up to retirement and then afterward. For that reason, in the second strategy, the authors recommend adding auto-enrollment, re-enrollment, and sweep policies that can support better long-term outcomes for plan participants.
“Employees instinctively realize that they need to save for retirement, and removing as many barriers as possible to allow inertia to overcome procrastination can help them take the critical first step,” the paper said. “Raising the default contribution rate—for example, from 3% to 6%; increasing the frequency of automatic enrollment and re-enrollment for all employees; and adding an automatic escalation feature that increases a participant’s contribution by a fixed amount each year are related strategies that may further enhance both participant outcomes and participation rates.”
Voris and Gilliam advise re-evaluating auto-enrollment and sweep policies on a systematic, recurring basis with the plan provider to help keep employees on track for successful retirement outcomes.
The third strategy, said the authors, is to re-evaluate the approach to participant education. Plan sponsors and consultants can engage participants and improve outcomes with e-mail campaigns, audio presentations, newsletters, webinars, workbooks, workshops, and in-person discussions and presentations—but not necessarily in all cases.
“Even when an ideally designed and delivered educational strategy has been activated, some participants may still fail to engage in plan-related education,” the paper said. “For employees falling into this category, an employer might be well served by automatically enrolling and re-enrolling these workers into a QDIA.”
As a fourth and final strategy, the Schwab authors urged plan sponsors to explore the benefits of adding a self-directed brokerage account as an option to open up access to a network of mutual funds that enhance the appeal of a company’s DC plan.
“Offering an investment option that can be personalized might be ideal for employees who are knowledgeable, experienced investors comfortable making their own asset-allocation decisions or who choose to delegate management of their account to their personal financial advisor,” the paper said. “Within this group of retirement savers are likely to be participants seeking to broaden or deepen the diversification of their fixed-income allocation or to express ESG priorities.”
A self-directed brokerage account can also serve as a competitive differentiating benefit, providing subscribed employees with the opportunity to enjoy increased investment choices, premium research and tools, and the flexibility to invest their own way.
The authors cautioned against a one-size-fits-all approach to DC retirement planning.
“We suggest a thoughtful approach to all aspects of your DC plan to ensure its best-practice suitability for your employees, especially as your company grows and shifts over time,” the paper said. “Fees are an important consideration in the process of selecting the right investment vehicles for your DC plan, but not the only one, so do your due diligence.”
Founded in 1971, the Charles Schwab Corporation is a multinational financial services company. It recently moved its headquarters from San Francisco to Westlake, Texas.