Cost benefit

Milliman’s Janet Rubenstein, BlackRock’s Barbara Novick, Cynthia Hayes of Merrill Lynch and Ameriprise's Rusty Fields on the holy grail of financial plans: can they be attractive to employees and sustainable?

In a shifting benefits landscape, companies are faced with growing pressure to deliver financial plans that are both attractive to their employees and sustainable amid growing concern over costs. HRM gathered together three experts in the field to discuss how employers can tackle this complex issue head on and deliver the best possible program.

HRM. Just how important have retirement plans and other financial benefits become in attracting and maintaining high caliber employees?
CH. Many studies have proven that a competitive compensation and benefits program, including retirement plans, are key to attracting and retaining employees – in particular highly skilled and management talent, but also rank and file.

With the benefit programs dramatically shifting from employer-funded solutions to shared or completely employee-funded offerings, achieving the right mix for the specific needs of your employees and cost structures has become more complex.

Balancing healthcare, retirement and equity compensation programs – as well as aligning programs to the changing needs and interests of employee populations – will become increasingly important. We can expect workforce changes as the ‘baby boomer’ generation approaches retirement age and there are fewer Americans in the next age group to fill their shoes. Proactive employers will evaluate the structures of these programs to ensure they can not only attract and retain younger workers, but also potentially provide incentives for ‘boomers’ to remain in the workforce longer.

JR. Provision of retirement benefits is critical because of the current environment, which requires many employees to be more responsible for the accumulation of their retirement savings. People are living longer and may spend almost as much time in retirement as they do in work; most employees can expect to live 20 years after they retire and will require sufficient savings to maintain their standard of living in retirement.

Employees also face various financial challenges, such as the replacement by many companies of ‘guaranteed’ pension plans, providing a monthly income, with employee-directed savings plans that have no guaranteed monthly income and generally require the employees to be more actively involved in their own retirement planning (or face the prospect of outliving their retirement savings). Many baby boomers face the challenge of financing their children’s education while caring for aging parents. Many may delay or forego saving for retirement. Social Security benefits may be reduced or eliminated due to the demographics of the population and overall funding levels of the program. The impact on inflation can reduce the spending power of a retiree’s retirement savings.

Studies have shown that many employees have not saved enough or are running out of time to accumulate adequate retirement savings. Employer provided retirement benefits will be very attractive to employees nearing retirement. Younger employees meanwhile will most likely be attracted to higher salaries and lower health care premiums than retirement contributions.

BN. Retirement plans are a crucial part of any competitive benefit package today, especially in the investment management industry. We find that discussion about compensation and benefits today is focused to a large extent on retirement benefits. Moreover, because of our extensive work with retirement plan sponsors and the large portion of our business represented by them, we are especially focused on retirement benefits and on providing both our own and our clients’ employees with excellent investment options to build a diversified portfolio.

At BlackRock, we pride ourselves on the quality of benefits that we provide to our employees. We operate in a very competitive industry and in very competitive markets. Our employees are our most valuable resource and attracting and keeping the highest level of talent has differentiated BlackRock, and continues to distinguish us as an organization.

HRM. Should organizations provide any kind of financial education with these pension or investment plans? If so, why is this important and how can this be best provided?
CH. We do believe that organizations should provide support to their employee population to help them understand, appreciate and, ultimately, become informed consumers of their benefit programs. Part of this responsibility may be seen as necessary under 404 (c) and other regulatory guidelines, but increasingly employers are seeing financial education support as an added benefit to their spectrum of employee programs.

We believe this can best be provided through the framework Merrill Lynch has created for communicating benefit programs. The approach is based on four simple, yet powerful, principles designed to help individuals take charge of their financial future by supporting them through workplace-based programs: 1) making the most of the benefit programs, 2) investing wisely, 3) building and monitoring a personal financial plan and 4) protecting and maximizing accumulated assets as you move from one employer relationship to another, or into retirement.

Once a clear message platform is established, it’s critical to provide communications through multi-media – print, electronic and, most importantly, personal interactions. We’ve found that most people want and need assistance in understanding and managing their retirement programs. Personalized assistance – over the phone, through workplace based interactions, or face to face with advisors – coupled with specific, personalized advice provides the most effective means for accomplishing successful retirement outcomes.

By doing this at Merrill Lynch, we ensure the ability of participants to maximize their benefits, effectively plan for retirement, and ultimately, better meet their retirement goals.

JP. It is critical that organizations provide financial education and investment advice to employees as a result of the increase in 401(k) plans and other defined contribution plans. As society has transferred responsibility for the investment of retirement savings from the employer to the employee, the employee must understand the implications of saving for their own retirement. Unfortunately, the average employee’s ability to make sound investment decisions is limited by their knowledge of the financial markets.

Surveys of Americans highlight a widespread lack of understanding about how the financial markets work and the role of asset diversification in managing their risk and return. Some believe that participant education has largely failed and that the cost of providing this service does not make sense. As inertia, intimidation or a general lack of interest dominates participant behavior towards their own financial security, there is a growing belief that employers need to structure their defined contribution plans in a more parental fashion by implementing age-based default investment options.

Providing investment education to employees who are interested and ready to take responsibility for their investments will lead to a more self-reliant workforce, greater participation in company sponsored savings plans and better understanding of the financial issues faced in retirement. Investment advice or management from a qualified investment advisor should be available to those employees who are uncomfortable or unable to manage their own accounts. Simply determining an employee’s risk profile and years to retirement will help an investment advisor select the proper asset allocation strategy for an employee. The delivery of this service takes several forms either through face-to-face meetings, call centers or online solutions. Again, depending on the level of sophistication of the employee population, different options may be necessary.

BN. At BlackRock, we believe that education is crucial in the retirement planning process. Employees at all levels and in all types of organizations struggle with decisions around retirement planning. We work with organizations on both sides of this challenge – those who require education for their employees, and those who provide education for their clients’ employees – and they share our philosophy almost universally. They have developed programs that run the gamut of available options today and that extend from simple information through education to advice. At BlackRock, we support those efforts by providing background information on capital markets as well as portfolio and strategic information. Our ultimate success is determined not only by how well we perform for our clients and their employees, but by how effectively those individuals utilize the plan’s investment options.

HRM. Where does an organization looking to assess its retirement offering, or to implement a new plan, start? How does it determine which kind of contribution is most suitable to it as an organization and to its employees?
CH. An organization’s first step is to determine the goals of its benefit programs. Is it to attract new employees or to retain existing employees? Do you want to offer larger benefits to older, more highly-compensated employees, or provide a program for only highly-compensated executives? The answers to such questions will drive the overall plan decision – i.e. the types of plans to offer. Once that has been determined, it is important to analyze the costs incurred by the different types and sources of contributions and their impact on overall cash flow, compensation and benefit structures, and organizational goals.

At Merrill Lynch, we offer a multitude of benefits programs – including defined contribution, defined benefit, non-qualified deferred compensation, and equity award services - and can consult with employers with regard to the most effective plan design, investment solutions, specialty products and services, and funding method(s).

JP. The first step in designing the appropriate retirement plan for an organization it to determine the goals of the organization in terms of the employees they are trying to attract and whether or not their program will be competitive in the marketplace. For example, organizations with high turnover rates may want to offer a 401(k) plan that is portable – a fully vested employee can take their account with them when they separate from service. If an organization wants to share in the success of the company they may want to consider a profit sharing contribution as a way to motivate their employees to focus on the bottom line.

The next step is to determine the type of investment products that will be offered by the plan and whether the employee or employer will make the investment decisions. Finally, a study of the overall cost of the plan is critical since excessive fees can erode account balances and cause employees to fall short of their retirement goals. Employers should consider what type of retirement plan is appropriate for their organization. In many cases, it makes sense to contact an employee benefits firm that specializes in this area. A successful retirement plan has to meet the objectives of both the company and its employees. As one might expect, there is no ‘cookie cutter’ solution.

Decisions on the appropriate contribution will generally be decided based on the organization’s objectives and the type of plan(s) offered. For example, many organizations offer a 401(k) plan that allows employees to save on a pre-tax basis with an employer matching contribution. A common matching contribution formula provides for a 50 percent match on pre-tax contributions not greater than six percent of the employee’s compensation. The goal of this type of contribution structure is to encourage employees to contribute to their retirement account along with the organization.

Some organizations introduce an element of profit sharing to their plans to allow employee’s to share in the success of the organization. By offering a profit sharing and 401(k) savings plan to employees, organizations can manage their costs since the employer contribution rates are discretionary and can be changed from year to year. A traditional pension plan requires the organization to bear the investment risk and make contributions to fund the promised benefits. Over the last several years, many organizations have migrated towards defined contribution plans as a means of controlling expenses, as well as making those costs more predictable.

BN. The development and ongoing management of a corporate retirement strategy is a complex undertaking that can be daunting for a new plan sponsor and challenging for those already acting as sponsors. At BlackRock, we work with plan sponsors of defined benefit and defined contribution plans of all sizes.

The first step in the process is to quantify the financial obligations associated with various retirement plans. Needless to say, the economic impact on the organization and a plan’s affordability are important considerations. Ultimately, plan sponsors must balance their desire to provide retirement benefits with the financial impact and affordability of the benefits, given their competitive position. Determining how to do this can be aided through diverse media – from benchmark studies and industry groups to consultants, advisors and focus groups.

Given that, a successful strategy is probably best developed with the help of experts with experience across plans, organizations, industries, and who understand both the successes and failures of the various plans. At BlackRock, – while not in the business of developing retirement plans or determining the best type of plan for an organization – we believe that our investment expertise and knowledge of multiple clients’ strategies, coupled with other experts, can lead a plan sponsor to an educated decision that will help foster success.

HRM. What are the main challenges and pressures that organizations face today when it comes to delivering quality, cost-effective plans and investment schemes for their employees?
CH. Some of the biggest challenges include providing the right blend of compensation and benefit programs and investment choices to help employees achieve their goals while still maintaining an acceptable cost and risk structure for the company. For many companies, that means utilizing employee-funded benefit plan structures that include qualified and non-qualified savings opportunities, coupled with employer contribution and participation strategies that get people into the plans and become active consumers. One of the most popular techniques for doing this is through automatic enrollment programs.

When it comes to investment choices, the challenges relate to catering to the diverse needs of a broad employee population – for example, suiting those demanding sophisticated investment options while keeping it simple for those less comfortable with investments.

At Merrill Lynch, we recommend a four-tiered investment menu structure, which includes: 1) a core set of investment offerings covering major asset classes, 2) a self-directed brokerage window for individuals requiring more choice and flexibility, 3) asset allocation solutions for those who want a one-choice option that provides diversification and automatic rebalancing, and 4) managed accounts and personalized advice for more holistic retirement planning and delegation of investment responsibilities. We also recommend as part of the investment menu strategy consideration for annuity like features that provide an ‘income for life’ option to participants. The company was the first to introduce a group annuity investment option for 401(k) plans last year.

JP. Events such as the recent mutual fund scandals and corporate defaults have brought to the forefront the fiduciary responsibility plan sponsors have in ensuring a secure retirement for their employees. Numerous studies have shown that many plan sponsors are not fully aware of their fiduciary responsibilities, which has led to a renewed interest in the ‘ABCs’ of fiduciary care. Two areas requiring special attention are the costs and investment selection associated with participant directed retirement plans. Typically, the administrative costs of sponsoring a 401(k) plan are passed onto participants benefiting from the plan in the form of higher investment management fees. Evaluating the services provided from a 401(k) vendor against the costs to participants is crucial component of a plan sponsor’s fiduciary duty.

Under ERISA, a plan sponsor must ensure that participants are charged reasonable fees in relationship to the services provided. If the administrative fees are determined as a percentage of plan assets and the assets grow over time, the fees may become excessive in relationship to the services provided. Engaging a qualified consultant to review the fee structure and compare it to industry averages is an effective way to determine if the plan is reasonably priced.

The quality of the investment funds offered to employees is also an important element of a plan sponsor’s fiduciary responsibility. The first step in selecting the investment products for the plan is to develop an investment policy, which provides the expectation for fund performance and action steps for replacing a fund that is under-performing. Once the investment products are selected, the organization along with the 401(k) vendor should determine the communication strategy for assisting employees in the development of their investment allocation strategy. Ultimately, rolling these retirement programs out to employees in a meaningful and cost-effective manner will be critical.

BN. As is clear from the almost daily news bulletins about defined benefit plan closures and modifications, the largest challenge to organizations in providing retirement benefits is one of economics. More specifically, the challenge is to provide workers today with the ability to retire with financial security, while keeping the sponsoring organization financially healthy. The age-old balance of costs and benefits is very complex.

In structuring a DC plan, the key challenges are participation and deferral rates and asset allocation. Employees need choice, but they also need guidance. The number of investment options, the default option, and employee education all play a role.

HRM. How can organizations look to companies such as your own to find solutions to some of these issues?
CH. Our Retirement Group’s mission is to “partner with businesses to help individuals achieve retirement success.” This can only be realized through working with our clients to ensure utilization and appreciation of benefit plan offerings and by providing innovative solutions for advising both employers and employees on their retirement objectives.

Our advisory heritage, investment expertise and local presence in communities across the country provide a strong foundation for all our retirement services. As a leader in the retirement business, we recognize the retirement issues employers and employees face and provide comprehensive, forward-looking solutions to meet those challenges. We use a combination of our experience, client needs and research to drive our innovations and have successfully been providing financial advice and investment solutions to businesses, governments, institutions and individuals for over 115 years.

We provide a comprehensive array of investment, administration and advisory services that cover the full range of employer-based wealth accumulation benefit programs such as: defined contribution plans, non-qualified plans, equity compensation programs, defined benefit plans and alternative savings vehicles such as Health Savings Accounts.

JP. Milliman offers a fully integrated service platform that provides record-keeping, administration, investment, employee education/communication, compliance, consulting, trustee and custodial services from a single source. Our program is designed to provide organizations with the information, access and control they need to provide employees with a superior retirement benefit program. The company has the infrastructure and experience to provide turnkey, comprehensive services for an organizations entire retirement program, including pension plans, defined contribution plans and supplemental executive retirement plans. Our fully integrated data warehouse allows access to complete benefit information for both the employees and employer. A state-of-the-art website integrates all retirement benefits including employer sponsored plans, Social Security benefits and personal savings to assist employees in comprehensive retirement planning.

Investment flexibility, unbiased guidance, quality service, and innovative technology – these are the qualities that set us apart as an industry leader in 1947 and they continue to distinguish Milliman in the retirement plan business today.

BN. BlackRock has worked with plan sponsors for over 15 years in assessing their needs and developing customized solutions for DB and DC plans. As well as providing advice and perspective, BlackRock’s broad range of investment products can be applied to plans of all sizes. For many products, BlackRock offers both separate accounts and institutional mutual funds. In addition, we offer specialty products such as synthetic GICs and an asset allocation fund. Depending on a plan sponsor’s needs, we may also tailor a solution to their specifications.

Cynthia Hayes
As First Vice President of Employer Plan Solutions for The Retirement Group at Merrill Lynch, Hayes has overall responsibility for the employer plan business. This includes business and product management, marketing and client relationship management for over 32,000 employer retirement plans, with over US$150 billion in assets and over five million employees. Responsibilities include all segments of the employer plan marketplace for all types of retirement and equity award plans and all sizes of businesses. Hayes also serves as President of the Princeton Retirement Group, a wholly owned subsidiary of Merrill Lynch.

Barbara Novick
BlackRock’s Managing Director, heads the company’s global business development, marketing and client service, and chairs the firm’s marketing committee. Novick also co-heads the Fixed Income Operating Committee, is a member of the BlackRock’s management committee, and serves on several other operating committees.

In 2002, BlackRock implemented a ‘One BlackRock’ initiative in which business development, marketing and client service across both products and distribution channels was consolidated onto a single platform under Novick’s leadership. Since 1990, Novick’s primary responsibilities were managing the institutional business development, marketing and client service team, developing asset management products, and building and maintaining relationships with institutional clients and consultants. From the firm's inception, Ms. Novick was responsible for structuring and marketing BlackRock's mutual funds as well as managing several large portfolio restructurings for institutional clients and their regulators.

Janet Rubenstein
As Principal, Practice Manager, Senior Benefits Consultant at Milliman, Rubenstein assists clients with the design, implementation, and administration of employee retirement plans.

She also leads and manages the defined contribution practice and was instrumental in the development of Milliman’s defined contribution service package.

Rubenstein’s consulting experience is concentrated in the design and implementation of complex defined contribution retirement programs. She works with clients to develop retirement plans that offer competitive benefits and streamlined operations. Her 20 plus years of experience in the defined contribution plan arena also allows her to address complicated benefit issues and provide solutions that meet regulatory requirements. Janet works with clients to correct operational plan defects and develop procedures to avoid future issues.