Retirement Plans

Tonic for Retirement Ills

Balancing benefits costs and outcomes is critical to enterprise success.
September 19, 2016

Finance executives’ efforts to manage benefits risks and costs, while trying to enhance benefits outcomes, will be critical to their companies’ ability to succeed in the future.

This is the key finding of a recent CFO Research survey of 180 senior finance executives at U.S. companies with defined benefit (DB) retirement plans. (Many respondents also have defined contribution [DC] plans as well.) The survey, sponsored by Prudential, gauged finance executives’ current thinking on a range of retirement and benefits issues.

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Five strategies were highlighted by the survey: enabling financial “wellness” of employees via innovative offerings; increasing contributions to close DB funding gaps; transferring pension risk through annuity purchases; helping employees better manage their retirement planning; and outsourcing benefits administration.

Financial Wellness

The survey found that finance executives view employee “financial wellness” as an important component of corporate performance, as well as a sound human resource management strategy. Respondents agree that good benefits programs are valuable for their businesses. More than six in ten respondents (63%) say that employee satisfaction with benefits is important for their company’s success, and 65% believe that employee benefits are critical to attracting and retaining workers.

Finance executives believe that the financial security of employees is an important concern for the company, as well as for the employees themselves. More than eight out of ten respondents (82%) believe that their companies reap rewards from having workforces that are financially secure. Nearly as many (78%) also believe that employers should assist employees in achieving financial wellness during their working years.

Finance executives consider higher employee satisfaction (59%) and increased retention (53%) as the most important advantage of a focus on financial wellness. These convictions may help explain the fact that 72% of respondents agree that the financial wellness of employees is a focus for their organizations, and even more (84%) say that it is important to ensure that their employees are educated on key tenets of financial wellness.

16Sep_FieldNotes_p46Closing the DB Gap

Finance executives from companies with DB plans reveal a continuing worry about funding those plans. Accordingly, many companies are increasing contributions to close their funding gaps, moving plans closer to full funding.

Nearly two-thirds (64%) of respondents report either that their companies have already increased contributions (15%) or that they are likely to do so within two years (49%).

A fully funded plan reduces financial risk to the company and enables the consideration of different investment strategies available to maintain full funding. It can also lay the groundwork for the next stages of DB risk management, such as transferring pension obligations to a third-party insurer.

Longevity risk continues to garner increased attention. The survey shows that most companies are preparing to account for an increase in life expectancies in their calculations. About six in ten respondents (61%) say either that they have reviewed participant mortality experience within the past 12 months (46%) or are planning to do so within the next 12 months (15%).

Pension Risk Transfer

As finance executives consider the ultimate disposition of their companies’ DB plans, risk transfer in the form of annuity purchases has become a solution that more companies are deploying.

More than one in seven (15%) respondents report that their companies have already executed liability transfer transactions, and nearly one-quarter (23%) say they would be “very likely” to purchase an annuity within the next two years. Another 24% say that they are “somewhat likely” to do so.

The rising interest in liability transfer serves as motivation for some companies to close their DB funding gaps — that is, the gap between projected liabilities and the level of assets required to cover those liabilities. The more fully a plan is funded, the easier it becomes for an employer to manage its DB plan risk, and the more options it has open to it — including, in some cases, liability transfer.

Nearly four in ten respondents (38%) acknowledge that liability transfer could be helpful in enabling them to focus more on their core business, rather than on pension plan management.

16Sep_FieldNotes_p47Help in Achieving Secure Retirement

Finance executives continue to look for ways that their companies can help employees better manage their own retirement planning. The survey shows that finance executives anticipate having to manage an increasingly aging workforce. Longer life spans mean that employees will need to make their retirement savings stretch even farther. More than half of the finance executives surveyed (57%) believe their companies’ employees already will be delaying retirement due to inadequate savings.

One executive echoed this sentiment when writing that her company needed to address gaps in its portfolio of DC plan investments “that affect long-time employees reaching retirement age.” In fact, nearly half of the survey respondents (49%) say that the concern over market volatility drives the need for offering more conservative investments in DC plans.

Overall, survey results reveal a growing interest in DC plan features that help individual employees save an appropriate amount while ensuring those savings last during retirement. These features include adopting matching contribution formulas that encourage employees to save at higher rates, utilizing automatic contribution escalation policies, and making guaranteed lifetime income products available.

Outsourcing Benefits Administration

The survey also suggests that, as companies look for ways to focus more on the strategic value of benefits planning and less on the time-consuming administrative aspects, they are more likely to consider the advantages of outsourcing some parts of benefits administration.

At the same time, the cost of benefits programs continues to rise steeply — especially for health and medical benefits. Controlling the cost of medical benefits for active employees is the top benefits-related priority for finance executives in the survey, selected by 35% of respondents. In second place is minimizing benefit cost increases overall (25%). Notably, nearly one-fifth of the respondents (19%) say that complying with local, state, and federal regulations in their benefits programs is a top priority.

Seeking to free themselves from the burden and cost of benefits administration and regulatory reporting, many companies are turning to outsourcing for a variety of benefits programs. Respondents express the strongest interest in outsourcing management of Affordable Care Act (ACA) compliance. Nearly half (46%) say that either they have already outsourced reporting and regulatory compliance for the ACA to their insurance carriers or to other vendors (26%), or that they are at least considering it (20%).

Interest in outsourcing extends beyond the management of new ACA requirements. Four in ten respondents (40%) also are either outsourcing, or considering outsourcing, administration of requirements for the Americans with Disabilities Act (ADA). Approximately the same number of companies (27%) in the survey are already outsourcing ADA compliance as are outsourcing ACA reporting.