How high are the stakes for companies in making sure employees are prepared for a timely retirement? High enough that Buck Consultants has applied for a patent on an automated approach to keeping its clients’ employees on track toward that goal.
By press time Buck had signed up two clients for its brand-new service, called Savings InSight, says the firm’s North American retirement leader, Ted Goldman.
To get the ball rolling, Buck starts out by working with a retirement-plan sponsor to set a target retirement age for employees, a target income replacement level (for example, sustainable retirement income that’s 70% or 80%, say, of a retiree’s final salary), underlying assumptions about investment returns, and how long into retirement payments will last.
Then, based on each employee’s age and pay, Buck calculates how much the worker should set aside to reach the targeted replacement-income level by the targeted retirement age. Clients can opt to default participants to that contribution level, and participants can override the defaults and assumptions and set their own savings rate, of course.
That much is not unique or even necessarily unusual. Most plan sponsors are trying to make such calculations.
In Buck’s scheme, the calculation takes into account a “typical” employee’s savings from sources unrelated to the current employer. That may not exactly be revolutionary either, though it’s probably not commonplace that Buck then makes a pitch to plan participants to replace the “typical” outside savings with their actual information. If the company has a frozen defined-benefits retirement plan, the calculation takes that into account as well.
That still doesn’t quite seem patent-able. But Buck has developed an automated process for redoing the calculation for each person each year — or even on demand, if a plan sponsor wishes to make that available to participants. The updated calculation takes into account actual investment results, changes in pay, revised assumptions as necessary and other variable factors.
“The patent is for the underlying technology and business process,” says Goldman. “To our knowledge, no one else has come up with the concept to auto-enroll individuals at personalized contribution rates and to then review, refresh and update those rates automatically throughout one’s career.”
He insists that this can be an effective tool to help employees understand how much they need to save. “In spite of very well-done educational materials and modeling tools on the market today, the needle has barely moved,” Goldman says. “And we want to make it difficult for our competitors to quickly adopt our idea once the market embraces it.”
Keep in mind, he notes, that when auto-enrollment into retirement plans first came on the scene years ago, many employers indignantly cried that they’d never “force” employees into a 401(k) plan. “Now, nearly half of all plans use auto-enrollment features and no one bats an eye,” says Goldman. “Personalized auto-enrollment contribution rates represent the next evolution in the marketplace.”
Buck, a subsidiary of Xerox, presented the concept to a Xerox panel that reviews new ideas and recommends whether patents should be pursued, Goldman notes.
An underlying goal is to provide something of value for plan participants that doesn’t require them to do anything, unless they wish to. “Most people fall into one of two categories,” Goldman says. “For some, their eyes glaze over on this topic, and they’re never going to be comfortable no matter how much education we give them or how many tools we put in their hands. Then there are people who could [make informed choices on contribution levels] but are so busy in their daily lives that they never get around to it.”
The calculations will be updated only for as long as an employee continues to work for the company that contracted with Buck for the service. But, says Goldman, the calculations up to that point will provide a blueprint that may be useful for life.
The point is not to arrive at a very specific savings threshold, he adds. “If we’re throwing at a dartboard and the center of the bull’s-eye is what you need to live happily ever after, our goal is to get you on the dartboard. If we hit the center great, but we’re just trying to give people a fighting chance to have enough money to live on in retirement.”
Buck gets paid through a flat annual per-person fee that the client company can elect to pay or have taken out of employee account balances. The firm is also working on a “robo-advisor” feature that will, based on all information known about the employee, automatically allocate assets across the spectrum of funds offered in the plan. Those who opt for that service will pay a basis-points fee based on a participant’s assets in the plan.
Ultimately, Buck is hoping to arrive at a way to calculate the cost of having a retirement program that doesn’t help employees get to desired outcome, such that older workers become a burden to the employer.
It’s a daunting task, requiring a model that takes into account termination and retirement rates, a definition of “on a path to a secure retirement,” estimated severance costs, productivity levels, career advancement denied to younger workers, and health-care costs — “and it all has to be credible,” Goldman says.