When employers began the shift away from traditional defined benefit pension plans to 401(k) and other defined contribution plans, they had several goals. CFOs welcomed the move because 401(k) plans have much more predictable costs and funding obligations than traditional pension plans. The HR rationale was that 401(k) plans provide employees with greater control over their retirement planning. Companies followed up with various communication and education programs and online retirement planning to empower employees to invest appropriately for their retirement.
However, a rather large chink in this strategy appeared during the 2008 financial crisis and the resulting meltdown in the financial markets. Older employees nearing retirement were particularly devastated by the collapse in asset values and many have had to postpone retirement as a result. The reason? Most 401(k) plan communication and education focuses on accumulating assets and investing them for retirement. There is comparatively little information and, more importantly, few investment choices designed to help older workers as they approach retirement age to shift toward assuring a certain level of retirement income from the assets they have accumulated.
According to research conducted by the Institutional Retirement Income Council (IRIC), many companies do not offer retirement income products, such as annuity purchase, as part of their 401(k) plans because of concerns about adverse employee reaction and their own inexperience when it comes to evaluating these products. However, the IRIC research indicates that offering some sort of retirement income-generating product is in keeping with the more activist role 401(k) plan sponsors are assuming as they add features like automatic enrollment, contributions, and investments to their plans.
Another key issue for those investing toward a secure retirement is inflation. After years of low inflation, retirement plan participants may need more options to guard against the erosion of asset values if inflation increases in the future. Plan sponsors are recognizing that and are starting to offer some type of inflation protection strategy to their participants, according to the Mercer U.S. Defined Contribution Investment Survey of more than 200 retirement plan sponsors.
The Mercer survey found that 24 percent of plans have begun offering Treasury Inflation Protection Securities (TIPS) as an investment option, while 12 percent offer an inflation protection product that involves combining multiple asset classes, such as TIPS, commodities, natural resources and real estate investment trusts (REITs). Another 10 percent of plan sponsors plan to add some type of inflation-protection strategy to their plans within the next year. These numbers represent a significant increase in inflation-protection investment options compared to just a few years ago.
When it comes to making decisions about whether or how to offer both retirement income and inflation protection products through a 401(k), CFOs have a lot to bring to that process. Not surprisingly, the Mercer survey found that larger 401(k) plans are more likely to offer inflation protection strategies because the Finance or Treasury functions are more likely to be involved in the management of those plans.