Financial Health Perspectives
Blog published on September 7, 2016
As we all know, there are many aspects to financial health beyond the prescriptive “spend, save, borrow and plan.” If you’re most Americans, you have no problem with the spending part. As for saving, many of us – some 90 million, in fact – have access to retirement plans as a feature of an employee benefits package. But what about the millions of Americans who don’t have access to an employer-sponsored retirement plan?
We sat down with Christine Marcks, president, Prudential Retirement, to get her perspective on the very real “coverage gap” that exists today, how more Americans might save enough to be protected from outliving their assets, and how innovation happens in her organization.
Q: Where do you see the greatest potential for financial services to improve consumer financial health from where you sit?
A: I think it’s helping consumers prepare for that stage of life that we call "chapter two," and others call retirement. Progress has been made in this area over the last 10 years, thanks in large part to improvements that have been made in the employer-based retirement system, but there are still gaps in retirement savings adequacy, and in covering all workers and in providing solutions that will protect consumers from outliving their assets. So there's still plenty to be done.
Q: You talked about innovation at EMERGE, and your Big Idea around solving the coverage gap. What do you mean by that?
A: Roughly half of working Americans don't have access to an employer-sponsored retirement plan. And we know that those kinds of plans are actually extremely effective in getting people to save because they make it easy from the standpoint of offering payroll deduction and professional oversight. There are many positive features connected with employer-sponsored plans that a lot of workers just don't get the opportunity to experience. So the solution we are working on is called an “open multiple employer plan.”
Q: Tell us more about that.
A: The structure of a multiple employer plan has actually been around for quite some time. They've been allowed under federal tax law for decades, but there are changes that need to be made to make them available to more employers overall and small employers in particular, which is where the coverage gap is most acute. So I think of it as the ability for multiple employers to join a single plan and to enjoy the same kinds of economies of scale and benefits, ease and professional investment oversight and so forth that large employers can offer in their plans. So it's a pooling concept.
Q: You shared a personal story in your Big Idea, something that makes you care a lot about this part of financial health. What was that?
A: I grew up as one of five children, and my father was an independent pharmacist in a small town in Western Massachusetts. He had 10 employees in his business, and he cared about their welfare very much, but... Every day was about running the business and trying to be profitable. He had a lot of rules and regulations he had to follow in his profession, and he honestly just didn't have the time, the capability or the expertise to focus on what he would need to do to provide a retirement plan for his employees. So they were on their own…and that's the same circumstance that so many small business owners find themselves in today – where it's the cost, the administrative hassle, and the risk of fiduciary liability that prevents them from offering retirement plans to their employees. We know from the Employee Benefits Research Institute that middle- and low-income folks who have access to a retirement plan are almost 16.5 times more likely to save for retirement than if they don’t have a plan. We know it's a very attractive and highly-desired benefit, and so that's where these multiple-employer plans come in – they would make it much easier for small employers to offer a retirement plan to their employees and in turn, they would make it easier for employers to hire and reward the best workers. It's a powerful mechanism for savings, which is a core part of ensuring consumer financial health.
Q: When you think about the people who aren’t saving for retirement, is it all about access, or something else, in your opinion?
A: I do believe that access to an employer-sponsored plan is one of the fundamental building blocks of achieving retirement security. You often hear that Social Security, employer-based plans, and personal savings are the three pillars of retirement security. But you can tell by the growth of employer-sponsored plans – there is $6.7 trillion in assets in defined contribution plans today – that they’re a core part of many workers’ long-term savings. So the fact that roughly half the workforce, mainly people who are employed in small businesses, don’t have the same ability to save is a real issue. It’s even more alarming when you consider that many underserved groups such as women, Latinos, African-Americans, Asian Americans and others make up a significant proportion of workers in that segment of the economy. I think that's a very fundamental question for this country as it looks at consumer financial health, and that's why we have been so focused on developing and promoting multiple employer plans.
Q: What do you think employers should do, if they offer a retirement plan, to take an active role in the financial health of their employees with respect to retirement savings?
A: Offering a retirement plan is the first step, but we need more and more employers to recognize that they can have a positive impact on their employees by taking advantage of automatic enrollment features, and by setting the minimum default rates above the average, which is 3% for most plans today. Automatic enrollment is critical, because it overcomes two very powerful human behaviors: procrastination and inertia, and it gets them started. Employers can also adopt automatic contribution increases, so each year the contribution rates go up another percent. Most employers set a limit, of course, but this kind of program keeps people saving and contributing as their salary grows. Finally, employers can make sure that they are automatically enrolling participants into balanced funds that nicely diversify investment risk.
Q: Let’s change gears here and talk about innovation – which is difficult, sometimes, for larger organizations. How does Prudential promote innovation?
A: We actually just hosted a challenge with employees across Prudential where they offered up almost 100 ideas on how to improve retirement security. It really got them thinking about the solutions we offer today, what we could change and modify to make them even better, and how to engage people differently to help them connect to their financial future. It showed us that in some instances, innovation doesn't have to be huge – it can be a small change that has a big impact. We actually saw a range of degree of difficulty and implementation, and there’s a lot of interest in carrying several of these ideas forward.
Q: Can you tell us about some other innovations in the Prudential pipeline that might play a role in financial health?
A: We're working with a firm now, piloting a solution that helps employees who have student loan debt to rationalize and consolidate that debt. There’s also an opportunity for employers to put some kind of a match into the 401K plan as those employees pay down their student debt. Student debt is definitely a challenge for the millennial generation, and we found in our research that the parents of millennials, too, may have taken out loans to help finance their kids’ college education. Often people make a choice to pay down the debt first, which means they don’t have much left over to invest in retirement savings, which is contrary to the the power of time and compound interest. So, this kind of solution is really interesting, and it's a good retention mechanism for an employer who's trying to attract talent.