Council members control the majority of group benefits programs in the United States and thus are the gatekeepers for their clients’ retirement plans. With this issue, Leader’s Edge expands its benefits coverage to include retirement plans. Our first story explores where retirement programs stand today and the challenges that brokers face aiding their clients.—Editor

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Some estimates put America’s retirement savings shortfall as high as $14 trillion.

Only about half of American workers participate in a workplace retirement plan.

Brokers are focused on bolstering the savings of workers they’re able to reach through group benefits plans.

 

See the Numbers

Numbers Cruncher

Retire with dignity.

It’s a phrase brokers and financial advisors tend to use, sooner or later, in conversations about their efforts to help Americans prepare for their departure from the workplace.

Allison Winge, executive vice president of retirement at Plexus Financial Services, is among those who talk about the importance of a graceful transition. She knows the alternate scenario all too well.

“I am the oldest of five kids,” she says. “My father worked hard to ensure we had the best things in life and worked hard to put us through college. Unfortunately, that meant he did not have personal savings, nor did he defer into his employer’s retirement account…. My father had an ‘I can always save tomorrow’ kind of attitude.”

In 2008, her dad lost his job. Stuck with a large mortgage in a declining housing market, her parents lived off unemployment checks, odd jobs and some money from his employer’s profit-sharing plan. “While my father is now gainfully employed, he has little to no retirement savings,” Winge says. “My siblings and I will be caring for my parents at some point.”

The challenge is familiar to Council members. About a third are active in retirement planning, a space that’s undergone numerous changes in recent decades as employers and employees continue the steady shift from traditional defined benefit pension plans to defined contribution plans like 401(k) plans and IRAs.

“I know my father’s situation is not an anomaly,” Winge says. “In fact, with the national savings average so low, I suspect similar situations will be commonplace as baby boomers retire and could become an epidemic.”

Trillion Dollar Shortfall

By some estimates, America’s retirement savings shortfall is as high as $14 trillion. For “early boomers” who are facing a shortfall, the Employee Benefit Research Institute estimates that average deficits will range from $71,299 per individual in married households to $93,576 for single males and $104,821 for single females.

Ami Hindia, a senior vice president with Fidelity Investments, recently outlined those challenges and others in a webinar hosted by Plexus. According to her firm’s analysis, more than half of working Americans are in fair or poor financial condition to cover retirement expenses.

It’s not just boomers who are struggling with preparations for retirement, Hindia says. “A lot of millennials are very timid about putting money into a 401(k) plan, because they saw their parents’ situation,” she says, referring to the great recession, which took a chunk out of their parents’ savings.

Only about half of American workers participate in a workplace retirement plan, according to the Pew Charitable Trusts. More than 30 million full-time private sector workers lack access to a plan, and the majority of them say they’ve saved less than $1,000 on their own. Only one fourth say they’ve calculated what they’ll need to retire comfortably.

For brokers, the focus is on bolstering the savings of workers they’re able to reach through group benefits plans.

A Fidelity Investments analysis of corporate direct-contribution plans involving 13.5 million participants found the average account balance at the end of 2015 was $87,900, with median at $22,400. For 10-year continuously active participants—numbering 1.35 million—the average balance was $242,400 at end of 2015.

For many Americans, that won’t be enough. “If you can save 10 times your salary by the time you retire, you’re probably going to be OK,” says Paul Denu, president of the New York region for USI Consulting Group.

Workers appear to realize they’re headed for rough times in retirement. According to the Employee Benefit Research Institute, more than a third of Americans lack confidence they’ll have enough to retire.

“It’s very likely that future retirees are not going to get what past generations have received,” says Patricia Rotello, a senior consultant with Willis Towers Watson.

More than three quarters of U.S. employees expect to be worse off in retirement than their parents, according to a survey by her firm. Roughly the same number expect Social Security and Medicare will be less useful in meeting their needs in the future.

Social Security is currently the sole source of income for one in four recipients, and the system’s health doesn’t look good in the years ahead: by 2033, payroll taxes will cover about three fourths of scheduled benefits.

Research by Fidelity shows an average 65-year-old couple today will need $245,000 to pay medical expenses during retirement—not including nursing home or long-term care.

Lisa Kottler, senior vice president of retirement services, NFP

For many people, healthcare costs, particularly specialty drugs, will be an immense drain on their savings. Research by Fidelity shows an average 65-year-old couple today will need $245,000 to pay medical expenses during retirement—not including nursing home or long-term care.

“That’s something that gets overlooked by a lot of folks,” says David Kulchar, executive vice president and director of retirement plan services at Oswald Financial.

“I think we’re entering into a world we’ve never seen before,” says Lisa Kottler, senior vice president of retirement services at NFP. The challenges will be even greater, she says, for people who are juggling the costs of caring for their elderly parents as well as their children.

Can Americans afford to retire? “It’s not as immediate an issue for people retiring today,” Rotello says. “If you ask the question in five or 10 years, I think it’s going to be a lot worse. It’s going to be worse than it was five or 10 years ago, and it’s going to be even worse in the future.”

Denu says there will be instances of poverty among people who aren’t prepared. Overall, he says, “I think retirement is going to change. The face of it is just going to change.” He and others expect Americans in good health will wait longer to retire or make a slower transition with part-time jobs, partly because they want to remain active and partly because they have to.

More workers say they’re delaying their retirement because they don’t have enough money, according to an Employee Benefit Research Institute survey.

“Workers still expect to work longer to make up for any savings shortfalls,” Craig Copeland, senior research associate at the institute, said when the survey results were released. “However, many retirees continue to report that they retired before they expected due to an illness or disability, needing to care for others, or because of a change at their job. Consequently, relying on working longer is not a solid strategy for retirement preparedness.”

Employers have a major financial stake in ensuring workers retire on time. Delayed retirements—and anxiety over retirement readiness—reduce productivity and hurt the bottom line in many other ways.

“Overall, the impact of the delayed retirement would result in—as we see the data from a variety of sources, public and private—higher compensation costs, higher health insurance costs, higher worker compensation costs,” says Mike Levin, area vice president with Gallagher Retirement Services.

“Delayed retirement also presents issues to the company for career development and retention of employees,” Rotello, of Willis Towers Watson, says. The natural progression of workers into positions of seniority and authority stalls when people postpone retirement, and it’s costly to offer reluctant retirees buyout packages to leave.

NFP’s Kottler says quantifying all those costs will help brokers expand the role of retirement planning in group benefits plans. It’s critical to be able to say to employers, “Here’s what it’s costing you when your employees can’t afford to retire,” she says.

Retirement readiness has long been a concern in America, but the 2008 stock market crash and the recession that followed, along with an increasing reliance on employee-driven savings rather than traditional pensions, pose additional challenges.

The primary focus, as always, is teaching Americans to save. “At least theoretically it sounds great to have control of our money,” Kottler says. “However, many employees don’t have the time, the expertise, the resources to understand all the inner workings of their plan.”

“Depending on what survey you read, there’s progress being made, but there’s still a gap,” Levin says. “The industry can never do enough together to address the situation of helping employees save for retirement.”

So what is the current status of retirement planning and the commercial insurance brokerage community, which controls a majority of the group benefits programs in the business world? Leader’s Edge will explore these and other developments in more depth in the months ahead. Here is an overview:

Farewell, Pensions

Defined benefit plans are continuing their long goodbye, with more employers making lump-sum payouts to pension participants or shifting liabilities to annuity programs offered by third-party providers.

“The vast majority of Fortune 500 companies have closed or frozen defined benefits plans,” Rotello says. “Even in frozen defined benefit plans, there’s very focused attention now on plan sponsors de-risking those plans or settling a lot of liabilities.”

Only 20% of Fortune 500 companies had active defined benefit plans in mid-2015, down from 59% in 1998, according to a Willis Towers Watson survey. Few offer the plans to new hires. Defined benefits are disappearing at smaller workplaces, too. The Pension Benefit Guaranty Corporation reports the number of plans nationwide plummeted from 112,000 in 1985 to just 25,607 in 2011.

Retirement planners expect the numbers to drop even more as employers adjust to a major increase in premiums they must pay to the Pension Benefit Guaranty Corporation as a result of the Bipartisan Budget Act of 2015. Employers pay annual premiums to the corporation to cover the cost of plan termination insurance.

Premiums will rise by more than 40% over the next four years, and that’s on top of an increase included in a 2013 budget deal.

“What was a minor inconvenience and nuisance became a big, fat line item,” USI’s Denu says of the premiums. A survey by Aon Hewitt found almost half of employers intend to reduce PBGC premium costs through settlement strategies with plan holders.

Some employers continue to struggle with long-term funding obligations for defined benefit plans, a trend that’s also hastening closures of the plans. As a group, they haven’t been able to fully fund their plans in almost a decade.

In an analysis of 413 Fortune 1000 companies with a December fiscal-year end date, Willis Towers Watson found the aggregate funded status was 82% last year, an improvement on the low of 77% in 2012 but roughly the same as 2014.

“Employers continued to de-risk their pension plans with lump-sum buyouts and group annuity purchases,” Matt Hermann, a senior retirement consultant at Willis Towers Watson, said when that study was released. “In fact, 2015 turned out to be the second most active recent year for annuity purchases, and we expect employers will continue to evaluate their retirement plan strategies this year.”

Council members are active in arranging those strategies. Oswald’s Kulchar says his firm conducts suitability studies to ensure funds are transferred to financially sound institutions. Today, he says, about 12 to 14 companies are engaged in bidding on partial or terminal funding of defined benefit plans.

Finding the right match isn’t always easy. Denu says securing an annuity provider for a small pension plan can take time because business is booming in this space. “They’re being picky because they can be,” he says.

Even amid the decline of the plans, there has been periodic speculation that, as baby boomers retire and GenXers and millennials step into their shoes, the competition for workers will intensify and pension plans might re-emerge as a recruiting tool. Brokers, however, are skeptical.

“Some companies do maintain a defined benefit plan because they view it as a differentiator,” Rotello says. “I think there are certain industries where defined benefits plans are certainly more attractive. Some of those industries have been slow to move to all defined contribution plans.”

Defined benefit plans are still a significant presence in the utility, healthcare, pharmaceutical and insurance industries, according to Willis Towers Watson.

It's critical to be able to say to employers, "Here's what it's costing you when your employees can't afford to retire."

Lisa Kottler, SVP of retirement services, NFP

“For that closely held business that has stable income, that’s profitable, that’s looking for ways to shelter more and benefit key employees, it can be a great plan,” Winge says.

But a resurgence clearly isn’t happening, at least not yet. Employers are “continually looking for ways to leverage their retirement plans,” Levin says. “But there’s no line around the corner with employers saying, ‘I want to create a defined benefits plan.’”

That’s not to say employees wouldn’t welcome a return of the plans. A 2011 survey by Willis Towers Watson found more than half of employees were willing to trade for guaranteed retirement.

Kottler and others point to the problems inherent in pension plan structure, including the lack of portability in an increasingly mobile workforce, that helped lead to the demise of defined benefit plans. “To some degree, I think we look at past decades with a bit of a rosy filter,” she says.

From an employer’s perspective, Levin says, pensions aren’t appealing because the funding proposition is over 30 to 35 years, while the average tenure of employees with a company is six to eight years. Add market volatility to the equation, and the plans are even less appealing.

Denu says he expects some employers will eventually circle back to them, partly for a competitive edge and partly because they “realize their employees aren’t saving enough.”

But the federal government, he says, would first have to ease funding restrictions and tax penalties that no longer allow companies to overfund plans to cope with lean years and turbulent markets. “There could be some changes in the law that might entice employers to put in some type of promised-benefits plan,” he says.

Set Your Dial to Auto

As defined benefit plans fade from view, brokers and agents are focused on boosting participation and deferral rates in today’s primary retirement vehicle—defined contribution plans. There are now an estimated $14 trillion of assets in 401(k) and IRA plans, with 401(k) plans accounting for just under half.

Seventy-nine percent of employers now offer a 401(k) or a similar plan, according to the Transamerica Center for Retirement Studies (TCRS). The nation’s retirement savings have clearly gravitated there. A Willis Towers Watson study indicates 58% of all retirement plan assets are in defined contribution plans.

Almost all companies employing more than 100 workers offer some type of retirement plan, and three quarters of plan sponsors offer matches for employee contributions, according to TCRS. The percentage dipped during the recession when some employers suspended contributions.

The average deferral rate last year was 8.2% of salary, according to a Fidelity Investments analysis. The majority of active participants defer 6% or more, the study showed.

For many years, automatically enrolling new hires in a 401(k) was deemed too aggressive, but the practice has become widespread, with few complaints from workers. “From the employee standpoint,” Winge, of Plexus Financial Services, says, “it’s really, ‘Make it easy for me.’”

Fidelity’s analysis found that close to a third of defined contribution plans use auto enrollment, with almost all of them setting target-date retirement options as the default investment and nearly half increasing the deferral by one percentage point each year through a program known as auto escalation.

Various studies by Fidelity and others show more than half of large employers now use auto enrollment. “We’re seeing a lot more plans adopt that,” Winge says. “I think that will continue as probably the norm.”

Denu, from USI, thinks the trend will accelerate. “Within two years, pretty much every employer is going to have auto enrollment and auto escalation,” he says.

Retirement planners are trying to boost deferral rates from the outset, too. “Many employers automatically enroll [employees] at 3%, and that’s not going to go very far in retirement,” says Kottler, whose firm, NFP, recommends starting at 6%.

Winge says her firm encourages clients to start at 6 to 8%, then set auto escalation at 1% a year until the cap is reached. “That’s really getting people into the plan and really getting their money to work,” she says. “We’re finding that most employees are not opting out.”

Kottler says more retirement planners are using behavioral science to help boost retirement readiness. Among other things, that means putting inertia—the default setting for most humans—to work.

If employees enter a plan at a 3% contribution level, they’re likely to leave it there throughout most of their working lives, she says. Surveys by Willis Towers Watson and others show that employees tend to assume the appropriate level of savings is whatever was suggested or set for them when they were first enrolled.

But if they’re enrolled at a higher rate with yearly increases, they’re not likely to take steps to alter that course, either—because they assume, once again, that the suggested or automatic rates are the best approach. Auto enrollment and escalation are “putting that inertia to work to their advantage,” Kottler says.

“I can’t help but wonder what my father’s savings situation would have been had there been auto features like automatic enrollment with auto escalation in retirement plans when he first began his career,” Winge says.

In addition to those features, Kottler and others say there’s growing interest in setting employer match rates at levels that make participation and higher deferral rates more appealing to employees. Today, the most common match is 50 cents on the dollar up to 6%. Kottler’s firm encourages employers to look at offering 25 cents on the dollar up to 12% of pay. The cost to employers is the same, but employees opt for the higher deferral rate to take advantage of what appears to be “free money,” she says.

Fidelity’s research shows that deferrals for Roth 401(k) plans also are growing in popularity, with more than half now offering them and almost all large companies providing them. The highest participation rate is among workers ages 25 to 29—a critical group to get into a retirement plan as early as possible.

Customize and Communicate

Brokers encourage their clients to offer their employees a diversified mix of plans covering a range of investment styles from conservative to aggressive. Winge says more than 80% of new contributions are going into target-date or lifecycle funds designed to shift allocations to less volatile funds as participants near retirement.

“Most 401(k) providers have a narrowed down selection of funds you can choose from unless the provider offers true open architecture,” Winge says. “If open architecture is offered, we will work with the investment committee to implement quantitative metrics to narrow down the investment menu.”

Almost all plans now offer a target-date fund, with index funds often the default plan, according to Robyn Credico, defined contribution practice leader for North America at Willis Towers Watson. In the past, the majority of defined contribution plans were off-the-shelf, but customization is more common now, she says.

Large employers are offering a customized glide path that changes allocations as the participant ages and nears retirement. Companies with defined benefit plans still in place tend to look at a customized glide path plan for defined contributions, she says, and those plan participants tend to go with more aggressive options to build their savings.

Credico says larger companies offer actively managed options more than smaller plan sponsors do. Interest is higher among companies in industries like finance and insurance than in retail and other industries, she says.

Delayed retirements—and anxiety over retirement readiness—reduce productivity and hurt the bottom line in many other ways.

“It’s important to understand what your employees need and how engaged they’re going to be in the decision-making process,” she says. Most people are passive in their approach, regardless of age, compensation or education, she says.

NFP offers flexPATH Strategies, an open-architecture approach that enables plan sponsors and participants to access multiple money managers for passive or actively managed funds. Using multiple managers enables plan sponsors to pick the strongest funds, according to Kottler. The glide paths can be set at conservative, moderate and aggressive. Kottler says three quarters of participants opt for a moderate glide path.

The majority of investments at NFP are in mutual funds, according to Kottler, who says her firm works with a core of about 20 providers. “Because our advisors are independent, we have access to all of the mutual funds out there, and we can really work with any of them,” she says.

Her firm works with employers to make sure they have all the asset classes they want and to provide due diligence on an ongoing basis. Generally, employers are encouraged to offer no more than 10 to 15 investment options, she says, because too many choices can overwhelm participants and deter deferrals.

Brokers will bring one investment advisor or multiple firms into a retirement plan, depending on the client’s needs and wishes. The advantages to using a single provider, Winge says, include getting a dedicated service team with advisors who have marketing and practice management support.

“The disadvantage is that clients may view an advisor as biased,” she says. “If the advisor is a co-investment fiduciary, they need to ensure no conflicts of interest exist.”

To maximize savings in defined contribution plans, the Transamerica Center for Retirement Studies encourages using managed services and asset allocation suites. The majority of sponsors now offer some form of this, according to the center’s research, with more than half offering target-date funds. More than half also offer target-risk funds designed to match risk tolerance of employees, and two thirds offer a professional investment advisor to make investment or allocation decisions for participants.

“For plan participants lacking the expertise to set their own 401(k) asset allocation among various funds, professionally managed accounts and asset allocation suites can be a convenient and effective solution,” Catherine Collinson, president of Transamerica Center for Retirement Studies, said when the survey was released.

“However, it is important to emphasize that plan sponsors’ inclusion of these options, like other 401(k) investments, requires careful due diligence as well as disclosing methodologies, benchmarks and fees to their plan participants.”

Another key way to bolster participation and savings is to extend 401(k) offerings to part-time employees. According to TCRS, half of plan sponsors currently do so.

Levin also suggests employers evaluate their employee turnover rate and see if it makes sense to alter the time at which workers are vested in 401(k) plans. “If there’s not much turnover in the first 90 days, why not make (the vesting period) one month or immediate?” he asks.

To increase savings levels, Kottler says her firm also talks to employers about ending the practice of letting participants borrow from their 401(k). “It’s for retirement, not paying current expenses,” she says.

Fidelity’s analysis showed that roughly one fifth of active participants had an outstanding loan in 2015.

According to Kottler, some employers allow up to five or six loans, and many workers view the loans as harmless because they’re paying loan interest to themselves. “You’ll never repay enough relative to what you would have had, had you kept it in the account and kept investing it,” she says. “It turns into a money loser, really, for those participants who abuse it.”

To bolster participation, retirement planners also encourage employers to talk to their employees regularly about how their programs are doing. “There’s definitely a disconnect between how employers think their retirement plan is working and how employees think it’s working,” Kottler says.

A 2014 survey by TCRS found that nearly all sponsors believe their workers are satisfied with plans but only 80% of workers say they actually are. Only one quarter of sponsors reported they’ve surveyed employees regarding benefits, and even fewer employees say they’ve discussed their plan with a supervisor or HR person in the past year.

A significant number of employees, it appears, do want to hear more. According to a Willis Towers Watson survey, the majority of employees think their employers should actively encourage retirement savings, and many say they’re open to general advice on managing their money so they can save more.

Get Well Soon

Financial wellness programs appear to be joining auto enrollment and escalation as fundamental building blocks in sound retirement planning.

“There’s no shortage of organizations in this space or gearing up to be in this space,” Gallagher’s Levin says. The programs are very prominent with almost every client, according to Rotello, the senior consultant at Willis Towers Watson. “It has increased over the past year and half or so,” she says, with more firms tying health and wealth together.

“The largest corporations have started doing it, and I think it’s filtering down to the smaller and midsize companies,” Kulchar, Oswald Financial’s director of retirement plan services, says.

Almost all of the 250 large companies surveyed by Aon Hewitt last year said they planned to launch or expand financial wellness programs. For employers, there are compelling reasons to address the topic long before an employee approaches retirement. Seven out of 10 workers say their financial situation is the greatest cause of stress for them, according to the American Psychological Association and Willis Towers Watson.

Employees struggling with finances miss an average of 3.5 days of work a year, nearly double the average for others, Willis Towers Watson found. And people concerned about finances report they’re distracted 12.4 days per year on average, compared to 8.6 days for others.

A 2014 PricewaterhouseCoopers survey found that half of GenXers, born between 1964 and 1980, are especially concerned about their financial situation, with nearly a third saying it’s a distraction for them in their workplace. And among workers of all age groups who are worried about their finances, more than a third said they spend at least three hours a week at work thinking about or dealing with personal money problems.

In a 2014 report, the U.S. Consumer Financial Protection Bureau warned employers they’re paying for financial stress through health, workers comp and disability claims.

The bureau cited a study by the peer-reviewed journal Health Affairs, which analyzed the medical expenses of more than 92,000 employees over three years. Individuals reporting high stress cost employers $413 more per year than employees who said stress wasn’t an issue for them. In comparison, employees who smoke cost employers an average of $587 per year in healthcare costs.

“Given the large costs that may be associated with financial stress in terms of productivity loss and higher healthcare spending,” the Consumer Financial Protection Bureau report concluded, “employers have a potentially large incentive to explore cost-effective ways to enhance employee financial wellness.”

Financial Finesse, one company active in setting up financial wellness programs for employers, reports helping a client reduce healthcare expenses by 4.5% over a two-year period. The Society for Human Resource Management estimates that return on investment for employers ranges from $1 to $3 for every dollar spent.

For brokers, the return isn’t as obvious. “When we offer a financial wellness program, we’re really not making a lot of money,” Kulchar says. The value shows up in the health benefits side—and in boosting participation in retirement savings.

The programs are becoming integrated within broader wellness efforts at workplaces. Kulchar says some employers offer financial wellness sessions, which add to points employees can accumulate to save on health insurance premiums, much the way they can earn discounts if they quit smoking or lose weight.

The vast majority of Fortune 500 companies have closed or frozen defined benefits plans. Even in frozen defined benefit plans, there’s very focused attention now on plan sponsors de-risking those plans or settling a lot of liabilities.

Patricia Rotello, senior consultant, Willis Towers Watson

Kottler says she believes more employers are seeing the connection between health plans and retirement plans. “We’ve spoken about them separately over the years, but they’re really just one overall spend,” she says.

Financial wellness programs take many forms, according to Council members, and include online tools and group sessions about a wide array of topics such as retiring existing debt, curbing daily expenses, managing credit cards and planning for emergencies.

“Sometimes what we find is that we really have to go back to basics and go back to education on budgeting,” Winge says.

“Helping people understand the basics of finance really is one of the most critical things we can do,” Kottler says. “Unfortunately, it’s not taught much in schools.”

As models for programs, the Consumer Financial Protection Bureau points to the U.S. Army’s success with financial programs that have reduced debt and increased retirement savings for soldiers.

Financial wellness programs can be an early step in retirement planning for many workers. Simply encouraging them to save for their golden years isn’t enough, Kulchar says. “A lot of participants may not want to hear that,” he says. “Their problems may be deeper than that.”

Solving immediate concerns leads to better preparation for the future. “The idea behind that kind of financial wellness program is trying to reduce the stress, which may hurt the 401(k) savings in the short term but help it in the long term,” Kulchar says.

The approaches are evolving, and success rates vary. “I don’t think anyone’s figured it out yet,” Denu, USI Consulting Group’s president of the New York region, says. His firm ran a beta financial wellness program with a partner for a large corporation, but only 200 of the 7,000 employees participated. Even fewer employees engaged fully.

There appears to be substantial interest in financial advice, however. A MetLife survey of workers found that nearly half would like assistance. Nearly all were workers who say financial stress is affecting their productivity.

Regulators and Legislators

Council members are closely monitoring the potential effects of a U.S. Department of Labor rule, released in April, which broadens fiduciary duties to cover all investment and rollover advice.

Earlier versions of the rule drew fierce opposition from industry groups, largely regarding compliance costs, but the revised plan received a warmer reception. “The final regs are great news for plan sponsors and participants,” Winge says.

For years, broker-dealers and some investment professionals have been able to offer advice that’s deemed “suitable” for clients but not necessarily in the client’s best financial interests. The latter must take precedence under the new rule, which will be implemented in stages beginning next year.

The White House Council of Economic Advisers estimates the current structure costs investors $17 billion a year in commissions and hidden fees and bonuses. That’s an assessment the industry disputes. Kottler calls it a “bad apple regulation” that will end up regulating the good guys while the “bad guys are still going to be bad guys.”

The consensus, at least for now, appears to be that the Department of Labor made enough concessions to industry complaints about earlier drafts of the rule to minimize the cost to brokers. Some smaller firms exited the space prior to release of the final rule, though, and Kottler says the industry may see some consolidation as larger firms buy smaller ones.

The rule, about six years in the making, is expected to prompt a greater use of fee-based models over commissions, which might cause some firms to drop small investors or push them toward robo advisors. Other expected changes include lower commissions for 401(k) rollovers to IRAs and growth in index funds and exchange-trade funds.

Retirement consultants are also watching a perennial proposal from the Obama administration to place a cap of $3 million on accounts eligible for tax advantages. At today’s interest rates, that amounts to about $200,000 in annual retirement income.

“That just really flies in the face of what we’re promoting,” says Kottler, who views the proposal as “punishing people who have saved well.”

The proposal would affect about one in 1,000 Americans, according to the Employee Benefits Research Institute. But, critics warn, it’s likely to capture an important group—small business owners, i.e., plan sponsors, who may see less incentive to continue supporting a retirement program that cuts them out.

Efforts to curb tax deductions for employers for benefit programs aren’t expected to pass any time soon. But, Rotello points out, they bear watching because they would put company-provided benefits into play for cost reductions. “That could have a pretty profound effect,” she says.

The brokerage community is also keeping an eye on a growing interest among states in extending retirement savings opportunities for workers who don’t have access to a plan. Illinois, New Jersey, Rhode Island and Washington have set up plans that enable automatic payroll deductions for IRAs, similar to the myRA program launched last year at the federal level. Kottler says the Obama administration has focused on boosting savings for millions of Americans who aren’t covered by employer-sponsored plans.

The lack of coverage is most pronounced among employees of small businesses, young people, low-income workers, and women and minorities, according to AARP’s Public Policy Institute. State plans could help shore up those numbers.

In Illinois, companies must take part if they have been in business for at least two years and have at least 25 employees. The state pools the assets for the workers. Winge says she thinks more states will follow suit.

According to AARP, roughly two dozen states are exploring such programs. The group sees the move as potentially the biggest development in retirement savings since the creation of 401(k) plans and IRAs. Even so, the plans are viewed as a supplement to Social Security and not likely to provide enough funds to cover retirement.

The programs aren’t expected to have much effect on providers of existing accounts, but the effort is drawing attention. “My concern is: is it well thought out, and is the administration well thought out?” says Kulchar, who notes taxpayers would have to bear the costs of fixing flaws.

Kottler says she doesn’t see much opportunity for brokers in the state-run plans. “I think the entire industry is for additional coverage,” she says. “We just might disagree on how to get there.”

Storm Clouds

Confidence is fading in the market, according to investors and retirees surveyed by Wells Fargo and Gallup. Optimism was down significantly last year, with respondents saying they have less faith they can meet their five-year goals and less faith that economic growth will continue. Those concerns are widely shared in the brokerage community.

“Many forecasters are anticipating a bumpy road ahead, and I think it’s incumbent on advisors and employers to prepare employees for that,” Kottler says.

There seems to be no consensus among brokers on whether to shift fund allocations, but there’s agreement on deferral rates. During the recession, many plan participants stopped or reduced contributions to their retirement plans—despite tried-and-true advice to stay the course.

Kulchar says people facing retirement in 2008 and 2009 suffered a short-term setback, but the focus needs to remain on the long-term picture. “You can get pretty depressed if you look at your balance going from $250,000 to $200,000,” he says, but employees should be encouraged to watch their projected monthly income, not total assets, just as they should during prosperous times. “That’s really where the focus needs to be,” he says.

Kottler echoes that sentiment. “We need to remind people of the value of the 401(k) plan,” she says. “They need to focus on accumulating shares, not dollars.”