Podcast Transcript

Speakers

Richard Reed, Vice President, Defined Contribution Practice Director
Robert Krebner, Consultant, Princeton
Benett Hadley, Financial Wellness Solution Leader, New York

Podcast transcript

Narrator: Governance, operations, investments, compliance. These are the four pillars of risk that define contribution plan sponsors need to stay up on. Every quarter, we're going to be giving you the scoop, the skinny, the low down on all the latest developments in the field, everything you need to know to stay current and informed. We're going to be talking regulatory issues, best practices, investment strategies, all of it about what it all means and more important, what it means to you. So put on your swimsuit, we're going to be doing some deep dives. Welcome to the Retirement Plans Insider from Segal.

Rick Reed:  Hello, my name's Rick Reed and I'm the Defined Contribution Practice Director at Segal and the host of our Retirement Plan Insider podcast. I'm joined today again by my colleague Robert Krebner. Robert is a Retirement Consultant in our New York region and works with some of Segal's largest Corporate clients, including companies in the communications, sports and entertainment industries. Hi Robert. Thanks for joining us today. Would you mind giving us some additional background about yourself?

Robert Krebner: Hi Rick. Thanks for having me back. As you mentioned, I'm a Consultant in Segal's New York Retirement Practice, and my focus is on plan administration where I've spent more than 10 years helping our clients manage operational risk for both pension and defined contribution plans. And I'm excited to co-host with you again today on such an important topic that I know is on everyone's mind, whether you're employee or a plan sponsor, this is something that you're already thinking about and if not, you probably should be thinking about. So without further ado, Rick, do you want to introduce today's topic?

Rick Reed: Sure, thanks. Well, today's topic of discussion is financial well-being, which is also known in the industry as financial wellness, financial security, or a variety of other labels, and we'll get into that in a few moments. Bennett Hadley is also joining us today for this discussion. Bennett is an Associate Consultant in our Segal New York office and is our Corporate Market Financial Well-Being Solution Leader. Bennett supervises Segal's financial well-being consulting engagements and market efforts. And he has led financial well-being projects in the implementation of these programs for some of Segal's largest corporate and multiemployer clients. Hi Bennett, thanks for joining us today. And as I mentioned in my opening statements, the subject of financial well-being has a lot of names and descriptions. So for our audience today, could you at least give us your description of how you define financial well-being and what does it actually entail?

Bennett Hadley: Yeah, absolutely, and thanks for having me, Rick, Rob, really excited for our discussion today. And as you said, financial well-being, wellness, security, whatever you want to call it, goes by many different names and it has several different definitions based on who you talk to. However, just like the names, even though there are a lot of different definitions, the words, the technicalities might be a little bit different, but the definitions essentially all boil down to the same thing. And I like to use the U.S. Consumer Financial Protection Bureau's definition because I think it really captures the essence of what financial well-being means. And really it covers four different tenets that are really important to define financial well-being, that is a person's financial stability, resiliency, control, and choice.

Stability is really kind of the basics. Making sure people can cover their daily and monthly expenses, that they can balance their books, that they can pay off all the bills that are coming in the mail, well, not so much in the mail these days, but maybe over email. Resiliency is their ability to deal with those emergency situations, to absorb those financial shocks so that they don't have to go out and borrow money from their 401(k), or take a short-term high-interest loan just to repair their car or repair their refrigerator.

Control, the third tenet is about being on track to meet those financial goals. So that's saving for retirement, saving up for a down payment on a house, saving for a wedding, making sure that when you're welcoming a newborn into the family that you can cover all those expenses. And finally, the last tenet and really kind of at the top of the pyramid is choice, and that's having the financial freedom to do the things that help you enjoy life. It's being off the go on the vacation that you want to go on, being able to pay for your kid to do their favorite sport. It's not necessarily essential, but really it is essential for people to enjoy their lives. So that's the U.S. Consumer Financial Protection Bureau's definition, what I like to use.

Rick Reed: Well, that's terrific. Thank you, Bennett. That really narrows it down. And your description really kind of dovetails right into my next question, which is why is it such an important topic in today's society? But I think you pretty much kind of covered that, but could you expand on it?

Bennett Hadley: Yeah, yeah. So I will say that it's become more of a hot topic, right? 20 years ago it was certainly important, but it wasn't talked about as much or as important as it is today. And that's really because our financial lives have grown much more complicated over the last 40 years. There are so many decisions people need to make in order to be financially secure now in the future. Whereas 40, 50 years ago, it was still important and not easy, but it wasn't quite as complicated. People worked at the same company for a long time. Most people had a pension that would take care of them in retirement so that they could really focus on getting that house they've always wanted, two cars for them and the rest of their family. These days it's incumbent on individuals to save for their own retirement.

So they have to balance those short-term needs with that long-term saving and making sure they're going to be set up in retirement. Really, there are a lot more decision points that people need to make nowadays, which makes their financial lives more complicated, which stresses them out and makes it a more important, well, a more complicated topic these days than it has in the past.

Rick Reed: Well, it sounds like in addition to all of that, which is a lot, is also their paycheck has to be stretched further to encompass many more responsibilities.

Bennett Hadley: Yeah, absolutely. That's a great point, Rick.

Rick Reed: So again, with these now new detailed definitions that we've just discussed, how would you rate Americans? How is the average American doing financially in this current situation?

Bennett Hadley: Right. I'd say for most people it's challenging. It's not an easy economic environment currently. Sure, you could look at overall metrics. You can say the economy has done quite well over the past year recovering from the dip we had at the onset of the COVID pandemic, but really most Americans aren't feeling the benefits from this strong market. The tongue-in-cheek label that some people in the media I've heard put to the situation is vibe session. Which isn't really a serious term, but I think it actually does a pretty decent job describing the situation where by most common metrics, you can say the economy's doing well, people should be doing quite well financially, but in reality, people are struggling. So they say the vibes are off, it should be doing well, but people aren't. And that's really because costs have climbed astronomically, as we all know.

And while maybe the rate of growth of inflation is down, prices certainly aren't down. Just last year, the national rent-to-income ratio reached 30 percent for the first time. So people were paying huge sums of money just for housing that they haven't in the past. The student loan debt moratorium ended it and payments restarted in October. So that's a expense that people haven't been dealing with for the last three years. And a lot of people, two-thirds of people saying that the cost of living is outpacing their income growth. So while the traditional numbers might say that the economy is doing well, unemployment's low, really people are struggling with how costs have risen the past few years.

Rick Reed: Bottom line, people are stressed, people are stretching the dollar, inflation's really hitting them hard. There's a number of headwinds that are making it more challenging day by day. So that makes perfect sense. So thank you for that. Robert, is there anything you'd like to add at this point?

Robert Krebner: Yeah, so Bennett, I'd like to talk about this idea of employee/employer social contract. This is something that has largely remained unchanged for the last couple of decades, but I'm wondering to hear your opinion on what does the employer contract mean to you and how does that shift in recent years impact people's retirement planning?

Bennett Hadley: That's a great question, Rob. So how I define the employee/employer social contract is basically the implicit agreement between people and their employer of what they'll receive in exchange for their labor. So it's not the physical employment contract, but it's kind of the non-spoken societal norm of, I will work for your company and I will receive compensation benefits in return. And like you said, it's been viewed as kind of stable, but really what we're seeing, what we have seen very subtly is that it's changed somewhat and especially when it comes in terms of benefits. The nature of benefits, as I had to do that earlier, has really changed over the last 40, 50 years. The fall of defined benefit pension plans and the rise to defined contribution retirement plans and a move away by private corporations from parentalism or paternalism towards more a consumerism view of benefits.

So it's really, in the past, companies took on a lot of the risk, a lot of the mental strain that benefits might cause people, they took it on themselves and really did things for their employees so that they didn't have to think about their health insurance or their retirement. Nowadays, there are so many decision points around health insurance, around retirement that people have to make so that they've moved away from this parentalism and more towards this system of consumerism where it's incumbent on the individual to deal with their benefits to make sure that they're not busting their budget, make sure that they can save for retirement while also saving for all these other things. So that's kind of the shift we've seen there.

Robert Krebner: So it sounds to me like that shift is really causing a new gap, and with that significant shortcomings in the retirement system, which has developed over recent years. So let's talk about the next five to 10 years. Do you think there's a self-correction that we're headed towards?

Bennett Hadley: Yeah, yeah, that's a really good point, Rob. I think it's actually already happening. If you read a lot of benefits news, especially when it comes to retirement, you'll see lots of headlines about guaranteed lifetime income, in-plan, lifetime income, kind of what we call the DB-ification of DC plans, where over the years we've shifted to defined contribution plans, 401(k) plans, and now we're kind of seeing a shift back. Once you've built up this big sum of money, how do you actually turn that into income and retirement?

And a lot of plan sponsors and people in industry are thinking that this is something we can actually do for our people in our 401(k) plans. We can take a portion of their big pot of money and we can purchase an annuity at negotiated rates with an insurance company to give people that guaranteed income in retirement so that when they get to retirement age, they can see that they have this paycheck each month for the rest of their life or for their life and their spouse's life to kind of make that transition easier.

Now, there's more than just in plan income that some, most really these days, most plan sponsors are thinking about, and that's financial well-being benefits. They're these non-traditional benefits that companies offer that help people deal with their short-term liabilities or obligations rather than just their retirement in the future. So we're talking about student debt help, caregiving support, emergency savings accounts, because these are all things that are stopping people from being able to contribute enough to their 401(k)s to eventually be secure in retirement.

Robert Krebner: Right because as a consumer, I'm paying rent, I have a mortgage, I need expenses for food and transportation and student loans, so how could I possibly sacrifice those short-term spending for retirement? It's just how can I build that emergency savings? It's a big question to tackle.

Bennett Hadley: Exactly, exactly what Rick was saying earlier. People's paycheck is stretched beyond belief and they need help kind of bringing that back on track so that they can meet all those needs you set and save your retirement. And I'll give you a little bit of an example here, Rob, to make things, to put some dollars to things. Say someone has student loans. Before the pandemic, the average monthly loan payment, it was around $300. I mean, it is probably larger now after the pandemic, but let's just say $300 just for this thought exercise. Say we assume that half of these monthly payments towards student loans, so $150 per month would've gone into the borrower's retirement account. And we say this borrower started working on age 25, paid off their loans over 10 years and had an annual market return of 7 percent.

All very standard assumptions. At age 65, this person has over $200,000 less in retirement savings just from paying off those loans over 10 years, and that increases to almost $300,000 at age 70, right? You don't think about these term things in terms of 40 years, but really when you stretch over 40 years and you put it in the context of retirement plan, these small monthly amounts that people are unable to put in their retirement account has a huge, huge impact on their retirement security.

Rick Reed: Bennett, let's bring this back a little bit more again, to the retirement plan sponsors' role. What do you view their role as in helping to continue this rebalancing of our retirement system? There's got to be something, are there certain things that in addition they should do to encourage saving for retirement, but at the same time dealing with the complexities of meeting short-term needs?

Bennett Hadley: Yeah, absolutely Rick. Like we talked about a little bit earlier, this self-correction, right? We're on a bit of a self-correction course. Sponsors are starting to think about how they can help out their employees achieve more, shift the needle back a little bit, not go all the way back to a pension plan, but shift the needle back towards more like a pension like benefit. But these products are a little bit new. Most plan sponsors aren't jumping on them. The industry needs a little bit of time before we see a more mature market around in-plan guaranteed lifetime income. But in the short term, it's really all about well-being, right? It's about making sure their people are taken care of in the short term so that they can afford to save for that long term.

So if they have a younger population, maybe it's student debt. If they have a lot of mid-career people, maybe family benefits are very important. And the wrapper for all of this is always financial education, financial literacy. It's not really taught in schools today or in the last 10 or 20 or 30 years. It hasn't been taught in high schools and middle schools and colleges and universities. So that's really, if plan sponsors go the way of offering financial wellness benefits, they should also always include education around how to use those benefits effectively. Because at the end of the day, no matter how many financial wellbeing benefits you have, if people don't understand the benefit of using them to themselves and how to use them, they won't use them.

Rick Reed: So let's say I'm a plan sponsor, Bennett, and I no longer offer a pension plan to my employees, but I make the 401(k) matching contributions. Why should my employees be focused on financial wellness and why is an employer should I be that concerned?

Bennett Hadley: That is a very good point, Rick, and it is a question that we hear a lot from plan sponsors. Yes, we want to support our employees, but we already offer them a 401(k) match. We have rich retirement benefits, we have a whole host of other benefits. Why do I also need to be offering financial wellness benefits or financial well-being benefits? And the answer is really for employers, it mostly comes down to financial stress. There's a lot of research out there about how financial stress negatively impacts employees in the workplace. They take more sick days, they don't get along as well with their colleagues. They can't complete daily tasks as effectively, they're looking for another job at a much higher rate.

So there's a lot of kind of hidden costs that come with financially stressed employees. And the more you can address financial stress, lower that stress for your employees, by giving them tools to improve their financial situations, you do actually end up getting both a bottom-line benefit to your company by saving real dollars. But there's also a cultural benefit as well. Employees are much more loyal, the culture's better, they have better feelings towards their employer. So there are lots of benefits to employers for offering these benefits for their employees.

Robert Krebner: Because when I read about well-being, I hear a lot about not just retirement and financial and short-term obligations like we talked about today, but the emotional depression and physical pain from muscle, back, heart issues, and those all drive up costs for the employer. So this is all connected, isn't it?

Bennett Hadley: Oh, absolutely Robert, absolutely. Financial well-being, emotional well-being, physical well-being, health claims, retirement security, it's all interlinked, right? And like you were saying, people who are stressed, they have more physical ailments, the higher rates of anxiety, higher rates of depression, higher rates of heart disease, back problems, trouble sleeping, and then that takes an emotional strain and then they have to go to their doctor, they get some medical bills, then they have to pay those medical bills, and that's a further drag on their finances, and then they're more stressed. So this is all related. It's cyclical. You need intervention to stop this, to improve people's lives, to improve their financial security, to improve their physical health. It's all connected and it's all critical.

Robert Krebner: So as employers or plan sponsors, what kind of programs or strategies do you see our clients implementing around financial wellness?

Bennett Hadley: Good question. Good question. So five, 10 years ago, there were mostly one-off benefits projects, Financial Wellness Awareness Week, programs like that. These days, there's a big push towards holistic solutions. So it's making sure that your financial well-being benefits compliment each other, make sure they compliment your health well-being benefits, your health insurance, your retirement, making sure everything comes together, making sure everything's communicated holistically and consistently to their people to make sure that they know that they have these great benefits, they know they have the financial benefit, they know they have a health wellness benefit and how they can benefit the employee.

So these days, really it's about making sure what you do end up offering in terms of financial well-being complements your existing plans, making sure that it's relevant to your population, and that it's going to have a positive impact ahead of time. So that's doing your due diligence from the outset, making sure your benefits are relevant to your people's needs, so you're not really like five, 10 years ago, shooting from the hip a little bit. This sounds like a great program. Let's set it up and see what happens, right? Plan sponsors are doing their due diligence, their research from the outset to make sure things will be a success for their people.

Rick Reed: Bennett, quick question. We're talking about the complexities of making decisions. Is there a reason why employers are being viewed as the catalyst for introducing these kind of programs? I mean, why can't individuals just go out and get these things themselves? Do you find that people are relying on their employer to maybe help sift through all the mounds of data and mounds of options?

Bennett Hadley: Short answer, yes, Rick, but I think there are two things at play here. First, like you said, people are making a lot of decisions. People are exhausted. People don't really have the mental bandwidth to say, my finances, maybe I'm doing all right. I'm getting by, but I like to be doing better. Let me go out and research and find someone that I can trust to help me with that. Not many people are doing that. They're too busy.

Rick Reed: They're paralyzed.

Bennett Hadley: Yeah, exactly. There are too many things going on. And the second thing is people trust their employer more than any other institution today, more than the government. People trust it. They have trust, they have faith in their employer, and if their employer offers something, they know that it's going to be safe for them to use. A lot of people don't have a ton of faith in the financial system. They don't, and they're not wrong to say that there's some predatory young people and practices out there that need to be avoided. So if the employer is offering a service, then they know that they can trust this financial advisor, whoever it is, to have their best interests in mind.

Rick Reed: So it's really, they're relying on that in a sense, on that fiduciary relationship. Even though maybe in the true sense of the word, it's not a fiduciary, the employers that function you as a fiduciary, but they're doing some due diligence to circumvent some of that dishonesty that's out there.

Bennett Hadley: Yes, yes. They're sifting out the bad actors, and they're making sure that they're only offering reputable and high quality services and people to interact with their employees.

Robert Krebner: And the government is here to help too, right? They're offering new, or they're helping plan sponsors offer new financial wellbeing solutions. So talk to me about how Secure 2.0 changes the game.

Bennett Hadley: Yeah, very good point, Rob. Secure 2.0 introduced a few new avenues that plan sponsors can explore when it comes to offering financial, well-being benefits to their people. For student loan borrowers that they instituted 401(k) or 403(b) plan match on student loan payments so that borrowers can pay off their loans and simultaneously the employer can make contributions to their retirement plan on behalf of them. So that was a great provision and Secure 2.0 that some plan sponsors have taken up.

Another is kind of emergency savings 401(k) sidecar accounts where plan sponsors can set up an in-plan emergency savings account for their people, which has some pluses and minuses. I think in the industry, a lot of people view it as an interesting concept, but maybe not best executed in its current form, but really Secure 2.0. How I view it is that it's just further confirmation that this is a serious situation that the government is taking note of and acknowledging that something has to be done to help support employers, support their people. That they need more tools to offer these kinds of benefits to help out their people.

Rick Reed: Well, our economy relies on the everyday American and their consumption. So if they don't have the resources to invest in, buy their first home or to buy a car, I think that has an everlasting effect on our economy as time goes on.

Bennett Hadley: Yep, yep. That's a good point.

Rick Reed: So Bennet, here at Segal, our vision for a successful retirement program is based on three main pillars and centers on one, providing a meaningful retirement income. Two, ensuring that the benefit payments are safe and secure, and three, that the program is understood and appreciated by key stakeholders. In other words, the participants. So how does all this financial well-being discussion tie into this concept and its three pillars?

Bennett Hadley: So I would say mostly pillar one, providing meaningful retirement income, right? Because as we've been talking about, our current retirement system is really mostly 401(k), 403(b), defined contribution retirement plans. And the only way that those become meaningful retirement income is by building savings. And the only way that savings can be built is by participants making contributions. And the only way participants can make contributions is if they feel financially well, right? If they don't feel financially well, if they can't pay their bills, if they can't repair their car, if they can't buy a house, they're not going to be saving for retirement. So it's really all about making sure that they can build those retirement savings so that eventually in retirement they can have income, meaningful income.

Rick Reed: I agree with that. That's very helpful. Thank you. So just kind of wrapping up a little bit, I mean, how can employers get things started? I mean, not all employers have financial well-being programs, or they may offer, as you were talking about these one-off benefits to help in certain areas, but there's not really a strategic plan around it. How can employer get started? How do they get engaged, their participants and their employees to be encouraged to save for their future?

Bennett Hadley: Excellent question. So, right. Like I said, the modern financial well-being benefit or HR benefits in general are all very holistic. So we would say that you need to start by understanding what you're trying to accomplish and what your people need in terms of financial well-being. So asking yourself as the plan sponsors, as the employer, what are our goals for this program? And then also taking a really deep look into your employee population. What do our people actually need in terms of financial health, financial well-being. What financial challenges do we need to solve for to help them?

And then once you understand those two things, you can build as you hit at Rick, a strategic plan to tackle that, right? And then once you have that plan in place, you can go out to the marketplace, see what's out there, make sure, like we talked about, that you're sifting out those bad players and eventually finding the products that best fit your strategic plan.

And once you have your program set up, we know that things change, right? The economy changes constantly. People's financial change challenges are changing month to month, year to year. So you have to monitor what you set up. So even if today you have a very successful financial well-being plan, there's still work you need to be doing. You need to be measuring outcomes against key metrics to make sure that your program is staying effective and that if outcomes start to get less positive, you can look at your plan and say, all right, what's changed? What do we need to tweak in order to get this functioning well again?

Rick Reed: You'd say the strategic plan would help target certain solutions to certain demographics. I mean, I've seen where if you're telling somebody who's 57 years old about what do you need to do to help support you buy your first home, there's probably not going to be a whole lot of interest there.

Bennett Hadley: Yes, yes. Excellent point, Rick. Yeah. Yeah. The strategic plan is all about your-

Rick Reed: Demographics.

Bennett Hadley: ... Is all about matching solutions to your demographics and what certain people in your population need, and what are the key sub-populations that you''re trying to target to improve their financial well-being and decrease financial stress. We talked about how harmful financial stress could be for an organization.

Rick Reed: Just to give a little example, I also have a client where they're in a part of the country that is, the labor force is not as large, so they're trying to attract new people to their region. So the example I can give is in their financial well-being program, young Americans, they want to buy a house, and it's very difficult as we've talked about. One of their key elements was how do we help our people, our young people buy a home that would help maybe attract people from the East Coast to the West Coast or wherever? And that's an example of how I've seen where an employer's goals and a participant's employees goals can align in one program. Would you agree with that?

Bennett Hadley: Yes. Yes. Right. That's an excellent demonstration of the employer saying, all right, what are we trying to accomplish? Right? We need more young workers at our company. We're struggling to attract them and keep them when they're here. What are our people's needs, right? People need to buy a home, so let's set up a benefit that helps people buy homes so that they can address an employee need and at the same time support their business. Excellent example.

Rick Reed: Robert, anything else you want to add?

Robert Krebner: No, that was great. I learned a lot. This is a lot of great information, and thank you for allowing me to be a part of this.

Rick Reed: Great, Bennett. Thank you so much for being here today. This was very educational and formative. Thank you. To our audience, thank you for listening today. For more Retirement Plan Insider podcast episodes, please visit our website at www.segalco.com and in the search bar type "Retirement Plan Insider". And please don't forget to join us for our next quarter, next quarterly episode. That theme is currently being discussed, and we will make sure that for you, it's as informative and helpful as today's has been. So thank you and have a great day.