K⁴ Plan Goals
Meeting Fiduciary Requirements and Achieving Participant Goals

by Tim Paulin, CFA

Without a doubt, recent developments in retirement plan design and implementation of the Pension Protection Act provide plan advisors and plan sponsors a greater arsenal to fight what has been deemed by many to be a losing effort: helping Americans fund their retirement needs. With the trends toward automatic enrollment, default investment portfolios, and escalating savings rates, a greater number of employees will participate in plans at higher savings rates and with healthier investment diversification. But a vitally important question remains:

Will a participant with a default investment portfolio and a default savings rate escalated at a default savings increment actually achieve his or her retirement objectives?

The retirement plan marketplace is already littered with calculators purporting to answer this key question. They typically ask the participant a few basic questions regarding objectives and assumptions. The outcome is usually an estimate of assets accumulated at retirement and/or the probability that the participant will not outlive his assets. But what happens when the participant is dissatisfied with the initial results? Additional iterations are required until the participant does one of two things:

• finds a minimally acceptable solution, or
• gives up and abandons the evaluation.

During the 1^st quarter of 2008, KleinDecisions will introduce K⁴ Plan Goals to address this question in a unique and compelling way. K⁴ Plan Goals brings an easy-to-use but robust process to retirement plan guidance.It defines participant objectives and priorities and determines the most satisfying combination of savings rate and investment portfolio likely to achieve the participant’s retirement goals. This internet-based participant retirement tool will be licensed to retirement plan providers and advisors enabling them to add value for both plan sponsors and plan participants. K⁴ Plan Goals will allow licensees to incorporate their own investment assumptions, asset models and plan investments. For those who desire to outsource capital markets assumptions and asset model construction, K⁴ Plan Goals will also be offered with default assumptions and models.

 

The K4 Plan Goals Difference

What makes K⁴ Plan Goals different is its ability to engage the participant in the process and then motivate the participant to action. This is achieved by solving for a complete optimal strategy rather than simply calculating results for a single “what-if” scenario. There are no iterations in the process. The optimal participant strategy is calculated and presented without trial and error and without having to settle for a merely acceptable option.

K⁴ Plan Goals reveals

1. A retirement age that can be achieved
2. The retirement income that can be expected
3. A savings rate that must be maintained
4. An investment portfolio that is appropriate
5. The probability that the combination of the four items above will provide enough funding for the entire retirement planning period.
6. The combination of these four factors that achieves maximum participant satisfaction within the desired probability of success.

Benefits of K⁴ Plan Goals versus other retirement “calculators” available in the marketplace today are:

• K⁴ provides guidance to all participants, even those without online tools
• K⁴ engages retirement plan participants focusing then on their retirement goals
• K⁴ simplifies the planning process with minimal inputs and actionable results
• K⁴ personalizes the planning process making it relevant to the participant by including participant preferences
• K⁴ presents an optimal combined strategy for retirement age, retirement income, savings rate and investment portfolio for each participant to achieve appropriate investment and savings decisions
• K⁴ exceeds fiduciary standards for participant guidance and gives plan providers and sponsors the ability to use aggregate and/or specific participant results to evaluate whether participants are “on-track” and adjust education efforts, as needed.

Guidance available for all participants

K⁴ Plan Goals is designed and constructed to respond to the needs of a very broad group of retirement plan participants. Most are not professional investors and many have little interest in investments or their plan. Just as importantly, over 60% of participants have no other retirement assets outside of their retirement plan(s). With those observations in mind, the first requirement is that K⁴ be engaging, easy and quick to complete.

The hard part is making anything easy. From the start, the aim of providing the broadest benefit possible led Klein to simplify wherever possible and avoid inclusion of content that would only appeal or apply to a small cross-section of participants. Infrequently used bells and whistles often lead to high abandonment rates and dissatisfaction among users. K⁴ Plan Goals intentionally avoids such pitfalls resulting in simple questions and minimal participant inputs.

Certainly, some wealthier participants, those very near retirement or those with special needs may desire additional planning beyond the scope of K⁴ Plan Goals. Of course, they are the most likely participants to either already have an advisor or to seek one. But the issue for the fiduciary is that all plan participants must be served, not just a subset. If the additional complexity required to meet the needs of one or several subgroups alienates the masses, the effort to extend the benefit of retirement planning tools to all participants may be largely wasted and may raise regulatory issues. K⁴ Plan Goals conscientiously and deliberately avoids complexities that are not used by the 75-80% of participants who want guidance but have limited time and limited knowledge in this area.

Engages plan participants

As suggested above, many retirement plan participants are “reluctant investors”. They may not make a proactive effort to plan for retirement or assess their retirement plan alternatives. For them, automatic enrollment and default solutions are very beneficial. Getting started is a necessary step toward a successful retirement.

But keeping participants – both online and offline - engaged and invested is critical as well.K⁴ Plan Goals has a unique approach to engaging participants. It provides a number of communication options, both online and offline, in enrollment/education meetings, on the web, through regular mail, or via email.

In general, engaging the online audience is easier than engaging offline participants. Most plans now provide online access to plan information, transaction capability and retirement planning tools. If anything, online participants may suffer from too much information which can lead to over-analysis of plan investments and rash, short-term investment decisions. But the real key for online participants is to emphasize whether or not they are on track to meeting retirement objectives. K⁴ Plan Goals gives online users a clear snapshot at login to indicate whether their current investments and savings are likely to produce retirement success.

 

By keeping them focused on their progress toward their goal K⁴ Plan Goals is more likely to keep online participants contributing at appropriate levels, invested in the optimal allocation, and less inclined to micromanage their investments.

Offline investors are much harder to reach. By offline, we mean participants who are not typically Internet users or those who are not taking advantage of online tools available to them as participants. To engage these participants, an offline solution is necessary. Unlike other tools, K⁴ Plan Goals enables plan providers to generate periodic paper-based reports to participants illustrating progress toward retirement objectives. These reports may be distributed either via email or regular mail and are designed to be participant-centric rather than investment-centric.

By participant-centric, we mean that K⁴ focuses on what the participant is trying to achieve in the future more than what plan investments have achieved in the past. Too many retirement plan investment statements go into the garbage pail without being opened. This indicates that either the statements simply contain too much or too little information presented in a way that does not pique participant interest.

Many participants do not see recognize their retirement plan as a tangible financial asset that needs managing and nurturing to provide enough future benefit. In addition to the initial snapshot, ongoing K⁴ Plan Goals results may be delivered regularly using the same online/offline methods. This continually reminds participants that their current balance – however small – is a means to providing a tangible future benefit. Establishing and maintaining retirement as a definite and valued goal is the only way to help investors recognize the true value of appropriate investing and the true cost should they decide to liquidate or halt participation in their retirement plan.

Personalized retirement Planning made easy

K⁴ Plan Goals initially engages all participants by providing a current assessment of their progress towards their retirement goals, and suggesting an alternative strategy for those that are not on track. A key feature of this compelling information for participants is that the initial assessment from K⁴ Plan Goals does not require any input from the participants. It is a default-based, actionable solution for participants who need an easy way to make goal-based decisions about their retirement plan strategy.

Once they see how they are doing and how easy it is to engage in the process, participants can further personalize their planning strategy by adjusting their objectives and priorities. Perhaps a participant would like to retire earlier than the defaults indicate. Or a participant may want to replace more income during retirement. Although the defaults produce valuable information, each of the variables can be tailored by each participant. And rather than ask for a specific retirement age or income level, K⁴ Plan Goals allows the user to input a range for each of the objectives reducing the time for narrowing each down to a single number and also enabling K⁴ Plan Goals to calculate numerous possible scenarios.

K⁴ gathers the participant’s acceptable to ideal range of results for each of four attributes of a retirement strategy:

• retirement age objective
• retirement income replacement objective
• willingness to save
• tolerance for risk (short-term volatility)

In this Retirement Age example, the participant would like to retire at age 60, but would be willing to work to age 70 if necessary.

 

Not only does K⁴ make things easier to conceptualize with a range of values for each variable, K⁴ determines how important each objective is to the participant through a series of simple, paired trade-off questions. For instance, one participant may be willing to work longer to generate more income in retirement while another may prefer the opposite. With K⁴ Plan Goals, not only is it possible to personalize the objectives, K⁴’s patented method of assessing preferences provides a way to prioritize amongst those objectives. By setting the ideal/acceptable range and measuring the priority for each objective, the participant enables K⁴ to do all the necessary the “what-if” work to arrive at the optimal strategy.

Presenting the optimal combined strategy

Unlike other calculators and simulation models, K⁴ Plan Goals doesn’t simply evaluate one set of retirement objectives. Instead, it evaluates dozens or even thousands of combinations of retirement age, retirement income, savings rate and investment risk within the participant’s acceptable ranges. The K⁴ Plan Goals patented process incorporates participant priorities up-front in a series of easily understood trade-off questions and then is able to actually calculate and rank all combinations within the acceptable ranges. K⁴ presents the best complete strategy that optimizes the participant’s satisfaction in meeting the objectives within an acceptable probability of success. There is no iterative process where a user has to input a new possible solution, view the results, see if they work, and then input another one until the maximum frustration level is reached. K⁴ results include the probability of success based on Monte Carlo simulation, an evaluation of participant satisfaction based on the participant’s objectives and priorities, and the top-ranked complete strategy solved for all four retirement planning variables simultaneously.

The unique, actionable result is a suggested strategy that may be directly compared to the current strategy on two fronts: (1) likelihood of achieving retirement objectives and (2) satisfaction with the combination of retirement age, retirement income, savings rate and investment risk.

 

K⁴ Plan Goals calculates the optimal strategy for all four variables based on the participant’s objectives and priorities yet it can still accommodate the needs of the “tinkerer”. Some participants like to try to “outsmart the system” or simply need to evaluate other alternatives to gain enough comfort to implement savings and investment adjustments. For these participants, K4 provides its own What-If capability. But rather than asking the participant to start with a blank slate, K⁴ begins the analysis with the optimal combination of retirement age, retirement income, savings rate and investment risk based on the participant’s objectives and priorities. In this manner, the participant may avoid testing the unreasonable combinations that often lead to frustration and tool abandonment.

Are participants on-track?

Finally, we return to the question originally posed at the start of this article.

Will a participant with a default investment portfolio and a default savings rate escalated at a default savings increment actually achieve his or her retirement objectives?

Of course, the answer is “It depends”. The improvements in retirement plan defaults fostered by PPA should encourage participants to diversify and increase (or begin) deferrals. But they still won’t help assess whether the participant is likely to run out of money during retirement.

K⁴ Plan Goals provides the means to efficiently evaluate whether any retirement plan participant is on track to achieving his or her retirement objectives and calculates a complete strategy that will achieve the maximum satisfaction and necessary probability of success. But K⁴ Plan Goals doesn’t stop there. For plan sponsors and advisors, the ability to help even those participants unwilling to go online or use offline tools means providers can truly serve all participants. And the ability for sponsors and advisors to periodically analyze the health of the plan in aggregate and target education efforts to help participants achieve their objectives is a critical element to being a top-notch fiduciary.

For more information about K⁴ Plan Goals, contact us at 919-233-6767.