Retirement plan participants have moved beyond recovering from the effects of the recession and are focusing on long-term goals, a report from The Principal found.
The report analyzed 2009-2010 data from retirement plans serviced by The Principle.
“We’re seeing participants shift their focus from getting back to where they were to taking steps to get to where they need to be to reach their financial dreams,” said Barrie Christman, vice president of individual investor services at The Principal.
Much of that burden will fall on plan participants rather than employers or plan sponsors. The report cites research from Deloitte Consulting that found just 15% of plan sponsors consider retirement income replacement ratios when they design their plans, even though 62% feel their responsibilities include making sure workers are on the right track for a comfortable retirement.
In spite of that concern, half of employers require one year of employment before workers are eligible to join the retirement plan, well above the 11.2% industry benchmark. Plans that allow new hires to immediately join are becoming less common, falling from 11.8% in 2008 to 10.8% in 2010.
In 2010, almost twice as many participants increased their contributions as those who decreased or stopped them, and while deferral rates were lower in 2010 than their 2008 levels, they had increased since 2009.
When employers increased the default deferral rate to 6%, average deferral rates increased to 7.1% and 61% of employers reached a contribution rate of 11% or more. The paper suggests participants should be saving between 11% and 15% of their pay, including their employer’s match, through their entire career. Plan sponsors agree, suggesting that employees should save an average of 12%.
Education is a major driver of retirement success, the report found. Access to a group meeting about retirement planning in the last 12 months increased participation rates by 5.5 percentage points. Findings suggest that employees need it. Twenty percent of workers say they’re not sure how much they need to be saving. Furthermore, 81% of pre-retirees do not have a written retirement plan. More than half of pre-retirees believe they can spend 6% or more of their savings per year without running out of income, and more than one-third think they can spend 8% or more.
Features that reduce the effort participants have to put into maintaining their plans were popular. Automatic enrollment and escalation features, not surprisingly, increased participation rates to 78%. Assets in lifecycle investments almost doubled since 2008, and in 2010 over 77% of plans offered target-date funds.
The number of plans that allow loans held steady through 2009 and 2010. While the percentage of participants who took a loan increased slightly, the percentage who took a hardship withdrawal fell to 1.3%.
Over half of financial professionals surveyed by The Principle said that no more than one-quarter of their clients began saving early enough to meet suggested levels of retirement income. An advisor’s positive influence, however, is obvious.
Over two-thirds of workers who use an advisor are aware of how much they need to save, compared with 42% of those who don’t use an advisor. Forty-two percent of those who work with an advisor are “extremely happy” with their current financial state, compared with 22% of those who do not have an advisor.