Account Balances, Not Participation, Called Best Measure of Retirement Plan Success

Auto-enrollment is beneficial, but not the only answer to improved outcomes, Diversified says

Plan sponsors need to remember the primary goal of retirement plans: namely, for participants to accrue sufficient savings to retire comfortably. Automatic enrollment increases participation rates, but that’s not the only measure of success for a retirement plan, according to Diversified, a retirement plan administration provider.

The company released a survey of companies with more than 1,000 employees on Oct. 18, “Report on Retirement—2011,” which found 37% of plan sponsors agree that helping employees accumulate income for retirement is the primary reason for offering a defined-contribution plan.

“According to Report on Retirement Plans—2011, most sponsors measure their plan’s success in terms of retirement readiness by assessing the participation rate as opposed to deferral rate adequacy or size of their participants’ retirement savings gaps,” Laura White, vice president of Diversified, said in a statement. Many industry experts now believe deferral rates or account balances are a better indicator of retirement preparedness, White added.

“Sponsors may need to embrace more holistic plan measures and use multiple metrics to engage employees,” White noted.

Automatic enrollment is already a popular feature and has been successful in increasing participation rates. Forty-seven percent of corporations surveyed said they offer it and it is especially prevalent among very large companies. Fifty-seven percent of companies with over 10,000 employees use automatic enrollment in their plans.

Automatic deferral escalation, on the other hand, is used by only one-third of plan sponsors, with another third considering adding the option. Over half admit their default deferral is too low—20% offer a deferral rate that is less than 3%. Furthermore, plans that offer a matching contribution have higher deferral rates, the report found. Nearly all corporate sponsors contribute to their 401(k) plans, with 87% offering a matching contribution.

The demise of defined-benefit plans has been well reported, but the difference to plan sponsors between DC plans and DB plans doesn’t stop at cost. While 41% say they offer a defined-contribution plan as a way to retain employees, plan sponsors are more likely to say the primary goal of a defined-benefit plan is employee recruitment.

Other ways to engage employees and increase savings is to offer participants advice. Doing so has led to increased savings rates for 55% of companies, increased reallocations for 41% and has raised participation rates by 26%. Over two-thirds of sponsors and participants turn to their plan provider for investment advice.

But while most plan sponsors cite increasing participants’ savings as their primary goal, they “are balancing the need to encourage employees to better prepare for their retirement, while managing expenses in a dynamic market,” White said. Just 12% of sponsors have an expense budget account to pay for plan expenses.

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