Screaming headlines of dubious reports purporting that 401(k) plan participants raiding their retirement savings are au courant these days.
But a Bank of America Merrill Lynch study released Thursday suggests an opposite trend, and the fact that Merrill’s retirement plan management encompasses 2.5 million total plan participants and plan assets of $98.1 billion gives weight to the study’s quite upbeat conclusion: that 2012 was a model year and that Americans are fortifying their retirement readiness.
“Of all participants in their retirement plans taking an action, we like to measure how many are taking positive actions and how many negative actions,” said Kevin Crain (left), head of institutional retirement and benefit services for Bank of America Merrill Lynch, in an interview with AdvisorOne.
The firm’s just-released annual and fourth quarter 2012 study shows that 81% of plan participants took positive actions such as initiating or increasing 401(k) plan contributions, while just 19% took negative actions such as taking loans or withdrawals from their plans.
Crain called that the “strongest” outcome he has seen since Merrill has been conducting its plan participant studies, beginning with the first quarter of 2009.
The Merrill executive cited two key reasons for the success Merrill plan participants enjoyed in the previous year.
One factor has been plan design features that encourage positive behavior.
“There’s a lot of effort now by companies, plan sponsors working with us as a provider, to make efforts to make it easier to get employees to stay engaged,” Crain says.
“They’re not just use auto enroll, they’re initially deferring at a higher rate than they used to,” he adds, noting that salary deferral rates of 4%, 5% and 6% are becoming a new normal in comparison to the 1%, 2% and 3% rates that once prevailed.
“What’s good about that is most companies match contributions, so you’re maximizing the employee savings,” Crain says.
Merrill has increased its training of its top plan advisors, currently numbering 150, but with plans to expand the group who receive this high-level training, to convince plan participants of the merits of not just selecting a high initial deferral rate, but opting for an automatic annual deferral rate increase.
Crain describes plan participants as a generally passive lot. Once in a program, they tend not to take any actions, for better or worse. So, even if they’re deferring at a decent rate, they tend not to increase later contributions.
But, if they initially sign up for an auto-increase of their salary deferral, they tend to leave that in place, too. “They keep getting bumped up; eventually we get them from 5% to 10%. With a company match, that’s a pretty good annual contribution,” he says.
The Bank of America Merrill Lynch study also described the integration of employee health care and 401(k) plan enrollment as another key plan design innovation that made it more likely employees would take advantage of their employer’s plan.
“When plan sponsors present employees with an easy ‘one-click’ option to enroll in or make a contribution change to their 401(k) plans during the annual health benefit process, we have seen significant increases in plan participation among new employees and in plan contributions among existing participants,” the report states.
The second key reason, aside from plan design improvements, leading to 2012’s exemplary results was promoting more face time with financial advisors. Specifically, employers offered in-person meetings were 67% more likely to increase enrollment or contributions in a company plan.
“There was a 30% increase in plan sponsors using face-to-face meetings,” Crain says. “They say, “Hey, this is great. I can tell our employees that another benefit I’m bringing them is financial education.’ In the old days, it was all about enrolling but now it’s much broader.”
Today, the firm encourages its plan advisors to promote general financial education as a benefit to the plan sponsor and participant alike. Rather than just signing people up, these education sessions are “about how to save in general and ways to save; how to budget in general and ways to budget; how to manage expenses in general and ways to do it,” Crain says.
The firm reports that tens of thousands of employees attended seminars or face-to-face meetings with a Bank of America Merrill Lynch financial professional last year at their place of work, a trend it hopes to encourage in future years based on the results of its 2012 model.