By now, the move out of defined benefit plans into defined contribution plans has been well-established, although the success of the plans wavers with the strength of the economy.
In November, Fidelity reported its highest ever average balance in the 401(k) plans it administers, while in September, EBRI reported a drop in participation rates in employer-based retirement plan participation in 2010, after a steady increase since 2007. The Center for Retirement Research and the Urban Institute stated in a working paper released in November that participation rates increased “dramatically” to over 40% in 2001, then rose and fell in line with economic cycles.
Participants in 401(k) plans are “definitely influenced by the economy,” Barbara Butrica, senior economist at the Urban Institute and one of the authors of the Urban Institute/CRR working paper, told AdvisorOne on Monday. “We saw dips in participation and contribution amounts.”
Those dips are especially troubling considering contribution levels are already very low, she said. “Most people aren’t contributing anywhere near the limit.”
The working paper found median contributions increased over 19% between 1992 and 1999, and a much more modest 3.7% between 2002 and 2004. They fell approximately 5% between 2004 and 2007, and again between 2007 and 2009. The maximum contribution for workers in 2013 will be $17,500, the IRS announced in October.
“A lot depends on the economy going forward and whether income is increasing and how people feel in general,” Butrica (left) said Dec. 17. The Conference Board released its most recent Consumer Confidence Index in late November, showing consumers are slightly more optimistic than they were in October. The index now stands at 73.7.
Butrica said that the industry is still learning from the switch from defined benefit plans to defined contribution plans. “There are still a lot of things we don’t know about what it means for retirement security,” she said. “This is a very different world.”
She pointed to the increased pressure on workers in defined contribution plans to determine their retirement success. They have to decide whether to participate and where to invest their money, “decisions that formerly they didn’t have to think so much about. Many aren’t prepared to make the financial decisions defined contribution plans require.”
Patrick Lulley, vice president of DCIO and insurance sales for Van Eck, shares a similar perspective, but has identified a subset of DC plan participants who are eager (or at least willing) to make those financial decisions.
There are two major types of investors in defined contribution plans, Lulley told AdvisorOne on Dec. 14. The majority of investors are passive, and are interested in pre-diversified products like target-date funds and managed accounts. There’s a second group, however, of more sophisticated investors who want to take an active role in diversifying their portfolios.
These “diversify it yourself” investors are interested in non-traditional, non-correlated assets, Lulley (left) said, like commodities, emerging markets and real estate. They may only account for between 20% and 25% of investors, but Lulley said “the industry needs to recognize that they must help participants identify themselves” as DIY investors if they are going to plan successfully for retirement.
“It’s critical for advisors and sponsors in the educational meetings they have to first educate [participants] on the type of investor they are,” he said. “The majority doesn’t have the background to make informed decisions. [Advisors] have to make them comfortable with pre-diversified solutions that are professionally managed and have access to asset classes that are critical to diversified portfolios.”
Another trend Lulley expects to see in 2013 is the continued interest in the retirement readiness aspect of planning as boomers move into the decumulation phase of their retirement. “Insurers will develop products to support the ‘401(k) paycheck’,” he said.