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Retirement Plan Participants Willing to Accept Restrictions

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Retirement plan sponsors and consultants up on the latest ideas about best practices in defined contribution (DC) plans may have support for plan design reform from an unexpected source: plan participants themselves.

The notion that the two groups are not far apart on some innovative retirement plan changes is borne out in a new survey of 1,000 current or past participants in a 401(k) plan carried out by Greenwich Associates on behalf of Northern Trust, which administers some $222 billion in DC assets.

The study, “The Path Forward: The Ideal DC Plan May Be Closer Than You Think,” is part of an annual research series that normally takes account of expert opinion — the views of plan sponsors or consultants. The current study, however, looks at plan design from the public’s perspective.

“This year, we hit the pause key on soliciting plan sponsor feedback, to find out where participants concur — and differ — with those who are responsible for designing and overseeing their DC retirement programs,” said Jim Danaher, managing director of defined contribution solutions at Northern Trust, in a news release.

“The results are encouraging, because they indicate that participants would accept limits on longstanding DC plan features such as daily liquidity or taking loans if the reforms could lead to improved savings rates, investment returns and retirement outcomes,” Danaher continued.

Indeed, best practices that might foster greater focus on the long term may not be an area of disagreement between plan sponsors and participants. The study says that plan participant behavior may belie the belief that plan participants want the ability to make daily portfolio changes.

The survey found that while a majority — 56% of participants — say the ability to change their investment mix is important, a far larger percentage, 91%, say they would be willing to sacrifice daily access to their account if doing so would offer greater return potential.

“What participants do supports what they say: many participants do not access their accounts regularly despite having daily access,” the report states. It adds that 51% of those surveyed hadn’t changed their investment mix for at least 2 months, “including many who haven’t made a change in two or three years.”

The Northern Trust report advocates that plan sponsors consider “premixed portfolios with less liquid investments that have greater long-term return potential,” saying that since investment managers don’t necessarily make daily changes in their investment mix, “why enable participants to change investments daily?”

Reached for clarification by ThinkAdvisor, Danaher had alternative investments in mind as examples of less liquid investments with increased return potential, specifying “strategies such as hedge funds or private equity that have typically been used in defined benefit plans.”

A second significant plan design change involves the issue of leakage of retirement assets prior to retirement. Northern Trust says 91% of plan sponsors allow participants to take loans, assuming access to these funds is a condition of their participation in DC plans.

Yet the survey finds that 76% of participants have never taken a loan, 57% think only emergency expenses could justify such loans and only 13% consider taking a future loan. If, the report asks, participant borrowing has not dramatically increased even in hard economic times, why make 401(k) loans so easily available?

Northern Trust suggests that restricting such loans to financial hardship and limiting access to employee contributions alone (and not to employer contributions) will prevent leakage of assets needed for retirement and further narrow the distance between expert and mass opinion.

Other key areas where plan sponsors and participants are closer than one might have thought include investment selection and rollovers.

On the former, a majority of participants have no objection to being automatically re-enrolled (unless they opt-out) into a target-date fund from their current investment selection. Last year’s survey showed that plan sponsors and consultants viewed premixed default options as a best practice for DC plans.

As to rollovers, the survey found that 51% of employees either rolled over their assets to a new employer’s 401(k) plan or kept it in the old plan (vs. the 24% rolling over to an IRA, which may lack “fiduciary oversight and institutional pricing”).

The willingness of plan participants to remain in 401(k)s, with some leakage of assets to IRAs, may mirror ambivalence among plan sponsors, who last year’s survey showed have fiduciary liability concerns about keeping the assets after an employee leaves.

Northern Trust casts its lot with those favoring keeping the assets, and advocates counseling that would encourage “new hires to roll over their savings to, and participants who are leaving to keep their balances in, the plan.”

The reason, Danaher says, is “the likelihood that participants will pay lower investment management fees through an institutional 401(k) than a retail-based rollover IRA.”

Danaher says his firm’s research is intended to aid clients of the Chicago-based firm:

“While Northern Trust does not administer defined contribution plans in the same sense as those firms who provide participant-level recordkeeping services, as a DC investment-only provider we continually advocate for plan design best-practice elements that we believe have the potential to produce better financial outcomes for participants at retirement,” he says.

Check out 4 Big Changes to 401(k)s, IRAs in Obama’s 2014 Budget on ThinkAdvisor.