Because defined contribution plans play such a critical role in retirement security, placing the burden entirely on employees’ shoulders leaves them vulnerable, a report from Northern Trust said.
Employers and plan sponsors should use plan design and education to compel employees to participate in the plan at a level most likely to secure them a well-funded retirement, the firm suggested.
“The Path Forward,” released Monday, is based on interviews by Greenwald & Associates with DC plan consultants, plan sponsors and plan participants over the course of five months in 2014.
There were almost $7 trillion in DC plans as of the end of 2014, and over 88 million participants, according to ICI and the American Benefits Council.
However, EBRI found only 22% of workers and 37% of current retirees say they are “very confident” about their retirement.
Plan sponsors’ two biggest concerns were whether or not people were saving enough for retirement and whether they’re appropriately diversified, according to Jim Danaher, managing director of defined contribution solutions for Northern Trust. In an interview with ThinkAdvisor, Danaher said there’s a “prevailing sentiment, rightly or wrongly, from employers that they don’t want to feel like they’re Big Brother looking over the shoulder of the employee and interjecting too much.”
He said there’s some concern among sponsors that pushing employees too hard will “have the opposite effect and drive them away.”
They’re also concerned that they could open themselves up to liabilities from a fiduciary standpoint if they push employees too hard to contribute.
Northern Trust found participants are contributing a median of 6% to their DC plan. One in 10 weren’t contributing enough to meet their employer’s match, and 29% were contributing just enough to get the match, but no more.
The survey identified five ways employers can increase the amount their workers are saving.
1. Recommending contribution amounts. Northern Trust recommended employers start by encouraging participation, but also suggested they set recommended contribution amounts based on factors like an employee’s age or salary. In fact, 84% of participants who responded to the survey said they would consider their employers’ recommendation when setting up their contribution amount.
2. Using automatic features more meaningfully. Similarly, the report encouraged employers who offer automatic features to use meaningful contribution amounts, like a 6% deferral rate and allowing auto-escalation to increase contributions to above 10%. The report found that even low-income workers were unlikely to change their automatic deduction if their employer set it at 6%.