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%.
Furthermore, 43% of all workers and 37% of low-income workers would let auto-escalation push their contributions to 15% or more of their salary over time.
However, some sponsors were reluctant to adopt more aggressive targets for automatic features. Danaher put that down to the shift in employee demographics, as older people are more comfortable making their own elections, while younger people just starting out prefer automatic features and products like target-date funds.
“We see that shift in employees saying, ‘I want more help,’ may be indicative of the way the population is changing. Employers perhaps have not looked enough strategically at how that shift is happening in the age range of their participants and not making that connection,” Danaher said.
3. Provide projections of retirement outcomes. The report found participants believe an “ideal statement” includes not just their account balance, but an estimate of what they’ll have at retirement and how much it translates to in monthly income. Three-quarters of participants said they wanted their statement to include an inflation-adjusted estimate of what they’ll need for retirement.
This recommendation had a lot of support from the plan sponsor respondents, Northern Trust found. According to the report, most sponsors and consultants said including projections on statements was a “good idea” because it could motivate participants to take action based on where they are in their savings goals.
Among sponsors who weren’t supportive of including projections, the main objection was to the underlying assumptions and the fact that they would be unable to include all household assets. Some noted, too, that not all participants read their statements, a concern shared by sponsors who supported projections.
4. Offering a simplified investment menu. Interestingly, this recommendation seemed to have little direct support from participants. Over 40% said they were neither in favor of nor opposed to such a move from their employer, and only 29% came down strictly in favor of it. In fact, 30% were at least somewhat opposed to it.
Danaher said, though, that the majority who are indifferent to a simplified investment menu are more likely to accept it. “What we call the silent majority of plan participants, they are not reacting negatively to these changes,” he said of sponsors who have already streamlined their investment menu. “There’s typically a vocal minority that will say, ‘Why are you taking away this fund?’ The fact that we had so many respondents say, ‘I’m not for it, I’m not against it,’ is a good sign to us because it means that demographic is probably going to go along with it.”
Plan sponsors who objected to simplifying their investment menu were worried about replacing choices with objective-based funds and sophisticated investors’ reactions to limited choice.
5. Offering ways for retirees to convert savings to income. The report referred to research from EBRI that shows a quarter of retirees didn’t receive any professional advice in 2013, even though Cerulli Associates found over $321 billion was pulled from DC plans in 2012 and put into IRAs. A significant percentage of retirees’ assets are likely not being overseen by an advisor, Northern Trust theorized.
Eighty-four percent of pre-retirees said they would be interested in an in-plan investment option that would convert savings into guaranteed monthly income. The report also found 83% of pre-retirees were at least somewhat interested in keeping their money in the 401(k) in investment options designed specifically for retirees.