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DC Plans’ Goal Is to Help Employees Retire on Time: T. Rowe Survey

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A survey released Monday by T. Rowe Price identified the major goals driving large defined contribution plan sponsors’ plan design. Many of those goals indicate these large plan sponsors feel a sense of duty to participants, and they’re doing more to help their workers reach a satisfying outcome.

The survey found 85% of large plan sponsors consider helping employees save for retirement a major goal of their 401(k) plan, the most commonly cited goal in the survey. Over two-thirds of sponsors agree strongly with the notion that helping workers save enough for a secure retirement is their responsibility.

(Related: Beware the Working Retirement Tax Penalty)

However, despite this responsibility, over half of large plans don’t have a formal way to measure participants’ retirement preparedness.

That was a surprise, according to Anne Coveney, senior manager of Retirement Thought Leadership for T. Rowe Price, especially considering the survey’s sample of plan sponsors with more than $100 million in assets.

She noted that the survey asked specifically about formal metrics. “It may be that many are using more informal ways of measuring” participants’ progress, she told ThinkAdvisor on Monday.

Of sponsors who do have a formal way to measure participant preparedness, 52% are using a metric provided by their recordkeeper. Over 20% are using one provided by their advisor or a consultant, and a quarter are using some proprietary metric.

Coveney said that this finding represents an opportunity for advisors to reach out to sponsors. “Essentially 73% [of sponsors] are outsourcing the metric,” she said.

Regardless of how they measure preparedness, plan sponsors that track their participants’ progress toward a savings goal tend to be more likely to offer plan design features that encourage savings like auto-enrollment, auto-escalation and periodic re-enrollment campaigns to add non-participants to the plan.

Auto-escalation schemes are still less common than auto-enrollment (58% versus 78%). Lack of interest from participants may be at least partly to blame. Almost half of the large plan sponsors that offer auto-escalation said participants opted out because they worried they couldn’t afford the regular cuts to their paychecks.

Some plan sponsors are responding to that concern by increasing workers’ compensation in line with the automatic escalation. Of the 21% of respondents who had adopted this strategy, it was most common among sponsors that also offer a defined benefit plan (35% versus 11%).

(Related: TIAA’s Target Date Fund Alternative Acts Like a Pension)

“That question was informed by the consumer research we do every year,” Coveney said. “What we found is that [participants] would save more if they could afford it, but that’s the No. 1 reason for not saving more. A lot of people report raises that are pretty small.”

Coveney believes auto-escalation schemes that are tied to a company’s compensation strategy could become a best practice.

Older Workers

Retaining talent and recruiting new employees were also major goals for respondents’ 401(k) plans (69% and 57%, respectively), but another key goal for the defined contribution plan was getting older employees out of the company. Almost two-thirds of sponsors ranked enabling workers to retire at their goal retirement age as a major goal, making it the third most important goal for sponsors in the survey.

As more workers shift into the withdrawal phase of their retirement planning, organizations are taking a more proactive approach to income planning for participants. Over 40% of large sponsors in the survey said helping their retired participants manage their income is a major goal.

“That seems to point to the direction of the 401(k) really evolving into a true retirement plan that can basically be with you through your various life stages and through retirement,” Coveney said.

“Anecdotally, at T. Rowe we’ve seen some of our larger clients are very focused on the effort, and they’ve seen their participants striving to save. I think they feel some responsibility and they also feel good about it if they can continue to help them into retirement.”

Over half of sponsors said they currently offer periodic withdrawal features, and 4% expect to offer such a feature in the next two years. A quarter of respondents offer managed payout funds to regularly distribute income to retirees, with another 5% saying they plan to add those types of funds in the near term.

“As we know, the baby boomers are all retiring, [and] this is obviously a focus,” Coveney said. “It’s encouraging to see it in the 401(k).”

— Read Millennials Are Top Savers, but Not for Retirement on ThinkAdvisor. 


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