Due to industry pressures and technology advances, the unbundling of these programs has driven down administrative costs and provided better choices to employees. However, the decisions of if and how to participate in the plan remain with the employee. The same factors contributing to lower administrative costs and improved investment selection also drove an increase in the complexity of the plan, at least as perceived by the employee. Although plans were now “better,” they did nothing to reduce the impact of participant inertia.
Certainly, plan sponsors have no obligation to help employees achieve their retirement goals. Yet, a recent survey conducted by Deloitte Consulting, LLC, showed that 62% of plan sponsors “feel that our responsibility includes taking an interest in whether our employees are tracking towards a comfortable retirement.” 2 Given this sentiment, there are several steps plan sponsors can initiate to improve the likelihood of retirement readiness for their employees.
When asked, participants often say they want and need help in two areas of retirement planning: 1) how much to save and 2) how to invest their money. A growing percentage of participants would be more than happy to completely pass off their retirement planning to someone else to manage.
A recent study by Aon Consulting found that participants should save 15% of their pay, including employer contributions, over their working career to provide adequate retirement income.3 Such contribution levels, in conjunction with Social Security, would provide 85% pre-retirement income replacement, an amount considered sufficient to maintain the same standard of living in retirement. To the extent participants wait to enroll in the plan or enroll at lower contribution levels, the required contribution amount increases.
In addition, often participants lack knowledge about making investment allocation decisions. Faced with an often confusing set of multiple investment options, participants often make investment decisions resulting in inadequate diversification and heightened risk exposure.
Plan sponsors have a fiduciary responsibility to ensure the investment options included in their plan are appropriate and the fees being paid are competitive. These actions go a long way to ensuring the plan being offered is a “good” one. However, the focus cannot just be on funds and fees. A lineup of five-star, low-cost funds becomes irrelevant if employees are not participating in the plan or are not making the right investment decisions. A well designed contribution formula combined with “auto” features can significantly improve participation rates as well as participant outcomes, often at little or no increase in cost. Plan sponsors can then take their plan from being good, to being one that works.
* * *
This article addresses some steps plan sponsors can take to improve participation rates and outcomes within defined contribution retirement plans. To read about other plan design changes that can improve participant readiness, read Improving Participant Outcomes: An Action Plan for Plan Sponsors. If you have any questions, or would like to begin talking to a retirement plan advisor, please get in touch by calling (855) 882-9177 or e-mail us at sbs@hanys.org.
1 2012 PLANSPONSOR Defined Contribution Survey.
2 Deloitte Consulting, LLC, Annual 401(k) Survey Retirement Readiness, 2010 Edition.
3 Aon Hewitt Consulting, The Real Deal – 2012 Retirement Income Adequacy at Large Companies.
