In what could be a major differentiator in recruitment and retention for companies that do it right, a new report finds that employees overwhelmingly favor their employers playing a more active role in their defined contribution retirement plans (DC plan). However, plan sponsors voice reluctance to doing so, according to the findings from Northern Trust.
The issue is critical since more than 88 million U.S. employees now participate in a 401(k) or similar DC plan. Such plans now hold more than $6.8 trillion in assets.
Specifically, Northern Trust found:
- 88 percent strongly or somewhat favor their employers providing tools to help determine if they are saving the correct amount for a financially secure retirement.
- 80 percent believe employers should encourage employees to contribute to their retirement plan, and 84 percent support employers providing incentives to encourage contributions.
- 72 percent think employers should provide a viewpoint on contribution amounts.
In addition, more than four-in-five employees surveyed said they would consider taking their employer’s advice when determining their contribution to a 401(k) plan.
For their part, plan sponsors interviewed for the study have reservations about taking a more active role in encouraging specific levels of saving and providing projections of retirement savings or income for participants.
“Plan sponsors generally agree it’s important to encourage saving for retirement,” Jim Danaher, managing director of defined contribution solutions at Northern Trust, said in a statement. “They have real concerns, however, about providing participants with targeted recommendations – by salary level or age – about how much they should be saving.”
The differing survey responses suggest employer behavior needs to change as employees look for plan sponsors to take a more active role in their retirement plans. At the same time, the study shows that policy issues, such as management’s role as a fiduciary, must be clarified before senior leaders will be comfortable providing the level of guidance sought by plan participants.
The study is the fifth installment in Northern Trust’s research series, The Path Forward, exploring the future of defined contribution plans. “Clearly most American workers must save more to have a financially secure retirement,” said Mathew Greenwald, president of Greenwald & Associates, who conducted the survey on Northern Trust’s behalf. “This survey found that most who participate in a retirement plan believe they are able to save far more for retirement than they are now. Indeed, two in three plan participants say that they can save at least 10 percent of their salary. A key issue is how to help workers set aside the amount of money they know they should, and these workers believe their employers can provide crucial assistance.”
Improving DC Plans
Based on the employee survey results, Northern Trust identified themes to guide employers as they consider evolving their DC plans to help employees achieve financial security in retirement:
- Step It Up: Increase the employer role in encouraging retirement savings, such as making specific recommendations for age or salary levels and encouraging participation in retirement planning.
- Provide Projections: Employees are interested in receiving projections of retirement savings or monthly or yearly retirement income, in addition to their current account balance. Sixty percent of participants surveyed think they are behind schedule on savings. Plan sponsors generally favor the idea, although some expressed concern about the accuracy of projections.
- Investments for Retirees: Add investment options specifically designed to provide a stream of predictable income for retirees. Participants said they would find such options attractive and plan sponsors conceptually like the idea of investment options that could reduce rollovers from company-sponsored plans to Individual Retirement Accounts (IRAs), which may have higher fees and less fiduciary oversight.
Some Obstacles Emerge
Interviews with senior executives at large plan sponsors revealed that fiduciary concerns about making prescriptive recommendations are a primary roadblock to more proactive management of DC plans. But plan sponsors’ views were also influenced by factors unique to their retirement plans, including the age or financial sophistication of their workforce and whether their company still offers a traditional defined benefit pension plan.
“The concept of employers taking a more active role in the retirement plans of their employees has yet to catch on throughout the broader marketplace,” explained Susan Czochara, senior product manager for defined contribution solutions at Northern Trust. “However, simply providing participants with a DC plan and retirement planning tools are not sufficient to ensure they will adequately plan and save for retirement. Our survey indicates that employees would welcome, rather than resent, a stronger guiding hand from their employers. Based on these results and other trends in the marketplace, we view proactive plan sponsors as becoming the new norm.”
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With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
