Employer-sponsored defined contribution plans the fundamental core of retirement funds for about 80% of the full-time workers in the nation need some alterations that will help boost plan participation among the part-time workforce and smaller employers, as well as offer better ways for workers and employers to contribute, according to a white paper released last week.
Professors Jeffrey R. Brown, and Scott J. Weisbenner from the University of Illinois at Urbana-Champaign, in association with the American Council of Life Insurers, explain that long-term retirement security is a feasible goal with some tweaks to the current employer system.
The existing employer-sponsored DC system in the U.S. provides a very strong foundation upon which U.S. households can build secure retirement, the paper states. Like any retirement system, ours is imperfect. However, significant strides have been made by plan sponsors and participants in terms of increased participation rates, more diversified portfolios, and the provision of immediate eligibility by many plans to cater to a mobile workforce.
Retirement options have been at forefront of American policy points in recent weeks with President Obamas
Figures point to typical participants instituting a 10% savings rate for their DC plans, but Brown says areas to improve include contribution levels and participation rates. He says that the plan sponsor community, the financial services industry, policymakers and regulators need to work together to improve the stable footing currently in place.
One of the big areas that I agree and continue to make further progress on, is to find ways to expand access, particularly to the part-time workers and the smaller employers, which are the two areas where the participation rates are lower, Brown says. I think the myRA itself is a small, but potentially useful, step in that regard in that it is providing employers with a strictly voluntarily low-cost way to use their payroll system to direct money into the accounts.
However, Brown explains that myRa, categorized as starter plan for individuals, is extremely unlikely to crowd out or substitute for a well-designed 401 (k) plan that an employer may provide.
Contribution conundrum
According to the University of Illinois professors, safe harbor limitations institute a minimum contribution rate of 3% for auto-enrollment in the early years of 401(k) plan participation. Brown says turning up the contribution dial could help boost savings for Americans.
We need to encourage higher contribution rates, says Brown. What we know is if you automatically enroll somebody into a plan, they automatically are much more likely to participate and are much more likely to stick at whatever level of contribution that you defaulted.
He adds that auto-escalating contributions can also help both parties in the long run.
It can be designed so that it doesnt have to increase employer costs at all, Brown explains. If an employer decides that they can afford a total of a 3% matching contribution, just because you ramp up the employee contribution doesnt mean you have to ramp up the employer contribution.
Brown adds that plan sponsors are often misguided when it comes to DC match systems.
Plan sponsors have a view that this can be expensive because they have an existing match in place, and what I always say is, what we know from research is that having a match is a good thing for participation rates, but the actual
Default investment option
Another option that falls into the autopilot segment includes increasing access to guaranteed income options that can improve risk management over lifetimes. While Brown notes that most retirement plans are moving away from
Brown says automating a portion of investment options through target date and life cycle funds can help individuals so that theyre not underestimating or overestimating retirement needs.
