A new survey of small and mid-sized employers finds that two out of three plan sponsors believe the current 401(k) system is effective in helping employees achieve adequate retirement savings, despite recent reports that show employees are often ill-prepared for retirement and not saving enough.
"Employers think that the 401(k) platform can be a successful platform, but they also recognize that the savings rate needs to be higher and there are more things they can do through plan design," says Greg Burrows, senior vice president of retirement and investor services with the Principal Financial Group, which published the survey results Thursday. He says plan design can be the real key to increasing not only participation, but adequate savings rates. The 2011 Principal Financial Group Retirement Readiness Survey questioned 1,305 benefits professionals, some offered defined contribution plans and some did not.
Three-quarters of plan sponsors consider their defined contribution plan successful, most commonly measured by participation levels — an ineffective yardstick, according to Burrows. “While participation rates indicate a plan’s popularity, they don’t measure true plan success in the form of retirement readiness — how well the plan delivers participants to retirement with adequate income,” he says.
By that measurement, only 15% of plan sponsors feel their employees are prepared to manage their money in retirement. Still, plan sponsors are skittish about taking a role in helping employees turn their retirement savings into retirement income, likely because of fiduciary responsibilities, Burrows says.
The survey also finds that 75% of employers say current tax-deferral incentives are retirement plan’s most attractive feature to employees, and more than eight in 10 say participation and savings would decrease if the incentives were removed — indicating which side plan sponsors are on regarding shows proposals to eliminate or decrease retirement plan tax incentives.
“Employers offer retirement plans voluntarily, so it is critically important to understand how proposed changes to the system would impact their decisions,” says Burrows. “It is especially vital to listen to smaller employers because they are the economic backbone of the nation. What we are hearing loud and clear in this survey is that employers value the current voluntary system and they want Congress to preserve retirement savings tax incentives.”
The survey also shows an evolving attitude by employers toward their responsibility to provide their employees with retirement benefits. Nearly half of employers (45%) and over half of plan sponsors (54%) disagree that employers should be mandated to offer some type of workplace retirement plan for employees, despite half of employers and nearly half of plan sponsors (47%) agreeing that all employees should be required to save for their retirement beyond Social Security.
"If you think about employees today, it's a mobile workforce, younger employees have a hard time envisioning that they'll work there for their entire careers," Burrows says. That mobility "drives less understanding on the defined benefit plan" and thus employers don't necessarily feel responsible for providing the same security through a plan they once did.
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