One-third of retirees will continue to work
Four years from now, the median account balance of a defined contribution plan assets will reach $150,000, up from $100,000 today—a decent-sized nest egg by most standards, but a far cry from the $1 million or more experts say is needed to sustain a retiree’s lifestyle and health care costs.
Thus, one-third of those “retiring” will continue to work and a majority of senior workers will be saving a portion of their earnings for “true old age,” when they actually stop working.
These are some of the key findings from a study by retirement plan administrator Diversified Investment Advisors, “Prescience 2015: Expert Opinions on the Future of Retirement Plans” — a 181-question survey of 68 retirement experts from 54 plan sponsors and plan administrators with $25 million to $1 billion in assets each.
Although market turbulence over the past several weeks has been jarring — following Standard & Poor's downgrade of the United States' debt rating from AAA to AA+ —experts expect the industry to experience a period of relative calm over the next five years, White says, a settling that investors and advisers both will welcome. U.S. equities are expected to appreciate and the economy to grow slowly but steadily by an average of 1.4% a year. Eighty-three percent predict the Dow Jones Industrial Average will reach 14,000 by the end of 2015, surpassing the peak of October 2007.
“This environment will be favorable to the growth of retirement plan assets,” White says.
In fact, the “Prescience” experts project 401(k), 403(b) and 457 assets to expand at an annual rate of 10%, from $4.6 trillion at the end of 2010 to $7 trillion by 2015.
Diversified also expects more people to participate in their 401(k) or other workplace retirement savings plan, with 70% of families with a head of household aged 55 to 64 having a retirement plan account, up from 61% today.
The experts also believe that 35% of plan sponsors will rely on fee-based retirement plan advisers to assist with fiduciary duties, asset allocation, fee disclosure and investment advice.
Survey respondents expect automatic enrollment to be in force among 72% of plans, up from 50% today. This will bring automatically enrolled participants in plans to 66% of all new participants. Automatic escalation is expected to rise from 25% of plans today to 43% of all plans by 2015. This more common usage of automatic enrollment will direct sponsors' attention to safe harbors and qualified default investment alternatives.
Fifty percent are hopeful the government will pass new legislation to expand automatic enrollment safe harbors to boost deferral rates from the current level of 3% in the first year to 10% or greater.
Legislation is also expected to be passed to require sponsors to illustrate what a 401(k) account balance would provide in a monthly income stream. In five years, the experts foresee 42% of all retirement plan assets invested in qualified default investment alternatives, particularly target-date funds.
Plan sponsors are also expected to scrutinize their investment choices more carefully, with 71% of the respondents agreeing that plan sponsors will pay closer attention to the investment practices of the funds in their plan. Eighty-three percent think plans will begin using Employee Retirement Income Security Act-based criteria to select funds, looking not just at performance or universe rank but also risk, style and consistency.
The use of mobile technology and social media is also projected to become more prevalent.
"Permission management for electronic communications will become more sophisticated, requiring the maintenance of preference information for multiple touch points, media and formats in which participants could receive messages," White says. Those plan administrators that can offer personalized advice on these mobile platforms will stand out among sponsors and participants, she adds.
While retirement plan experts do not expect any new regulations or tax code changes to impact defined contribution plans in next five years, they do expect health care to get plenty of attention. Eighty-one percent believe human resources staff will dedicate more time and attention to health care reform and less to retirement plans.
In sum, White says, “come 2015, the retirement outlook of working Americans will be improved. Out of the Great Recession, the retirement industry is poised for growth. The increased availability of advice at the workplace and the adoption of enhanced qualified automatic contribution arrangements will help drive this progress. The industry stands ready to close the door on defined benefit plans and to implement the bold defined contribution plan designs that can lead participants to successful retirement outcomes by default.”
This article originally appeared in Money Management Executive, a Source Media publication.