Employer-sponsored defined contribution plans have become the go-to retirement vehicle for the majority of workers in the U.S. but more needs to be done to get employees to not only save, but to save more, to ensure a comfortable retirement.
In the past five years, I think retirement planning or the thought of retirement and what it means is maybe more at the front of employees minds, but that hasnt spurred any change in how much people are contributing, said Jim Danaher, senior vice president and managing director of defined contribution solutions for Northern Trust. Thats a key element of behavior. We wanted to say, what is it that is challenging and creating this chronic under savings? What would help employees to understand the importance and to actually save more?
When Northern Trust speaks with employers, it finds that they are equally concerned about the welfare of their employees but they arent sure how much encouragement they can give to them without taking on a fiduciary role, he said.
See also: Fiduciary awareness found to be lacking
In Northern Trusts 2015 Path Forward survey, the organization wanted to find out participant views about DC plans but also wanted to find out what employers could do to help their employees save more.
Employers responded that they werent sure how far they could push employees to save without a backlash, Danaher said.
Northern Trust asked employees how they would react if employers took a more active role in identifying their need to save more and were stronger proponents of employees saving more when they first entered a 401(k) plan.
The happy surprise for Northern Trust was that employees said they wouldnt resent their employer for playing a more active role in letting them know they need to start saving money for retirement.
As far as employer fears about fiduciary responsibility go, Danaher said that he isnt saying that employers need to give investment advice to their employees but instead, they need to take the time to encourage employees to save more. That could mean telling them what their account balances would translate into in retirement or encouraging them to up their annual contribution by 1% to 2% per year to bring them up to 10% to 12% of their annual pay.
Many people in human resources and senior management are afraid they are being too intrusive and paternalistic toward their employees, Danaher said. We wanted to dispel the issue, that employees dont view you as too intrusive or paternalistic.
It is very important that employers communicate changes to the plan or investment lineup directly to employees.
It is very impactful if it comes from you the plan sponsor, Danaher said.
Plan sponsors generally agree its important to encourage saving for retirement, Danaher said. They have real concerns, however, about providing participants with targeted recommendationsby salary level or ageabout how much they should be saving.
The study showed that policy issues, such as managements role as a fiduciary, must be clarified before senior leaders will be comfortable providing the level of guidance sought by plan participants.
Based on the survey results, Northern Trust encouraged plan sponsors of DC plans to increase their role in encouraging retirement savings, such as making specific recommendations for age or salary levels and encouraging participation in retirement planning. It also believes employers should provide projections of retirement savings or monthly or yearly retirement income in addition to their current account balance.
Plan sponsors generally favor the idea, although some expressed concern about the accuracy of projections, the report found.
The third piece to improving DC plans was adding 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, which may have higher fees and less fiduciary oversight, Northern Trust said.
The target-date fund is another useful tool employers should consider including in their retirement plans, Danaher said.
The target-date fund is certainly great stimulus, a great tool for employers that helps remove the intimidation of investing in a 401(k). I also think about that on the spend down side, the decumulation side. Many plans have TDFs in them so there is no reason that the TDF cant be viewed as a tool for decumulation as well as accumulation, Danaher said.
Paula Aven Gladych is a freelance writer based in Denver.
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