As defined contribution plans, particularly 401(k)s, become the primary retirement savings vehicle for more and more American workers, there is no shortage of challenges facing participants. They aren't saving enough (despite new highs in average 401(k) account balances), they arent making good investment choices, and they arent committed to preparing for their retirement, as evidenced by the borrowing that is occurring to fulfill short-term needs.
The odds certainly can seem stacked against success for DC plans.
But there is reason for optimism. This year, we surveyed 1,000 DC plan participants and found they were surprisingly open to reforms in a few essential areas that could dramatically improve outcomes.
Investment choice: Often considered a key to engagement, investment choice has been interpreted as the ability of DC plan participants to select from a broad range of options, with daily access to make changes. Our survey indicates participants are open to an approach that takes a longer-term view.
The majority of participants in our survey (51%) had not changed their investment mix for at least one year and many hadnt made changes in two or more years. While the good news is these participants are not day-trading, it also suggests many plan participants may be invested with less-than-ideal allocations and could benefit from an automatic transition into pre-mixed vehicles like target date funds. In a single event, a plan sponsor can move an entire, often less engaged, participant population to more rational and sound investment allocations focused on retirement outcomes.
A more well-diversfied asset allocation should yield better outcomes for participants. It turns out participants are open to this idea: 54% of those surveyed wouldnt mind being automatically re-enrolled into target date funds.
Loans from 401(k) savings: The ability to borrow from retirement savings is another plan feature used in selling participants on access to their DC account balances. In our 2012 survey of plan sponsors, 91% allowed loans for a variety of reasons, due to the belief that such access was a key driver of participation, particularly for those who are not highly compensated.
But in our 2013 survey of participants, 76% said they had never taken a loan, and only 13% would consider borrowing from their account in the future. Most participants (56%) told us the only reason they would take a loan is for emergency situations. It may be that participants have a greater understanding of plan "leakage" every day a loan balance remains unpaid and uninvested, participants miss out on the longer-term benefits of capital market returns.
IRA rollovers: Our survey of plan sponsors in 2012 found two-thirds were ambivalent about encouraging participants to stay in their 401(k) plan after retirement, in part due to concerns over fiduciary risk, even though DC plans typically have greater institutional oversight and better pricing than retail IRAs. But in our survey this year, 51% of participants who had changed jobs said they would prefer to leave their balances in employer-sponsored DC plans.
Across the United States there are now 650,000 DC plans covering about 88 million participants, according to recent data from the U.S. Department of Labor. Two key features of these plans presumed to motivate employee participation include control over investments and access to funds. Today, plan participants have the freedom to determine what they need to save, how they should invest and where they should continue to invest their accounts prior to retirement. Yet, the responses to our survey indicate those elements might not be as critical to driving participation as we thought. Our findings make us optimistic that the ideal DC plan might actually be closer then we think.
Jim Danaher is managing director of Defined Contribution Solutions, Northern Trust.
