“The Ideal DC Plan May be Closer Than You Think,”
conducted by the Chicago-based Northern Trust Corporation, revealed a significant number of workers and retirees would be inclined to agree with
changes plan sponsors and consultants believe would improve outcomes in
defined contribution (DC) plans.
“The results are encouraging, because they indicate that participants
would accept limits on longstanding DC plan features, such as daily liquidity
or taking loans, if the reforms could lead to improved savings rates, investment
returns and retirement outcomes,” said
Jim Danaher, managing director of Defined Contribution Solutions at Northern
The study cited several areas where participant and plan
sponsor feedback could lead to changes in DC plans, including:
- Investment Choice: More than half (54%) of participants said they would
not object to re-enrollment into target-date funds from their current
investment selection. Plan sponsors and consultants surveyed in 2012 identified
a streamlined investment menu, which included simplified pre-mixed default
options, as a best practice for DC plans.
- Daily Liquidity: While 56% of participants said it is
important to have daily access to change their investment mix, 51% had not made
investment changes for at least a year. Ninety-one percent said they would be
willing to sacrifice daily access in exchange for the opportunity to invest in
something with greater return potential. This may allow plan sponsors to
consider including alternative asset classes in pre-mixed options, enabling
access to alternatives, which were favored by plan sponsors and consultants in
the 2012 survey.
- Loan Access: Three-quarters (76%) of participants had
never taken a loan from their 401(k) plan and only 13% percent would consider doing
so. More than half (56%) said loans should only be taken in an emergency. Plan
sponsors consider loans a key risk to retirement savings, but 91% of those
surveyed in 2012 allowed loans due to a belief that such access was needed to foster
participation in DC plans.
- Mandatory Participation: Twenty-one percent of
participants said participation in a DC plan should not be optional, compared with
63% of plan sponsors who favored such participation in a 2010 survey. However,
participants who were older and closer to retirement were more likely to say
participation should not be optional, supporting the views of plan sponsors.
- 401(k) vs. Rollover IRAs: Nearly half (47%) of participants left their
balances in prior employer plans or rolled into their new employer’s plan when
changing jobs. Twenty-four percent rolled their balances into an individual
retirement account (IRA). While a 401(k) plan provides for institutional
oversight, better pricing than retail IRA plans and other benefits, two-thirds
of plan sponsors surveyed in 2012 were ambivalent on the issue of encouraging
participants to stay in their plan after ending employment with the company. Part
of this ambivalence was due to fiduciary liability reasons.
“The evolution of DC plans from a supplemental benefit to
the primary retirement vehicle for most U.S. corporate workers is well under
way, and the plans are adjusting to reflect their changing role,” said Susan
Czochara, senior product manager for Defined Contribution Solutions at Northern
Trust. “While differences remain between the views of plan sponsors and
participants, our study shows the potential for greater shared responsibility,
with both constituents acting toward the goal of securing sufficient income in
The study, which surveyed 1,000 current and former
participants in U.S. 401(k) plans, can be downloaded here.