September 18, 2012 (PLANSPONSOR.com) – Participation and deferral rates are indicators of retirement plan popularity, more so than success, according to Greg Burrows, SVP of retirement and investor services at Principal Financial Group.
Burrows told attendees at the Plan Sponsor Council of America’s (PSCA) 65th annual conference, Reframing Retirement, that participant outcomes are the measure of a plan’s success. In addition to expanding coverage among their employees, plan sponsor must also ensure employees have adequate income savings and help them manage income in retirement.
Employees are unprepared to manage assets in retirement, according to Burrows. Showing a monthly income projection on retirement plan participant statements would help, but The Principal’s own research shows that 30% of employees think their employers should help them turn their savings into an income stream in retirement, and more than eight in 10 feel a guaranteed income option in their retirement plan is important.
Burrows said measures of plan success include an 11% to 15% savings rate for participants throughout their career and an 85% income replacement rate at retirement.
The Principal found that when participants have a choice to auto-escalate their deferrals, 5.8% choose to do so, but when defaulted to auto-escalation and given a choice to opt out, 79.6% remain in this option. In addition, at a 6% default auto-enrollment deferral rate, 19% of employees opt out, compared with 15% when defaulted to a 3% deferral rate. However, 61% of participants auto-enrolled at 6% have a combined savings rate of 11% or more, compared with 32% auto-enrolled at 3%.
Plan design does not replace education, Burrows said, but if sponsors implement plan design features to reach measures of success, they can repurpose education to address actual retirement planning. For example, instead of spending the enrollment meeting educating participants about how much to save, when to increase savings and how to invest, plan sponsors can use that time to talk about managing long-term debt and budgeting.