Looking at improvements to retirement plans in the decade since the passing of the Pension Protection Act (PPA), Northern Trust Asset Management says they have been strengthened—but that people are still falling far short of being adequately prepared for retirement.
The firm interviewed 1,000 defined contribution (DC) plan participants and 100 DC plan sponsors, along with a diverse range of industry experts, and has come up with three ways retirement plans could be better positioned.
First, Northern Trust notes, while 52% of sponsors automatically enroll new hires, only 32% pair that with automatic escalation. Sixty-three percent of participants think they could afford to contribute 10% or more of their salaries to their 401(k) plan, but the same percentage said their plan’s deferral rate is below 10%.
“The benefit of using both auto features in tandem is clear,” says Gaobo Pang, head of investor analytics for retirement solutions, at Northern Trust Asset Management. “Among plan sponsors using auto enrollment and/or auto escalation, 64% think that participants using these features are better prepared for retirement. We believe it is time for plan sponsors to strongly consider the potential positive impact of adding auto escalation to their plans.”
Second, Northern Trust urges sponsors and advisers to consider various types of risk that participants face—not just market volatility risk. Fifty-three percent of participants and 46% of sponsors cited market risk as a key concern—but they also mention a variety of other risks, such as inflation, longevity and concentration risk. To mitigate these risks, the firm recommends that sponsors use target-date funds (TDFs) that consider all of these factors.
“Risks evolve over time, so it is crucial that plan sponsors select a default investment option that can help plan participants appropriately deal with a variety of risks,” says Susan Czochara, managing director of retirement solutions at Northern Trust Asset Management. “By constructing a robust default optin, such as a target-date fund that adjusts in line with investment goals, sponsors can help participants manage risk exposures.”
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