Industry Voices

Five Moves Plan Sponsors Should Make in 2012 – Part I

If there’s one thing employers agree on when it comes to their employees’ retirement, it’s that workers simply aren’t saving enough.

By PS | July 31, 2012
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In fact, a record-low 4% of employers say they are “very confident” their employees will retire with sufficient retirement assets, according to the “2012 Hot Topics in Retirement” survey by Aon Hewitt.  Furthermore, this survey illustrates that employers want to do something about this – nearly half say helping employees overcome this retirement glut is a “top priority” – but at the same time, they’re wary about the costs of doing this. The good news: Plan sponsors can help boost employee retirement security, without having to break the bank.

To do this, sponsors should make five moves this year: 1) expand automatic product offerings; 2) diversify investment options; 3) help plan participants better understand the resources available to them; 4) make it personal; and 5) offer a better default investment option.  

Below are the details about items one and two, as well as how to best tackle costs associated with them.  

Expand automatic product offerings

Plan sponsors should introduce or expand auto-enrollment, auto-escalation and auto-rebalancing features -- as studies show these can increase savings and plan participation rates and boost outcomes.

Auto-enrollment ups participation rates significantly -- 85% of employees who were subject to automatic enrollment participated in their employer’s defined-contribution plans, compared to just 67% of those who were not, according to “The 2011 Aon Hewitt Universe Benchmarks—Measuring Employee Savings and Investing Behavior in Defined Contribution Plans” -- but plan sponsors need to offer it to more employees and increase the default savings rate.  

The study reveals the reasons for this. First, even though three in five employers offered auto-enrollment in 2010, 85% of them limited it to new hires – effectively stymieing plan participation rates among veteran employees.  Second, participants who were subject to auto-enrollment contributed one percentage point less, on average, than their actively enrolled counterparts – a “significant” gap that is “due to low default rates among the bulk of employers” (76% set default contributions at 4% or less), the study revealed.

Sponsors should also add auto-escalation (to boost savings) and auto-rebalancing (to ensure proper asset allocation).  Auto-escalation will allow employees’ to steadily increase their savings rate each year – a surefire way to overcome employee inertia.  Auto-rebalancing helps conquer employees “set it and forget it” mentality (roughly one in four employees say they just “check the box and go with the same benefits as before” from year to year, according to Prudential’s “Fifth Annual Study of Employee Benefits: Today & Beyond” from 2010) by automatically rebalancing portfolios each quarter to reflect participant’s desired asset allocation.