“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 Trust.
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 retirement.”
The study, which surveyed 1,000 current and former participants in U.S. 401(k) plans, can be downloaded here.
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