A new report from Northern Trust finds many plan sponsors have reservations about taking a more active role in encouraging specific levels of saving and providing projections of retirement income for participants.
Jim Danaher, managing director of defined contribution solutions at Northern Trust, warns employers that inadequate retirement savings among the employee population is a critical issue, in part because an older workforce can bring higher benefits costs and prevent new talent from joining up. Fully 60% of participants surveyed think they are behind schedule on savings, North Trust notes.
“Plan sponsors generally agree it’s important to encourage saving for retirement,” Danaher says. “They have real concerns, however, about providing participants with targeted recommendations—by salary level or age—about how much they should be saving. The differing survey responses suggest employer behavior needs to change as employees look for plan sponsors to take a more active role in their retirement plans.”
At the same time, the study shows that policy issues, such as management’s role as a fiduciary, must be clarified before senior leaders will be comfortable providing the level of guidance sought by plan participants. According to the report, employees favor companies playing an active role in their retirement plans—leading to better talent retention among employers actively managing and improving their retirement benefits.
The findings come despite industry chatter that retirement benefits are becoming a necessity during the hiring process, rather than a perk or differentiator, Danaher tells PLANSPONSOR. Employees still highly value their retirement benefits, he says, and they want to work for employers that can help them achieve a successful retirement.
He points to survey results showing 88% of employees “strongly favor” or “somewhat favor” employers that provide tools to help employees determine if they are saving the correct amount for a financially secure retirement. Not surprisingly, employees who say they favor their employers are generally likelier to stay in their current job or company. In addition, more than four in five employees surveyed said they would consider taking their employer’s advice when determining their contribution to a 401(k) plan, demonstrating plan participants continue to have a strong level of trust in their employers’ retirement benefit offerings (see “Employees Value Financial Education from Employers”).
Improving DC Plans
Based on the employee survey results, Northern Trust identified key themes to guide employers as they consider evolving their DC plans to help employees achieve financial security in retirement. The following plan principals were also associated with more positive employee perceptions of their employers:
- Get specific – Making specific salary deferral recommendations for age or salary levels encourages participation in retirement planning, Northern Trust says, and it shows employers care about employee outcomes.
- Provide projections – Employees are interested in receiving projections of gross retirement savings and of monthly/yearly retirement income expectations, in addition to their current account balance. Plan sponsors generally favor this idea, Northern Trust says, although some expressed concern about the accuracy of projections.
- Offer investments specifically for retirees – Northern Trust suggests sponsors should add investment options specifically designed to provide a stream of predictable income for retirees. Participants said they would find such options attractive and plan sponsors conceptually like the idea of investment options that could reduce rollovers from company-sponsored plans to individual retirement accounts (IRAs), which may have higher fees and less fiduciary oversight.
Northern Trust says interviews with senior executives at large plan sponsors revealed that fiduciary concerns about making prescriptive recommendations are a primary roadblock to more proactive management of DC plans. But plan sponsors’ views were also influenced by factors unique to their retirement plans, including the age or financial sophistication of their workforce and whether their company still offers a traditional defined benefit pension plan.
“The concept of employers taking a more active role in the retirement plans of their employees has yet to catch on throughout the broader marketplace,” adds Susan Czochara, senior product manager for defined contribution solutions at Northern Trust. “However, simply providing participants with a DC plan and retirement planning tools are not sufficient to ensure they will adequately plan and save for retirement. Our survey indicates that employees would welcome, rather than resent, a stronger guiding hand from their employers. Based on these results and other trends in the marketplace, we view proactive plan sponsors as becoming the new norm.”
The study represents the fifth installment in Northern Trust’s “The Path Forward” research series, exploring the future of defined contribution plans. In addition to the online survey of 1,007 participants, the study is based on 43 in-depth interviews with plan sponsors, whose plans have assets totaling more than $352 billion, and 10 plan consultants. Research firm Greenwald & Associates conducted the survey and interviews.
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