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.

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.

Cost considerations: Plan sponsors face two major costs with auto-enrollment: administrative and matching-funds.  Administrative costs tend to be low, and if needed, sponsors can charge these back to plan participants as long as this is disclosed.  Matching-funds costs, however, are often higher, since sponsors must provide the funds to match new auto-enrollees’ contributions. Still, these may not be as pricey as sponsors fear. Since new auto-enrollees may start contributing at the default rate (which in many cases is 3% or less, the Aon Hewitt study revealed), sponsors likely won’t be funding a full match (assuming the match percentage is greater than the default percentage); even if sponsors set the default rate higher, the total match that auto-enrollees receive is likely lower than for those who have been contributing to a plan on their own.  Of course, if you don’t offer a match, you don’t pay this cost, and you can always add auto-enrollment gradually to spread out costs more.  Bottom line: Ask your plan provider to provide you with a detailed breakdown of these costs, as well as whether costs can be offset by Pension Protection Act (PPA) “Safe Harbor” regulations; be sure to also ask about the impact that auto-enrollment could have on plan fees, as well as a breakdown of the costs of other automatic features you choose to add. 

Diversify investment options 

Amid the recession, many employees went from cushy retirement accounts to more meager sums, from hoping to flip the house and retire to just hoping to pay the mortgage. The average middle-aged American will now fall $47,732 short of simply funding basic expenses and uninsured health care costs during retirement, according to the Employee Benefit Research Institute’s 2010 study entitled “Retirement Savings Shortfalls for Today’s Workers.” This, in turn, has created unique investment needs.

Chief among them: Investments that can deliver guaranteed retirement income, like annuities and other in-plan guarantees, so retirees have a safety-net. But just 16% of employers currently offer in-plan annuities and related income guaranteed products – even though these products are becoming so crucial for retirement security that in their 2011 “Retirement Income: Ensuring Retirement Income throughout Retirement Requires Difficult Choices,” the U.S. Government Accountability Office, an independent government agency that does research for Congress, now recommends annuities to ensure retirement security. Of course, every plan is different, so create an open dialogue with workers to ensure you offer investment options targeted to their needs.

Cost considerations: Note that changing your investment line-up can trigger plan administration fees, though these vary depending on your plan provider (ask the provider to break these out for you). Secondly, be aware of the costs of new investments for participants. While sponsors may fear that in-plan annuities are too pricey, you can’t look at annuity costs in the same way you look at other investment costs because an annuity offers a guarantee of income, which others do not. Of course, it’s still important to dig into the quality and cost, as well as the suitability of the product for your plan.


Srinivas D. Reddy, senior vice president, Institutional Income at Prudential  

This material is for informational purposes only and is not an offer or solicitation to select any particular product or service. Neither Prudential Financial nor any of its representatives are tax or legal advisors. Consult your individual legal or tax advisor with any specific questions.  

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