Mega DC Plans Nudge Workers to Increase Savings

The 50 largest Northern Trust Asset Management plan sponsors are using auto-escalation to boost savings, but they are not focused on retirement income or decumulation options for plan participants.    

The 50 largest defined contribution plan sponsors custodied by Northern Trust Asset Management have focused on getting workers to boost their retirement savings with automatic features, according to data from the firm.  

The Northern Trust Asset Management report, “Top 50 DC Plan Highlights,” offers several insights into how the top plans are helping participants to prepare for retirement.

“Where we see some improvement in savings is around participant savings via automatic features,” explains Lee Freitag, practice lead for retirement solutions at NTAM. “What’s important is the continued progress toward improving DC plan menus in terms of how many options are there and how that allows participants to make the right choices in terms of not being overwhelmed by too many choices.”

Inflation is a major concern for plan sponsors and participants, he adds.

“This year more than ever, it’s important for plan sponsors to recognize the importance of including a robust, inflation-sensitive strategy option on their 401(k) menu,” he says. “Many of the target-date series have a level of inflation sensitivity baked in, but participants who pick their own lineup may want to be able to have a robust inflation sensitive strategy, especially younger workers who have not seen this type of inflation environment in their lifetime.”

The data show that 70% of the top 50 plans used auto-enrollment in 2021, up 50% from 2017, and 42% of the top 50 used auto-escalation features to boost participant savings. The average plan size of the top 50 DC plans is $11.3 billion in assets, according to an NTAM spokesperson. 

For plan sponsors that use auto-enrollment, 37% set the participant salary deferral rate at 6%, while 26% set it at 3% and 16% peg it to 5% of earnings, data show.

Plan sponsors use auto-escalation to increase participants’ retirement savings by 1% per year, up to the 15% cap. Among the top NTAM retirement plans, 43% set the auto-escalation cap at 10%; 24% at 15%; and 19% at 6%, data show.

“We can’t specifically attribute that to the passage of the SECURE Act, but it’s helpful to essentially look at that and see if there might be some level of correlation and that it’s rising,” Freitag says. “That’s important to recognize: how does legislation impact the ability for plan sponsors to offer improved menu design and how does that offer the improved access and savings for plan participants?”

The Setting Every Community Up for Retirement Enhancement Act of 2019—aka the SECURE Act— permitted qualified automatic contribution arrangement safe harbor plans to increase the cap on automatically raising payroll contributions from 10% to 15% of an employee’s paycheck, with the option to decline contributing.

Custom white-labelled investment fund lineups are prevalent among the top plans, as 74% use them for single and multi-fund structures, while 26% use them on single funds, according to the research.

“From a personalization perspective, I think where you can really see the evidence of that is how plan sponsors utilize target-date funds and perhaps even custom target-dates,” Freitag says.

Freitag explains that “despite a conversation in the marketplace and burgeoning discussion,” the largest plan sponsors have not altered their retirement plans to operate similarly to a pension, i.e., as an income replacement vehicle for workers when they retire. He says that plans remain primarily for participants’ investment and accumulation, not decumulation. 

“Plans today continue to be in more of the accumulation phase design, and we’re not seeing evidence of a lot of additional tiers that will be specific to retirees,” he says. “We’re not seeing a lot of evidence within the top 50 about retirement income. That’s something that the industry is really focused on, [but] we’re not seeing a lot of evidence there unless it’s baked into a target-date fund or even a custom target-date.”

The largest DC retirement plans custodied by NTAM collectively boast assets representing $563 billion in retirement savings for 3.7 million participants.