A Northern Trust news release said respondents also backed automatic increases in contributions each year until workers are setting aside more than 10% of their salaries. Respondents also favored government and employer policies – including tax incentives, restrictions on taking loans against plan balances, and transparent fee structures – to strengthen DC plans for their emerging role as the primary retirement savings vehicle for U.S. workers.
“The study participants describe the ideal DC plan as simple, automatic and cost effective,” said Jim Danaher, senior investment product manager for Defined Contribution Solutions at Northern Trust Global Investments, in the news release. “These traits are necessary to satisfy the requirements of three different constituencies: employees who need an efficient means of accumulating assets for retirement; employers in need of a cost-effective benefit to attract and retain valuable employees; and policymakers in need of a reliable savings vehicle in an age of lengthening life spans, pension funding crises, and chronic under-saving.”
Other survey findings included:
- 63% of plan sponsors and four of five consultants think participation in DC plans should not be optional for employees. Respondents had mixed feelings but one consultant summed up the prevailing view: “We can’t have this be optional and expect the population in any way, shape or form to be ready for retirement.”
- 49 of the 50 plan sponsors participating in the study and all of the investment consultants believe automatic enrollment would be a key feature of the ideal DC plan construction.
- Three-quarters of plan sponsors and all consultants support automatic escalation features.
- Virtually all plan sponsors and consultants agree that the ideal DC plan structure would include significant contributions from employers, and 60% of plan sponsors believe employer contributions should vest immediately, rather than waiting until an employee works for a year or more at the company.
- Nine of 10 plan sponsors and consultants consider government incentives – tax credits or deductions – a critical component of a vibrant private sector retirement savings system.
- In order to prevent retirement savings “leakage,” two-thirds of all plan sponsors and all consultants participating in the study believe workers should not be allowed to take loans against their defined contribution account balances, except in cases of proven hardship.
- 60% of plan sponsors believe plans must go beyond “total cost” disclosure and offer full transparency regarding administrative expenses, investment management fees and participant-initiated transaction fees.
While investment consultants were inclined to suggest that plan sponsors assume much of the responsibility for decisionmaking within the DC plan, plan sponsors countered that employers should design efficient retirement programs but allow employees to make informed decisions about what is best for them and their money.
“The Path Forward: Designing the Ideal Defined Contribution Plan,” a research study conducted for Northern Trust by Greenwich Associates, asked 50 large U.S. defined contribution (DC) plan sponsors and five leading investment consultants to outline the steps they think would be required to make defined contribution plans more efficient retirement savings tools for U.S. workers.
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