Tax-Exempt Plan Participants Not Saving Enough

A news release from Fidelity Employer Services Company (FESCO) said its survey of higher education, health care, government, foundations, and faith-based organizations showed tax-exempt sector employees have saved an average of $48,000 in their defined contribution (DC) plans. That is 23% less than the average $62,000 saved by their corporate sector peers.

Although one in four tax-exempt sector employees hiked their retirement contribution in 2006, almost half (48%) still put in less than $2,000 per year to their DC plan, the survey found. Deferral rates are 6.9% in both the tax-exempt and corporate sectors, according to the data – far less than many providers suggest as a minimum savings amount.

Not only that, but only about four in 10 participants (38%) plan to save more in their DC plan if their defined benefit (DB) plan is reduced or closed. The FESCO survey found that more than half (55%) of tax-exempt sector workers have DB access and 57% of those fear the plan will be reduced or discontinued in the future as has been the trend in the corporate world.

Of those affected by or worried about DB cuts, nearly one-third (31%) have not yet thought about how to compensate for the loss, according to the survey. Others have or plan to:

• increase contributions to DC plans (38%);
• work part time in retirement or delay retirement (26%); or
• contribute more to an IRA (21%).

The survey found many in tax exempt plans know their retirement savings efforts are lagging, with 71% admitting they are not saving as much as they should. In fact, nearly all (96%) who have an employer match provision said they are contributing just enough to get the match.

“It’s encouraging that many tax-exempt sector workers recognize that personal savings are playing a more critical role in their retirement, but troubling that they have no plans to increase those savings,” said John Begley, an executive vice president with Fidelity Employer Services Company, in the news release.

Multi-Vendor Environments

However, tax-exempt sector employees reported that they faced a series of challenges to being more actively engaged in their workplace savings plans, Fidelity said. Because plans in the tax-exempt sector frequently are multi-vendor, for example, just being able to discern the details of the plan offered by the participant’s provider can be hard.

Forty-five percent of survey respondents said they did not know how many providers they can choose from, and 26% were unaware of how many mutual funds or investment options they hold. Of those eligible individuals who have not yet opened a DC plan account, more than half (56%) said it is because they have no extra funds to save, while one in five (18%) reported that they “haven’t gotten around to it.”

On a positive note, the study found tax-exempt sector workers are participating in DC plans at higher levels, with sector participation rates reaching an estimated 83% (compared to 64% in the corporate sector).

However, as the survey pointed out, the disparity may be partially because one in four (25%) tax-exempt sector workers can receive an automatic employer contribution – typically in a 401(a) plan – without having to save any of their own dollars.

One potential positive sign for the future: Study findings suggested many employees would welcome the inclusion of automatic features into their employer plan. For example, more than two-thirds (67%) said they think it would be valuable to have an automatic increase option that boosts their savings rate annually, with 27% of respondents citing auto increases as very important.

"If you can auto enroll someone in at 2% or 3% and then bump it up 1% or 2% a year, you can get them up to a level where they are able to save enough for retirement," Begley told PLANSPONSOR.com in an interview.

Despite the regulatory clarity about auto enrollment in the recently enacted Pension Protection Act (PPA) (See DoL Releases Default Investment Option Safe Harbor ), Begley pointed out, it is still more difficult to enact the feature in the tax-exempt world where some plans are not offered under the Employee Retirement Income Security Act (ERISA), because the PPA only covered plans offered under ERISA.

The study also found 17% of respondents currently invest in a lifecycle fund. Fidelity said separate research has shown the number of participants in lifecycle funds double when the funds were offered as a default option.

One way the savings difficulty has manifested itself in the sector, Begley said, was by the fact that some universities are having difficulty getting professors to retire because the educators were uncertain they had saved enough for retiree health care and other post-career expenses.

The study was conducted by Richard Day Research among 1,521 current employees with DC plan accounts across tax-exempt sectors. The survey was conducted online and by phone between April and May 2006.