It is no secret that those in the Baby Boom Generation are nearing age 65 in record numbers. However, many of them are not able to comfortably retire at that age, having a lack of savings that will replace 70% of income (often cited as the goal for a comfortable retirement). With the employer-sponsored defined contribution (DC) retirement plan the place employees most likely hold the majority of their savings, it is clear employers are playing a large role in their employee’s retirement readiness. Diane Gallagher, VP of DCIO Practice Management at American Century, spoke with PLANSPONSOR about how plan sponsors can help company employees improve their retirement readiness through the DC plan.
PS: What do you see as the greatest challenge facing plan sponsors today?
GALLAGHER: Plan sponsors remain focused on helping their employees achieve their retirement goals and see that as their most important mission. However, sponsors also see insufficient saving rates and disengaged investing behavior among their participants. The great opportunity for sponsors is to take advantage of the tools in the toolbox and deploy them appropriately within their organizations. Plan sponsor decisions can make a tremendous difference, especially when defaults are structured to help people stay within the rails to save.
PS: Do you believe plan participants appreciate the corporate benefit of the retirement plan offering?
GALLAGHER: Participants value the retirement plan as an important part of their compensation and benefits. Participants recognize the plan as an important vehicle to help them accumulate wealth and prepare for the future. They need help, however, with the next step, which is actually using the plan effectively.
PS: Are plan participants aware of the national savings crisis and the need to increase savings for retirement?
GALLAGHER: Participants are a little contradictory about preparing for retirement. Although most expect the same standard of living in retirement as they have currently, they acknowledge that they may have to work longer, work part-time or trim spending. They recognize the risk of outliving their savings and admit they should save more to prevent that from happening. However, acknowledging those factors and taking action are different things. We know that the hardest step is the first one; if we can get people into automatic savings patterns, they will stay on that path.
PS: Did your study find ownership of a lack of savings by participants?
GALLAGHER: Today continues to be a barrier to tomorrow. Large majorities of participants identify retirement as one of their biggest financial goals. However, life gets in the way. Across age groups, we heard consistent barriers to saving, including the top three items, which are not earning enough (or not being able to afford to save), debt and unexpected expenses. In all cases, participants cited the first five years of working as the time period for which they have the greatest regret. They recognize the value of saving early and saving consistently over time.
PS: Are participants concerned about a retirement standard of living or are they confident?
GALLAGHER: According to our study, most participants expect the same standard of living in retirement as they have currently or a little better. Ten percent of participants between ages 25 and 54 expect their standard of living to be “much better,” and 2% of people between 55 and 65 expect it to be “much better.” However, by an overwhelming margin, participants consider it far worse to have too little money in retirement than to lose the opportunity to enjoy money today. They understand the potential consequences of not saving, recognize the importance of saving, but we still see a gap between acknowledgement and action.
PS: What do participants believe is the role of their employer in helping them to save?
GALLAGHER: Participants are counting on—and expecting—their employers to help them save more effectively. Fifty-nine percent of participants between 25 and 54 feel that automatic enrollment would have had at least a minor increase on their saving, while 64% of pre-retirees felt the same. Over six in ten participants overall felt automatic enrollment at 6% is something that an employer should do, and more than seven in ten said they would be at least fairly interested in automatic escalation.
Interestingly, more than eight in ten wanted at least a “slight nudge” from their employers to help them save. Participants are pretty self-aware about their own tendencies and behaviors, and would welcome a kick-start and a set path to save and invest.
PS: What is the role of the plan sponsor addressing participant wants and needs? How do those needs of participants intersect with the sponsor’s company needs?
GALLAGHER: Plan sponsors and participants differ in how they value plan features and services. For example, plan participants rate automatic savings programs as more important in encouraging savings rates, while employers rate model portfolios and seminars as more important. Sponsors underestimate how much intervention their employees actually want. While more than 80% of participants want at least a slight nudge from their employers, employers believe 30% of their employees want to be completely left alone. In fact, 15% of employees between 25 and 54 and 10% of those between 55 and 65 would like a “kick in the pants” from their employer; employers believe that number is only 5%.
PS: Are automated plan designs as good an idea to plan participants as they are perceived to be in the industry for improving outcomes?
GALLAGHER: Our research shows that participants greatly value automatic plan design features and acknowledge the potential impact these features could have on their retirement savings. They support automatic enrollment at 6% of pay and value the automatic escalation feature. Plan participants may not know the industry jargon for these programs, but they acknowledge their own behavior and tendency to procrastinate in getting started. We found that participants would greatly appreciate being defaulted into a savings habit to set them on a path to the future.