Defined contribution (DC) plans put many responsibilities on plan participants. For participants to have a successful outcome in a DC retirement plan, it is important for plan sponsors to understand what causes participants to delay saving for retirement and how those barriers can be overcome. In order to best understand participant behaviors, American Century Investments® surveyed them about their employer-sponsored retirement plans. Diane Gallagher, Vice President, Defined Contribution Investment Only (DCIO) Practice Management, spoke with PLANSPONSOR about what participants had to say—and what they would like from their plan sponsors.
PS: What is the key finding of your participant research?
Gallagher: Overwhelmingly, participants look to their employers for information and access. They really depend on the employer to set a path to successfully save and invest for retirement.
Twenty years ago, we spent so much time telling employees how valuable a 401(k) or defined contribution plan was to their compensation and benefits, but we didn’t tell them how to use the plan. Now, everyone understands that it’s a valuable benefit. The majority say, “I know I’m supposed to save, but I don’t know how. Please just set up a correct path for me, and I’ll stay on it.”
PS: How do participants feel about employers overall when it comes to a retirement savings plan?
Gallagher: Few participants think their employers have done enough to help them save. So, there’s an opportunity for plan sponsors to be progressive with plan design to capture the masses. All the academic research on automatic programs and defaults supports their effectiveness.
There is much opportunity for plan sponsors to get a committee together and discuss their commitment to implementing automatic plan design. On the plan sponsor side, we had nearly universal agreement that a top corporate objective of the plan was to provide a savings vehicle for retirement, yet only 38% actually measure retirement readiness. If your goal is to provide this vehicle for retirement security, shouldn’t you deploy the whole arsenal to help people succeed?
PS: What kind of help do employees want from their employer?
Gallagher: We specifically asked questions about automatic features. Nearly seven in 10 participants thought automatic enrollment, specifically, should be implemented at a 6% contribution rate. More than half thought that should be done retroactively for all employees, not just new hires. Automatic enrollment has most commonly included a 3% default deferral rate, but participants are amenable to a higher initial contribution rate for the entire population.
We also asked specifically about plan investment re-enrollment and had overwhelming support for that. Overall, what participants said would help them most was automatic enrollment at 6%, automatic escalation and automatically investing everyone into target-date funds (TDFs). In fact, two-thirds of participants said they feel more positive about a plan with automatic enrollment, automatic escalation and target-date funds.
When we asked similar questions of plan sponsors, they greatly underestimated their influence and assumed participants wanted less rather than more intervention.