Aon Hewitt recently completed an analysis of more than 140 defined contribution plans representing 3.5 million eligible employees and found that:
1. Participation hit a record high to 78% relative to 75% in 2011 and 68% in 2002
2. Automation continues to play a strong role in helping DC participants become retirement ready with 59% of plans now offering automatic enrollment compared to 34% in 2007 and just 14% in 2002
3. Leakage continues to be a sizeable issue but has declined from its 2010 peak. 26.6% of participants have a loan outstanding, 6.5% of participants initiated a withdrawal, and 43.1% of participants who terminated employment in 2012 took cash distributions.
4. Portfolio diversification continues to improve among participants driven largely by target-date fund defaults, reaching almost 40% of assets
The study further illustrates that employees continue to save at rates insufficient to support adequate retirement income. The average before-tax contribution rate remained flat from 2011 at 7.3 percent of pay. Most concerning, workers are not saving enough to take advantage of company matching dollars. Nearly 28 percent of employees contributed below the company match threshold, potentially forgoing significant retirement savings amounts over the course of a career.
Recommendations from this Research
1. Leverage the full potential of automation. Participation is at an all-time high, but there is still work to be done. To improve participation, many plan sponsors have harnessed the power of inertia by utilizing automatic enrollment for plan participants. The impact has been profound as 81% of individuals subject to automatic enrollment participate in the plan, while only 64% of employees participate if they must enroll on their own. Significant progress has been made to increase savings through techniques such as automatic enrollment, automatic contribution escalation, and automatic rebalancing, but more work can be done in terms of increasing default contribution rates, adding auto escalation, combining automatic enrollment with automatic contribution escalation, expanding auto enrollment to eligible non-participants (not just to new hires), and adjusting the match to encourage participants to reach for higher levels of savings.
2. Offer an array of investment advisory help. Investment returns were robust in 2012. The median plan return was 11.9%, which was up substantially from -0.7% in 2011. Plan sponsors need to continue to offer target date funds, offer guidance and advice through a variety of media and tools.
3. Curb leakage and look for new ways to reach employees. Participants’ saving and investing for retirement improved in 2012; however, leakage continues to erode retirement savings prematurely. Leakage remains significantly higher than prerecession levels of 2006, despite modest improvements in the latest data. Plan sponsors should challenge current provisions such as permitting loans and withdrawals only on employee savings, not employer contributions. Plan sponsors should also consider reducing the dollar amounts available for loans and withdrawals, limiting loan frequency, and allowing post-termination loan repayments.
4. Look for innovative ways to promote and educate a digital workforce. Use technology to reach employees about their retirement savings plans by using various channels of communication, such as webinars, podcasts, text messages and social media.
Additional information on the study can be found here.
Patti Bjork is Director of Retirement Research with AonHewitt.
Kevin Vandolder is a Partner and the head of Hewitt EnnisKnupp’s defined contribution client practice.
Source: Hewitt EnnissKnupp