- 1,000 DC plan participants — 800 current, 200 retired — were surveyed.
- One finding suggests that participants might benefit greatly from an automatic transition into pre-mixed vehicles.
- DC plans must not be treated as a supplementary complement to Social Security; they are a mandatory complement.
Participants in defined contribution (DC) plans may not be as focused on controlling and accessing their retirement plan balances as many industry analysts once assumed.
This was just one of the key findings identified in Northern Trust’s 2013 installment of its DC research series, The Path Forward.
In June 2013 we asked 1,000 DC plan participants — 800 current participants, 200 retired participants — to share their perspectives about their 401(k) plans.
These current and past participants shared their views on a number of topics, including the importance of liquidity, the necessity of stand-alone investment options vs. premixed solutions (such as target date funds), and maintaining their balances in an institutional DC plan vs. rolling them into retail IRAs.
How we respond matters
Our 2013 survey results, coupled with insights garnered from our plan sponsor and consultant surveys, are clear: the ideal DC plan really is closer than you may think. With some enhancements, we as an industry truly can help drive participants to more successful retirement outcomes.
Jim Danaher, managing director of DC Solutions at Northern Trust, recently discussed the survey results with Point of View.
Point of View: Why did you choose to survey participants in your 2013 study?
Jim Danaher: The industry continues to analyze ways to motivate employees to participate, save more and invest more appropriately in DC plans. At Northern Trust, we recognize plan participants want help. Benefiting from the insights gained through years of experience managing retirement plans and observing the successful elements of defined benefit plans (such as auto-plan features), we believed it was time to ask: “How are we doing?” And we decided to ask those who stand to benefit the most — participants.
Point of View: What did you find most intriguing about the participant data collected?
Jim Danaher: Across the United States there are now 650,000 DC plans covering about 88 million participants, according to recent data from the U.S. Department of Labor. Two key features of these plans presumed to motivate employee participation include control over investments and access to funds. Today, plan participants have the freedom to determine what they need to save, how they should invest and where they should continue to invest their accounts prior to retirement. Yet, the responses to our survey indicate those elements might not be as critical to driving participation as we thought. Our findings make us optimistic that the ideal DC plan might actually be closer then we think.
Consider a plan with a re-enrollment feature that invests participants directly into target date funds. Many plan sponsors have expressed concern that participants would react negatively if such a feature were implemented. However, we found that 54% of participants surveyed wouldn’t mind being automatically re-enrolled into target date funds, so controlling investment selection might not be as critical in driving participation. We actually believe that by permitting their balances to be re-enrolled into target date funds, participants are making a choice.
In addition, when we asked those participants who had changed jobs whether they would prefer to leave their balances in employer-sponsored DC plans, which typically have greater institutional oversight and better pricing than a retail IRA, 51% agreed that they would choose to remain in an employer-sponsored plan. That’s the positive response in this area; however, more concerning is the 24% who responded with a preference for an IRA. While they said they chose an IRA for more investment options and greater control, they sought no advice in helping them reach that decision.
Another key finding of our research concerns loans, which are another plan feature used in “selling” participants’ access to their account balances. Most participants told us the only reason they would take a loan is for emergency situations related to financial hardship, yet most plans allow loans for any reason. Typically, 20% of plan balances are held in loan funds. Yet, for every day the loan balance remains unpaid and uninvested, participants miss out on the longer-term benefits of capital market returns.
Point of View: You conclude we are closer to the ideal DC plan than we think. Why?
Jim Danaher: We found that the majority of participants don’t review and manage the allocation of their plan investments as frequently as we’d like. In our survey, 51% hadn’t changed their investment mix for at least one year — and many hadn’t made changes in two or more years. This finding suggests many plan participants are invested with less-than-ideal allocations. This finding also suggests that participants may benefit tremendously from an automatic transition into pre-mixed vehicles. In a single event, a plan sponsor can move an entire, often less engaged, participant population to a more rational and sound investment allocation. A more ideal asset allocation, which will likely be at a lower cost, could yield better outcomes for participants.
Point of View: If you could provide advice to plan sponsors, what would it be?
Jim Danaher: Whether it is because of the regulatory environment surrounding retirement plans or the broader market environment, the construction of DC plans has historically been reactionary and somewhat haphazard. To combat this, plan sponsors need to explicitly define the goals and desired results specific to their DC plan. Many plan sponsors tell us it’s about more than participant accumulation to retirement — it’s about sustainability of participant accumulation through retirement. Assuming that’s the case, we want plan sponsors to ask themselves, “What would a more ideal DC plan look like for my participants?” If that plan looks different than your current plan design and you know that change will make a difference, communicate the why and how to participants as you move them toward a more ideal outcome.
Point of View: And what about advice for a participant?
Jim Danaher: A DC plan, such as a 401(k), isn’t for simply saving, it’s for retirement. Social Security will replace only a portion of your pre-retirement income and you’re going to need that 401(k) balance to help sustain you financially upon retirement. Focus on investing for the longer-term tomorrow, not the shorter-term today. Any time your participants make changes to their accounts, or any time they access their account balances for reasons other than retirement, they need to understand how such actions will affect their ability to retire. If they answer, “I don’t know,” then they need to find out how. They need to talk to your plan representatives, such as your record keeper or internal benefits resources, and tell your representatives that they’re considering taking a loan or an in-service withdrawal. They need to understand the effect it will have on their longer-term retirement planning. Most importantly, they need to understand the drawbacks inherent in any disruptions on the path toward investing for retirement.
Point of View: What, if anything, is holding DC plan sponsors from achieving the ideal DC plan?
Jim Danaher: We’ve shifted the primary institutional retirement vehicle to the DC plan. We can’t continue to treat these plans as a supplementary complement to Social Security; they are a mandatory complement. In that light, plan elements like voluntary participation or the ability to either borrow or withdraw from these plans has to change. We can’t shift the purpose of DC plans without acknowledging the two serious challenges to their success: participation and retention. Requiring plan participation and maintaining plan balances only for retirement are fundamental to the viability and success of the DC plan system.