Sponsors of 401(k) plans are concerned that employees don't understand their retirement plans, yet many of those same organizations are not increasing efforts to improve member understanding and education over the next year or two.
A global study of defined contribution plans by Mercer shows that 65% of U.S. plan sponsors cite limited member understanding as their greatest challenge. And yet when asked about their priorities or changes for their defined contribution plans over the next 12 to 24 months, only 12% cited improving member understanding and education as their top priority.
Cost concerns ranked high on the list of DC plan priorities, perhaps not surprisingly, with 66% of U.S. organizations saying their top priority is changing DC plan eligibility to reduce costs.
Other cost priorities include plan changes, such as longer vesting (62%) and changing the plan contribution formula (54%). Changing investment arrangements to reduce costs and/or improve investment returns was cited by 17% of sponsors as their No. 1 priority.
"It looks like there's going to be continued concern from a cost perspective, which certainly isn't surprising in today's environment," says Amy Reynolds, a consultant with Mercer. "But our hope is that those concerns don't divert attention away from the need to endorse these plans and to continue to try and increase employees' understanding of them."
The global survey includes responses from over 1,500 companies in 33 countries, including 600 U.S. organizations.
Financial crisis reaction
Another inconsistency surfaced around employee reactions to the financial crisis. While employers seem to think many employees changed their personal DC plan asset allocation in light of the financial crisis - 60% of U.S. sponsors cited this as the most prominent employee reaction - the reality is many did not.
"The activity as reported by the employer wasn't necessarily reflective of what we've seen as we've looked at how participants have actually reacted," says Reynolds.
"When we look at some of the survey results from some of the large recordkeepers, the uptick that they saw in transactions really wasn't that significant. They didn't see mass transfers from one fund to another," she notes.
Close to data
There usually is a vocal minority of employees that the HR/benefits department tends to hear from frequently in market downturns, says Reynolds, and that's one reason plan sponsors seem to think that most employees were changing their asset allocations as a result of the financial crisis.
Moreover, "sponsors aren't necessarily as close to their data around these plans as perhaps they are in some other areas," she says. "In a lot of cases, they've outsourced the administration and put that responsibility on the recordkeepers. Some sponsors are very diligent about monitoring the activity in these plans, and others perhaps less so."
Sponsors' philosophical view of DC plans appears to be changing, with 61% of U.S. sponsors saying they provide a market-standard DC plan and education to enable employees to make adequate provisions for themselves.
Twenty-nine percent take a more paternalistic approach, saying that, as far as they can, they want to ensure members retire with an adequate retirement income and structure their compensation strategy accordingly. Another 10% say their goal is to provide some basic support for employees to provide for retirement, while managing risks as well as possible.
"The attitude when DB plans were the most prominent retirement vehicle was a much more paternalistic approach. The expectation was that as DC plans became more prominent, the perspective wouldn't necessarily change for sponsors," says Reynolds.
"So I think it was a bit surprising to see them view their role as a different one now. And I'm not sure their employees have moved as quickly down that path as they have," she adds.
Employers are clearly setting lofty goals when it comes to participation rates. According to the survey, more than half (52%) of organizations set a participation rate of 90% to 100% for their plans, yet only 20% actually achieve that high a rate.
"Are those goals realistic, and are sponsors focused on doing what they should to impact participation, or have they just said, 'We know we should have a very high level of participation, so we're going to make this our goal?'" says Reynolds. "It can become a useless mark in the sand."
She suggests sponsors should perhaps set more realistic participation goals and then "make those enhancements and changes in their communication efforts that are going to allow them to really impact these participation rates effectively."
Forty-three percent of U.S. organizations say high participation rates are one of the key factors they use for rating the success of their DC plan.
Annuity distribution options
As the DC market matures and more and more employees start retiring with their 401(k) as their main source of retirement income, there is slow-growing interest in annuity distribution options.
The majority (65%) of plan sponsors don't offer annuities or provide employees with assistance in buying one. Twenty-seven percent provide annuities through the plan using their current provider.
"This is the place where the U.S. 401(k) has really not necessarily taken on the challenge," notes Reynolds.
"Because they were initially put in place as a supplemental vehicle to a DB plan, increasingly employers moved away from annuity distribution options to just a lump sum," she says.
But as DC plans are more frequently becoming the primary retirement vehicle for many Americans, employers are starting to think about adding annuity options or offering some kind of help to purchase annuities when employees reach retirement.
"But it really is in its infancy in terms of how employers will address that," says Reynolds.
