September 18, 2012
and deferral rates are indicators of retirement plan popularity, not success,
according to Greg Burrows of Principal Financial Group. ---
Burrows, senior vice president of retirement and investor
services at Principal, told attendees at the Plan Sponsor Council of America’s
(PSCA) 65th annual conference, Reframing Retirement, that participant outcomes
are the measure of a plan’s success. In addition to expanding coverage among
their employees, plan sponsor must also ensure employees have adequate income
savings and help them manage income in retirement.
Employees are unprepared to manage assets in
retirement, according to Burrows. Showing a monthly income projection on
retirement plan participant statements would help, but The Principal’s own
research shows that 30% of employees think their employers should help them
turn their savings into an income stream in retirement, and more than eight in
10 feel a guaranteed income option in their retirement plan is important.
Burrows said measures of plan success include an 11%
to 15% savings rate for participants throughout their career and an 85% income
replacement rate at retirement.
The Principal found that when participants have a
choice to auto-escalate their deferrals, 5.8% choose to do so, but when
defaulted to auto-escalation and given a choice to opt out, 79.6% remain in
this option. In addition, at a 6% default auto-enrollment deferral rate, 19% of
employees opt out, compared with 15% when defaulted to a 3% deferral rate.
However, 61% of participants auto-enrolled at 6% have a combined savings rate
of 11% or more, compared with 32% auto-enrolled at 3%.
Plan design does not replace education, Burrows said, but if
sponsors implement plan design features to reach measures of success, they can
repurpose education to address actual retirement planning. For example, instead
of spending the enrollment meeting educating participants about how much to
save, when to increase savings and how to invest, plan sponsors can use that
time to talk about managing long-term debt and budgeting.