Half of Plan Sponsors Offer Auto Enrollment

 Plan automation solutions play a key role in the plan design process, a survey found.  

The second annual Retirement Plan Survey by Mesirow Financial Retirement Plan Advisory found that 50% of plan sponsors surveyed offer automatic enrollment features, and one-third include a step-by-step deferral rate option.

Implementing fee disclosure is at the forefront for 2012. Mesirow’s research suggests that plan sponsors allocate sufficient time and resources to ensure regulations are addressed to the satisfaction of the Department of Labor (DOL), and that employee communications are effective. Plan sponsors, along with their providers, should maintain a careful watch as fee disclosure rolls out in 2012. Respondents were asked, “Is your outsourcing provider communicating all fee disclosure regulations to your satisfaction [e.g., 408(b)(2), 404(a)(5)]? The majority (90.5%) said yes, while 9.5% stated no.

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A surprising find is that 34.4% of plan sponsors said they do not know if their adviser or consultant is acting as an investment co-fiduciary. Only 36.1% said yes, as a 3(21) fiduciary; 1.6% said yes, as a 3(38) fiduciary; and 27.9% said no.

Nonqualified Plans 

When asked if highly compensated employees (HCEs) limited their voluntary contributions to the retirement plan because of nondiscrimination testing results, 13.1% said yes, all HCEs are limited to a set percentage contribution limit each year, which is less than the maximum percentage allowed under the plan; 29.8% stated yes, some HCEs receive a portion of their deferrals back to them taxably after testing results are known; and 57.1% said no, all employees, whether highly compensated or not, are eligible to contribute to the retirement plan up to the maximum allowed by the IRS.

For nonqualified plans offered, 25% offer voluntary employee deferral plans; 17.9% offer employer matching/profit sharing plans; 7.1% offer employer-provided defined benefit (DB) plans, commonly referred to as an SERP (Supplemental Executive Retirement Plan), and 67.9% do not offer nonqualified plans.

 

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Plan sponsors are hopeful that there is progress in educating participants about the merits of taking part in their retirement plans, the survey found. One major concern is the lack of participant understanding and appreciation of the retirement plan benefit, yet satisfaction levels seem positive. The provider community offers multiple options in trying to meet the educational requirements and needs of both plan sponsor and of participants.

When asked to rate participant satisfaction with planning tools, participant website materials and meetings to help reach saving goals, 14.4% of respondents said they were very satisfied; 75.6% were satisfied; 5.6% were not satisfied; and 4.4% do not use these options.

Since the finalization of the Pension Protection Act, target-date funds (TDFs) have grown exponentially in usage and assets. The trend continues in Mesirow’s latest findings as plan sponsors use TDFs for double duty as a plan’s QDIA and also as a managed account strategy. The majority of respondents (72.4%) offer TDFs, while 27.6% do not. 

 

 

Americans May Experience Income Drop in Retirement

American households could face an income drop of 28% in retirement. 

Nearly four in 10 retiree households (38%) report not having sufficient income to cover their monthly expenses, according to Fidelity Investments Retirement Savings Assessment. For households that are planning for retirement, estimated income gaps could force significant sacrifices that could include cuts in discretionary expenses.

To help improve Americans’ retirement readiness, Fidelity conducted an analysis that quantifies the potential monetary benefits of five straightforward steps—such as adjusting asset allocation and annuitizing retirement assets. In the context of a comprehensive retirement plan, this analysis can help individuals better understand which steps may make the greatest impact.

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“While there is evidence that Americans are saving more for retirement, our analysis finds that they need to take additional steps to prepare for the future and take better control of their personal economy,” said Kathleen A. Murphy, president, Personal Investing, Fidelity Investments. “The study underscores the importance of early engagement in the retirement planning process and the potential impact these five actionable steps can have in helping address the retirement income gap that many Americans are facing today.” 

 

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Five Steps That Can Improve Monthly Income in Retirement  

Fidelity modeled five steps for three generations (Baby Boomers, Gen X and Gen Y) to determine the potential impact on future retirement income. The steps include a mix of strategies that can be taken whether an investor is working or in retirement:

1) Adjust Asset Allocation: Twenty-one percent of those surveyed are invested too conservatively with limited exposure to stocks, based on their current age and planned retirement date. This highlights how many investors have improperly allocated their assets and are losing the long-term earnings potential of stocks.

2) Increase Savings: Respondents indicate they saved an average of $3,500 in 2011, but most are still not fully benefiting from the tax-advantaged/deferred savings potential of their workplace or individual retirement accounts. This is especially important for younger investors, who have a longer time frame and more potential for their money to grow.

3) Adjust Retirement Date: The average planned retirement age is 65, but delaying full retirement by a couple of years or continuing to work part-time can help preserve assets so they have a better chance of lasting through retirement. This can be especially powerful for Boomers, many of whom are facing a potential drop in retirement income.

4) Annuitize Retirement Assets: Fewer than one-fifth of retirees (17%) are using an annuity to create a guaranteed lifetime income stream to cover essential expenses, but it can be an important tool to help ensure savings last through retirement, particularly if a retiree lives beyond his or her mid 80s.

5) Tap into Home Equity: Seventy-two percent of respondents own a home, and one-third of homeowners (32%) have no mortgage. Through downsizing and expense reduction, home equity could be harnessed to generate income in retirement.

 

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“Most Americans have the potential to get significantly closer to achieving their retirement goals, but they have to take action and consider implementing a mix of these five steps,” Murphy said.

To help Americans take improve their current retirement plan, Fidelity released “Don’t Take a Lifestyle Cut in Retirement,” a Viewpoints article. It outlines the five steps and the hypothetical impact of each for a Baby Boomer and for a Generation X household.

A hypothetical example profiles a Gen X household, based on that group’s survey responses. This generation reported an estimated need of $4,900 in monthly retirement income. Based on their current household salary of $74,000 and the amount currently saved for retirement, Fidelity estimates these households will have approximately $3,200 in monthly retirement income—a shortfall of $1,700. After taking all five steps, this household could completely erase its estimated retirement income shortfall.

 

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