Data & Research July 17, 2013

What Affects Retirement Income Adequacy?

A policy forum sponsored by the Employee Benefit Research Institute (EBRI) examined factors affecting retirement income adequacy and decisions that can mitigate their impact.
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At the forum, “Decisions, Decisions: Choices That Affect Retirement Income Adequacy,” experts on U.S. retirement policy offered insights about topics such as the impacts of a sustained low-interest-rate environment on retirement savings and retirement income, the influences of the employer match in 401(k) plans, and suggestions about how to help plans and participants optimize their distribution choices—in particular rollover, drawdown and annuity options.

Findings presented at the policy forum included:

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  • Roughly one-quarter of Baby Boomers and Gen-Xers, who would have had adequate retirement income under historical averages, would end up running short of money in retirement if today’s rates are assumed to be a permanent condition, although there is likely to be little impact from low bond rates on the lowest-income group.
  • The current interest rate environment, and its duration, has implications for defined contribution plans in term of the type(s) of fixed-income offerings on the menu, as well as stable-value and target-date funds.
  • The economic environment has had an impact on employer contributions to 401(k) plans—although among the minority of plan sponsors that suspended their matching contributions during the recent recession, many have restored them. Few employers have moved to less frequent matching cycles (such as annually), and the vast majority provide a 401(k) match coincident with their payroll cycle.
  • The level of the match seems to have an impact on contribution levels in voluntary-enrollment 401(k) plans, less so with automatic enrollment plan designs.
  • There doesn’t appear to be any linkage between adopting automatic enrollment and changes to the employer contribution level/timing.
  • The vast majority of defined benefit (pension) plan participants who were not forced to take an annuity chose to take a lump-sum distribution.
  • Plan design matters, both in term of the savings decisions participants make, and the decisions they make post-retirement.

 

Summaries of presentations are published in the July EBRI Notes online here.

Data & Research July 17, 2013

Certain Plan Features Boost Participation

Research shows certain retirement plan design features can increase participation up to 70%.
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According to The Principal Financial Group, employee participation rates increase as employers add plan features such as automatic enrollment, automatic increases, online deferral changes or employer contributions. In addition, plans with at least two of these features in any combination have been shown to produce an average total participant savings rate of 11%, more than double the average participant savings rate.

In analyzing more than 25,000 retirement plans, The Principal examined the impact of these plan features on employee participation and savings rates. The results were used to help create a new retirement readiness initiative and customized plan sponsor Retirement Readiness Report, which are designed to help employers understand how well participants are saving for retirement and how plan design features can help increase savings rates.

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“The true measure of retirement plan success is based on whether employees are saving enough to have adequate income in retirement,” said Jerry Patterson, senior vice president of retirement income strategy at The Principal. “Our analysis shows most Americans need to save in general between 11% and 15%, including employer contributions, over an entire working career to replace 85% of income in retirement. This new research identifies plan design features that can encourage employees to save at those higher levels.”

The Principal retirement readiness initiative approaches retirement planning with a focus on income replacement to help American workers achieve a higher level of income at retirement. The three-step approach to retirement readiness includes: strategic measurement, meaningful plan design changes and goal-driven participant education.

The customized Retirement Readiness Report from The Principal shows employers how many employees are on track to replace a sufficient level of income in retirement. If employees are falling short, the report offers best practices on plan design changes that, based on the research from The Principal, have been shown to increase savings.

"This report may be a wakeup call for some employers when they see how many of their employees are not adequately financially prepared for their retirement," said Patterson. "The good news is simple plan design changes and a goal-driven approach can be powerful motivators to boost participation and savings. It's a better return on investment for the employer because, for often no additional cost, their employees become much better prepared for their retirement."

To make the largest impact on savings, The Principal recommended the following best practices:

  • Automatic enrollment for all employees at 6% deferral;
  • Automatic annual increases of at least 1% annually;
  • Online deferral changes available to participants; and
  • Employer contribution or match.

The Principal Financial Group is a global investment management firm offering retirement services, insurance solutions and asset management. A sample of its Retirement Readiness Report can be found here.

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