Automatic Plans No Silver Bullet

The future of retirement plans may lie in automated savings arrangements, but that can’t be the only means of improving participation and employee engagement.
These were the sentiments of panelists speaking about the future of defined contribution plans and their role in framing adequate retirement savings at the Securities Industry and Financial Markets Association (SIFMA) Savings and Retirement Symposium in Washington, DC last week.
Forty percent of Americans still don’t have access to a retirement plan, so one industry goal needs to be increasing access to a retirement plan, commented Laura Grogan-O’Mara, Vice President, Regulatory and Legislative Initiatives at Merrill Lynch. Smaller employers employ more people, she said, but only 47% of companies with 1-99 employees offer a retirement plan.
Even when there is a plan available, participation is still lacking; at Fidelity, 36% of participants don’t participate in the plan because of inertia, fear, or a lack of financial literacy, according to Stephen Setterlund, Vice President, Retirement Services Marketing at Fidelity Employer Services Company.
Need for Accumulation
Over half of the population will be relying on Social Security for 90% or more of their income Grogan-O’Mara said. In 2003, based on government statistics, the median balance of employer-sponsored, defined contribution accounts, not including IRAs, held by people aged 45 to 64 was just $23,000. Based on that statistic, Karen Friedman, Director, Conversation on Coverage and Policy Director at the Pension Rights Center, said she doesn’t think that anyone can disagree that automated savings arrangements will help in asset accumulation.
“Everybody needs to be in and saving more,” Setterlund said, suggesting that every participant should be moved into an increased savings arrangement. Although it is good news that account balances are moving up, the folks that are really doing well are masking the problem, which is the median account balance, he said.
In Setterlund’s opinion, “we’ve got to get people saving 10% or more per year.” Plan administrators shouldn’t be fearful about setting the automated deferral rate too high, he said. If participants are not happy with it, they might revise their savings rate lower, but they won’t opt out of the plan because they know they should be saving. Only 8% of participants in plans recordkept by Fidelity maximize their plan contributions.
Less Abstract
It is important that the industry take planning out of the abstract for plan participants, Setterlund agreed. People need to understand what they have and how that compares to what they will need for the rest of their life, he explained. When amassing a large sum of money, it doesn’t translate into what type of income it will provide, so people should contemplate their needs ahead of time and determine what their savings will need to be for a particular retirement income figure.
The industry talks about getting people to accumulate adequate savings, Friedman said, “but what is an adequacy measure” she asked, suggesting the industry still has to figure that out.