Benchmark Report Paints Image of Industry in Flux

The average participant in the U.S. defined contribution (DC) retirement system is 43 years old and has saved $91,000, according to an industry benchmark report.

The Aon Hewitt 2014 Universe Benchmarks report shows U.S. employees have about 9.1 years of tenure on average with their current employer. More than three-quarters of employers in the U.S. rely on DC retirement plans as the primary retirement income vehicle for their employees, the report shows, putting an increasing amount of pressure on individual workers when it comes to planning for retirement.

However, the 2014 report identifies several positive trends currently taking shape in the DC industry. Participation rates across all companies and industries continue to reach higher levels than ever before, Aon Hewitt says. Additionally, the average plan balance at year-end 2013 significantly outpaced the previous year-end record ($81,240) by a large margin—a feat fueled in large part by the equity market bull run that has lasted through 2013 and into 2014. Expressed as a multiple of total participant pay, the average plan balance is 1.2 times pay, up from 0.9 times pay in 2012.

Another positive finding shows the vast majority of plans examined by Aon Hewitt continue to offer some type of employer-matching contribution on participants’ elective deferrals, and 58% offered after-tax contributions. The plans featured 20 investment options on average, though the number is reduced to 15 when premixed portfolios are counted as a single option. Most plans (91%) offered premixed funds and nearly six in 10 plans offer company stock as an investment option. Thirty-nine percent offer self-directed brokerage accounts.

Despite some positive findings, many challenges remain for workplace retirement investors. Most participants are well behind the savings milestones that they are generally encouraged to pursue to ensure adequate levels of retirement income, according to the report. For example, many advisers push for participants to defer at least 10% of annual salary into their DC plan accounts, yet the average savings rate remains flat at 7.5%. While more individuals increased their savings rates than decreased their savings rates during the sample time period, the amount of the increases was smaller than the magnitude of the cutbacks—resulting in an average savings rate essentially unchanged from the year before.  

And only a small percentage of employees accessed their DC plan account to increase their savings rate or rebalance their portfolio during 2013, Aon Hewitt says. Lack of engagement can be especially problematic during extended bull markets, as outsized equity returns can cause unintentional style drift within participant portfolios that are not regularly rebalanced (see “Equity Overweighting Likely as DC Balances Hit Record Highs”).

Aon Hewitt says the average participation rate across all companies was 78.3%, a slight uptick from last year’s value of 78% and well above the 69.8% measure a decade ago. This result was clearly aided by the increased use of automatic enrollment features, the report shows. Indeed, plans with automatic enrollment saw their average participation rate grow to 84.6%, up from 81.4% the prior year. Conversely, the average participation rate among plans without auto-enrollment actually decreased, from 63.5% to 62.4%.

The Aon Hewitt report shows in-plan Roth features, which allow participants to direct after-tax dollars into their accounts, continue to gain favor among participants. When a Roth feature was available to employees, 11% contributed after-tax dollars—up from 9.6% last year and 8.1% in 2011 (see “Roth Accounts Can Improve Retirement Outcomes”). The features are often attractive to employees who want to be able to maintain unrestricted access to some or all of the money directed towards retirement savings, the report suggests. 

Premixed portfolios, both of the target-date and target-risk varieties, are the default investment option for many plans, according to Aon Hewitt, and thus they receive the lion’s share of new participant investments. As a result, this year’s report shows an increase, on a participant-weighted basis, in deferrals to these accounts—with 42.2% of participants’ portfolios invested in premixed funds, compared with 39.7% the year before.

Driven in part by the growth in premixed portfolios and in part by the equity rally over the past several months, the percentage of equities in participants’ portfolios has reached an all-time high of 70.6%, up from 68.3% last year and 59% in 2008. Participants continue to invest in their companies’ stocks, the report shows. Within plans allowing this investment, the average employee allocation to company stock is currently about 12.9%, down modestly from 13.8% in 2013.

But even as account values grow strongly with the markets, participant account activity remains relatively low, according to Aon Hewitt. In 2013, 16.1% of participants initiated a trade within their DC plan account. This is greater than the 2012 value of 14.5%, but well below pre-2008 levels of nearly 20%. Among individuals holding assets in premixed portfolios, only slightly more than half (51.5%) are fully invested in these accounts—despite the fact that most, if not all, are designed as stand-alone investment options.

More than one-fourth (26.1%) of participants have a loan outstanding against their DC account, and the average outstanding balance represents nearly 20% of the total account.

All of this leads to a number of options to increase participation and savings rates, Aon Hewitt says. Researchers share a list of best practices and new ideas in the new report, as follows:

  • Enhance automation – Automatic enrollment can greatly increase participation rates, but low default contribution rates drag average savings rates down, Aon Hewitt explains. This is further compounded when automatic enrollment is not paired with automatic contribution escalation. The average savings rate among plans without automatic enrollment is 7.9%, but declines to 6.6% when automatic enrollment is present because too many sponsors set the default rate too low. Setting defaults at robust levels or coupling automatic enrollment with contribution escalation will close the gap between these rates.
  • Reenroll nonparticipants – According to Aon Hewitt’s 2013 Trends & Experience in Defined Contribution Plans report, 19% of companies enrolled eligible nonparticipants when implementing automatic enrollment. Only 34% of this fraction, in turn, did this so-called “backsweep” more than once. Employees can counter the effects of inertia by bringing all nonparticipants into the plan and forcing them to opt out regularly if they do not wish to participate.
  • Stretch the match – Nearly one-third (30.3%) of participants save at a level exactly equal to the maximum employer-matching contribution, showing that employees are taking cues from plan sponsors on how much to save. In light of this, employers can consider requiring participants to save more to receive the same matching dollars. For example, employers offering a dollar-for-dollar match on 3% could consider a 50-cents-per-dollar match on 6% to encourage greater savings rates without increasing company costs to the plan.
  • Add Roth provisions – In 2013, participants who used Roth savings features saved more on average than their non-Roth-using counterparts—10.2% of salary vs. 7.7%, respectively. Because every dollar in a Roth account yields more retirement income than a dollar in a pre-tax account, individuals could potentially save more if they change from pre-tax contributions to Roth contributions while maintaining the same contribution levels.
  • Target communications – Plan sponsors can improve the relevance of communications by targeting their message to the needs of the audience, Aon Hewitt says. For instance, plan sponsors may consider sending specific communication to nonparticipants with easy steps on how to enroll, and a different communication to low savers letting them know they are not taking full advantage of the resources available.

The report also shares best practices for improving investment returns and diminishing risk within investment lineups. Aon Hewitt urges plan sponsors and advisers to regularly review the funds they offer to participants and to reenroll unsophisticated participants into premixed portfolios. The report also urges plan officials to limit company stock as an investment option and to evaluate lifetime income solutions for inclusion in the plan.

To decrease plan leakage, sponsors and advisers can disallow loans on employer money and also reduce the number of loans available to individual participants. Adding a loan direct debit repayment option and increasing loan origination fees may also be helpful, according to the report.

An executive summary of Aon Hewitt’s 2014 Universe Benchmarks report is available here.