Transamerica Makes Recommendations for Improving 401(k)s

A study by Transamerica reveals positive news for retirement savings in America, but there’s still room for improvement.

Among employers that offer a 401(k) or similar plan (e.g., SEP, SIMPLE), the vast majority (89%) say they believe their plans are important for their ability to attract and retain talent. Employers are increasingly offering 401(k) or similar plans to their employees. Between 2007 and 2014, the percentage of employers offering a 401(k) or similar plan increased from 72% to 79%, the survey found. The offering of a plan is highest among large companies of 500 or more employees (98%) and small non-micro companies of 100 to 499 employees (95%), and it is lowest among micro companies of 10 to 99 employees (73%).

During the recession, many 401(k) plan sponsors suspended or eliminated their matching contributions. Plan sponsors that offer matching contributions dropped from 80% in 2007 to approximately 70% from 2009 to 2012. According to the survey, in 2014, 77% of plan sponsors offer a match, nearly rebounding to the 2007 level.

Catherine Collinson, president of the Transamerica Center for Retirement Studies (TCRS), and author of the study report, notes that 401(k) plan participants stayed on course with their retirement savings during the economic downturn and subsequent recovery. A survey of employees completed for the study revealed participation rates among workers who are offered a plan have increased from 77% in 2007 to 80% in 2014. Among plan participants, annual salary contribution rates have increased from 7% (median) in 2007 to 8% (median) in 2014, with a slight dip to 6% during the economic downturn.

Workers’ total household retirement savings increased between 2007 and 2014. The 2014 estimated median household retirement savings is $63,000, a significant increase from 2007, when the estimated median was just $47,000. Baby Boomers have saved $127,000 (estimated median) in household retirement accounts compared to $75,000 in 2007. “For some workers, current levels of retirement savings may be adequate; for many others, they are not enough,” says Collinson.

The survey identified five ways in which employers, with assistance from their retirement plan advisers and providers, can improve their 401(k)s.

Adopt automatic plan features to increase savings rates.

"Automatic enrollment is a feature that eliminates the decision-making and action steps normally required of employees to enroll and start contributing to a 401(k) or similar plan," Collinson notes. "They need only take action if they choose to opt out and not contribute to the plan."

The percentage of plan sponsors offering automatic enrollment increased from 23% in 2007 to 29% in 2014. Plan sponsors' adoption of automatic enrollment is most prevalent at large companies. Fifty-five percent of large companies offer automatic enrollment, compared with just 27% of small non-micro companies and 21% of micro companies.

Plan sponsors automatically enroll participants at a default contribution rate of just 3% (median) of an employee's annual pay. "Defaulting plan participants into a 401(k) plan at 3% of annual pay can be very misleading because it implies that it is adequate to fund an individual's or family's retirement when in most cases, it is not," Collinson says. "Plan sponsors should consider defaulting participants at a rate of 6% or more of an employee's annual pay."

"Automatic increases can help drive up savings rates: Seventy percent of workers who are offered a plan say they would be likely to take advantage of a feature that automatically increases their contributions by 1% of their salary either annually or when they receive a raise, until such a time when they choose to discontinue the increases," she adds.

Incorporate professionally managed services and asset allocation suites.

Professionally managed services such as managed accounts, and asset allocation suites, including target-date and target-risk funds, have become staple investment options offered by plan sponsors to their employees. These options enable plan participants to invest in professionally managed services or funds that are essentially tailored to his/her goals, years to retirement, and/or risk tolerance profile.

Eighty-four percent of plan sponsors now offer some form of managed account service and/or asset allocation suite. The survey found:

  • 56% offer target-date funds that are designed to change allocation percentages for participants as they approach their target retirement year;
  • 54% offer target risk funds that are designed to address participants' specific risk tolerance profiles; and
  • 64% offer an account (or service) that is managed by a professional investment adviser who makes investment or allocation decisions on participants' behalf.

"For plan participants lacking the expertise to set their own 401(k) asset allocation among various funds, professionally managed accounts and asset allocation suites can be a convenient and effective solution. However, it is important to emphasize that plan sponsors' inclusion of these options, like other 401(k) investments, requires careful due diligence as well as disclosing methodologies, benchmarks, and fees to their plan participants," Collinson says.

Add the Roth 401(k) option to facilitate after-tax contributions.

"Roth 401(k) can help plan participants diversify their risk involving the tax treatment of their accounts when they reach retirement age," notes Collinson. The Roth option enables participants to contribute to their 401(k) or similar plan on an after-tax basis with tax-free withdrawals at retirement age. It complements the long-standing ability for participants to contribute to the plan on a tax-deferred basis. Plan sponsors' offering of the Roth 401(k) feature has increased from 19% in 2007 to 52% in 2014.

Extend eligibility to part-time workers to help expand retirement plan coverage.

"Expanding coverage so that all workers have the opportunity to save for retirement in the workplace continues to be a topic of public policy dialogue. A tremendous opportunity for increasing coverage is part-time workers," says Collinson. Only 49% of 401(k) or similar plan sponsors say they extend eligibility to part-time workers to save in their plans.

"Employers should consider consulting with their retirement plan advisers and providers to discuss the feasibility of offering their part-time workers the opportunity to save for retirement," she adds.

Address any disconnects between employers and workers regarding benefits and preparations.

The survey findings revealed some major disconnects between employers and workers regarding retirement benefits and preparations. For example, 95% of employers that offer a 401(k) or similar plan agree that their employees are satisfied with the retirement plan that their company offers, yet only 80% of workers who are offered such a plan agree that they are satisfied with their employers' plans.

"Starting a dialogue between employers and their employees could help employers maximize the value of their benefits offering while also helping their employees achieve retirement readiness," Collinson says. Just 23% of employers have surveyed their employees on retirement benefits, and even fewer workers (11%) have spoken with their supervisor or HR department on the topic in the past year.

To help close the communication gap, TCRS created a survey tool for plan sponsor use.

For the study, a 21-minute telephone survey was conducted between July 31 and September 17, among a nationally representative sample of 751 employers. A 22-minute, online survey was conducted between February 21 and March 17, among a nationally representative sample of 4,143 workers.

The study report is here.