Speaking to attendees of the Plan Sponsor Council of America (PSCA)’s 2014 Annual Conference, Mark Iwry, senior advisor to the Secretary of the Treasury, and deputy assistant secretary of Retirement and Health Policy at the U.S. Treasury, explained that, in the age of 401(k)s and 403(b)s, the contribution is actually a big unknown. It is whatever the participant decides to put into the plan, plus whatever is offered by the employer in the form of a matching payment. “We need to restructure the retirement system so that retirement income can be defined,” he said. “There are things that can be done without the government passing more regulations.”
Iwry noted that the DC retirement plan industry is moving toward automation, which is a good first step, but the industry needs to take a few more. He noted that when regulators suggested a 3% default automatic deferral, “we were not thinking that was right, we were thinking that was a good starting point.” Plan sponsors need to use more robust strategies, he recommended: Automatically enroll existing participants that are not contributing, start at a higher default deferral, automatically escalate participants’ deferral rates, and don’t stop at 6% or 10% of salary for deferrals.
If plan sponsors are worried about bugging participants, who may complain that they keep having to opt out every year, Iwry advised re-enrolling employees every two or three years. In addition, plan sponsors can get a commitment from employees now to enroll at a future time—for example, elect now to begin deferring with the next pay raise.
He also pointed out that offering an employer matching contribution in the plan can help get more participants saving adequately. He recommended stretching the match formula to give participants an incentive to make larger contributions.
Still, some employees may not be able to defer more. For those, Iwry reminded plan sponsors that they can front load the match—offer extra to a certain group of low-income employees.
Plan sponsors should make it easier for participants to think about the income goal, according to Iwry. “Putting projected retirement income on account statements reframes participants’ thinking,” he said. In addition, participants need to be educated about what Medicare covers and their need for long-term care.
Plan sponsors can think about putting employees’ accrued vacation or sick pay into a retirement plan instead of paying them the balance, Iwry suggested. They should consider whether the waiting period to get into the plan is too long, and perhaps let participants defer but have to wait to get a match, he added. “It depends on what is good for the company.”
Iwry pointed out that the focus on income is not about everyone buying annuities. Yet, he said, he does think individuals are under-annuitized. “It’s something plan sponsors and participants should consider.”