To use a football analogy, workers must go long and deep in their defined contribution (DC) plans. In other words, they need to throw more dollars into those plans and for longer periods. That was one of the takeaways from a briefing held yesterday in New York City on retirement trends in the corporate defined contribution plan space sponsored by Prudential.
The discussion focused on how companies can work with plan sponsors and consultants to optimize defined contribution plans and encourage more worker engagement as more companies shift from pensions, or defined benefit (DB) plans, to DC programs. According to a study by Center for Retirement Research at Boston College, of the roughly 50 percent of private sector workers with access to any type of workplace retirement plan, the percentage covered by a DB plan has declined from 83 percent in 1980 to 31 percent in 2008.
Mark R. Wetzel, president of Fiduciary Investment Advisors LLC, said that auto-enrolling plan participants at a 3 percent contribution rate gave workers “a false sense of security.” What’s needed, he continued, is to start at a higher rate of say, 6 percent and then increase that to 10 percent. “Few and far between have saved enough,” he said.
Wetzel’s colleague, Chris Rowlins, senior consultant at Fiduciary Investment Advisors, added that when the auto-enrollment rate for contributions went up, there was not a wave of opt-outs. “That’s a good sign,” he said.
However, Barbara Delaney, principal of Stone Street Equity, cautioned that getting minimum-wage workers to contribute more is a challenge.
The need for an income product, like an annuity, in DC plans was further noted by the panelists. There is a certainly a place for guaranteed income products in such plans – once they are institutionally priced, Delaney said.
Before annuities can be put into widespread use in DC plans, there must be some “safe harbors” for plan sponsors and intermediaries, stressed Rowlins. Guidance from financial governing bodies like the DOL regarding fees, portability and how to handle the possible default of the annuity provider are needed before in-plan annuities are more commonplace, he said.
What’s also needed in the DC marketplace is more engagement with the workers the plans serve. All panelists noted the difficulty in getting participants to actively take part in their retirement planning, but did suggest some solutions. Delaney said companies could offer workers a financial incentive to participate in a 401(k), such as giving them $100 off their health-care premium.
Harry A. Dalessio, senior vice president, strategic relationships, at Prudential Retirement, said plan sponsors must fight for the attention of workers. Therefore, sponsors could create an “easy button” for their employees that will empower them to take control yet simplify the decision-making process.
Instead of trying to turn workers into investors, the message to them should be to save as much as they can, for as long as they can, Wexler said.
Also discussed were Target Date Funds (TDFs). While acknowledging the flaws of those products, the panelists agreed they are nevertheless good options.