As the economy continues its tepid recovery, U.S. employers have become less confident about their employees' ability to successfully save for retirement, according to the 2012 Hot Topics in Retirement survey by consultancy Aon Hewitt. In response, employers are rethinking their retirement plan strategies to assist their employees in better preparing for retirement.
In October 2011, Aon Hewitt surveyed more than 500 large U.S. employers, representing over 12 million employees, to determine their current and future retirement benefits strategy. According to the findings:
• Just 4 percent of employers were very confident that their workers will retire with adequate retirement assets, down substantially from 30 percent in 2011.
• Only 10 percent felt very confident that their employees are taking accountability for their own retirement success.
• Fewer than one in five employers (18 percent) were confident that workers will be able to manage their income during retirement.
"The stark drop in the confidence of employers is troubling," said Pamela Hess, director of retirement research at Aon Hewitt. "We've known for a while that workers weren't saving enough for retirement, but it seems that with continued tough economic times, employers are realizing just how dire the situation has become for much of their workforce. Fortunately, they're not sitting idly by—they're actively taking steps to help their employees get on a better path."
While more than half (52 percent) of employers will focus on encouraging workers to take greater accountability for their retirement savings in 2012, they aren't asking employees to do it all on their own.
As in years past, 401(k) and other defined contribution plans will continue to add automatic features, in addition to expanding savings choices and offering employees more resources to help them meet their needs while in retirement.
Automatic enrollment has been one of the biggest retirement trends in recent years, and this trend will continue in 2012, albeit with an enhanced focus on outcomes:
• Toward the end of 2011, 55 percent of plan sponsors automatically enrolled workers in their employer-provided defined contribution plan, up from 24 percent in 2006.
• Looking ahead, more than a third (34 percent) of plans were likely to add this feature for new hires in 2012.
While automatic enrollment can be beneficial to increase participation, it is just one step in fixing savings challenges. Aon Hewitt found that of workers who were subject to automatic enrollment, most (63 percent) aren't saving enough to get the full employer match. In response, nearly one quarter (24 percent) of employers plan to make changes to their automatic feature in 2012. Of those making changes, 26 percent will apply automatic enrollment to existing non-participants, 26 percent will add an automatic contribution escalation feature and 24 percent will increase the initial default rate.
"Automatic enrollment alone isn't enough to get workers where they need to be," explained Hess. "Plan sponsors need to step it up by encouraging employees to save at a higher rate. Adding features such as contribution escalation to get workers saving at least at the employer match level—or ideally even more—is key to helping them meet their savings goals."
To further help workers meet their retirement savings goals while helping them to become more accountable, plan sponsors increasingly are adding investment advisory solutions and features. Most employers (79 percent) offered a series of target-date funds as an investment option under the plan, the survey found. More than half (59 percent) offered online investment guidance, while nearly four in 10 offered online investment advice or managed accounts (39 percent and 38 percent, respectively).
For those plans that did not already offer it, 26 percent planned to offer online advice and 24 percent will likely add managed accounts in 2012.
"Our research shows that when defined contribution investors use employer-provided professional investment advice, they greatly outperform those who invest on their own," stressed Hess. "Offering a variety of help services to workers better positions them to make smarter savings decisions that keep them moving in the right direction—towards a sound retirement."
Retirement Income Solutions
As employers have moved away from offering defined benefit plans in favor of defined contribution plans, workers are now left with an annuity gap once filled by defined benefit plans. As a result, more plan sponsors are introducing retirement income-replacement solutions outside, within or alongside the plan. In 2011, 16 percent of employers offered an "in plan" income solution—including an insurance product, managed account with a drawdown feature or a managed payout fund—while 9 percent offered an out-of-plan option, such as purchasing an annuity. Looking ahead, 22 percent planned to adopt one of these solutions in 2012. Further, 42 percent of employers allowed employees to elect an automatic payment option from the plan over an extended period of time. Nearly one quarter (24 percent) were likely to add this option in 2012.
Beyond offering retirement income solutions, employers were increasingly trying to help workers understand how much they can spend each year during retirement. Nearly three-quarters (71 percent) of plans provide online modeling tools for this purpose and 64 percent were likely to add these tools in 2012.
"Once, workers could count on a steady income stream throughout their retirement years," said Hess. "Now, more people are relying exclusively on their defined contribution plan for their retirement savings and that regular ‘paycheck’ has disappeared, leaving many employees struggling to effectively balance retirement expenses. Employers recognize this challenge and are adding features and resources to help workers manage their savings."
Other key retirement findings from the survey include:
• Roth options. 39 percent of plans offer a Roth savings option, up slightly from 34 percent in 2011. Recognizing the strong benefits of Roth as well as the increased use that many plans have seen in recent years, 29 percent of plan sponsors are likely to add this option in 2012.
• Freezing pension plans and closing to new hires. Less than one quarter (23 percent) of defined benefit plans provided benefits accruals to new employees, down from 27 percent in 2010. In addition, 14 percent of defined benefit plans were likely to freeze accruals and 18 percent intended to close the plan to new hires.
• Pension plan funding. 86 percent of defined benefit plans were underfunded as of January 1, 2011.
• Retiree health care. 61 percent of employers provided some type of post-retirement medical coverage to current or future retirees. However, most of these plans (40 percent) were closed to new hires. To help manage costs, 78 percent of employers that currently offered retiree health benefits were likely to increase premiums in 2012. More than half (53 percent) planned to increase cost-sharing.
Stephen Miller, CEBS, is an online editor/manager for SHRM.
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