A 33-country survey by Mercer of organizations that sponsor defined contribution (DC) retirement plans shows widespread adoption of automatic enrollment and other relatively new “automatic” features designed to boost employee enrollment and limit the number of decisions employees need to make. “’Automatic’ plan features have become prevalent in some countries and are spreading quickly to others to combat employee inertia and to fulfill plan sponsors’ desires to further increase participation rates,” says Barbara Marder, a worldwide partner who heads Mercer’s global DC consulting practice.
The Mercer 2009 Global DC Survey was conducted in June 2009, with more than 1,500 responses received (including more than 300 from multinational companies). The plans surveyed represent more than $440 billion in plan assets. Among the key findings:
• One-third of respondents worldwide offer automatic enrollment, one-third automatic contribution escalation and over one-fifth automatic rebalancing features.
• Among the close to 80 percent of companies that have a default investment option, lifecycle funds are the most common default instrument, used by 67 percent of those respondents.
The progression of auto-enrollment features is varied across regions. The United States and Latin America are leading the implementation of these features, with Asia-Pacific, Europe and the U.K. lagging in this area. Mercer expects auto-pilot features to become the norm in most countries over time.
The quick adoption of automatic DC plan features might be in response to participation rates that, while high, are well below plan sponsor targets. The majority of survey respondents are seeking strong participation by their employees with 74 percent setting target participation rates of 80 percent to 100 percent. However, just half have actually achieved a participation rate of 80 percent or more.
Away from Paternalism
DC plan sponsors across the globe have moved away from paternalism, and now see their role as that of a “facilitator” for employees to save for retirement, say 55 percent of respondents. Overall, 76 percent of respondents indicate their top reason for sponsoring a DC plan is to remain competitive in terms of attracting and retaining employees, 56 percent want to encourage employee responsibility and 53 percent want to provide adequate benefits at retirement.
More than 72 percent of sponsors offer 15 or fewer funds to participants. The most prevalent investment options are:
• Balanced funds (offered by 61 percent of respondents).
• Lifecycle funds (57 percent).
• Fixed-interest/bond funds (51 percent).
Only a third of respondents plan to change their investment options or structure over the next two years.
Companies are generally active in monitoring and managing their fund line-up and investment managers, with 58 percent reviewing the range and number of fund options each year. More than 73 percent review investment performance at least semiannually.
Two-thirds of respondents require a minimum level of employee contribution in order to qualify for a core company contribution. It is common across the globe to limit the company match to 6 percent (30 percent of respondents). However, matching contributions among the plan sponsors surveyed range from 1 percent to more than 10 percent, with the most common matches 3 percent and 4 percent of pay (21 percent and 18 percent of respondents, respectively).
Multinationals Weigh Centralization
Surveyed multinational companies cite member communication and market/investment volatility as the primary risks associated with their global DC plans. While there appears to be some movement by multinationals towards more centralized DC plan management, corporate headquarters are selective in their areas of involvement. Plan design tends to be most often centralized, with headquarters at 71 percent of multinationals playing an active role in setting the plan’s contribution rate.
Nearly half (44 percent) of the multinationals surveyed stated that their DC plans are managed and overseen by either global committees or individuals in the corporate head office. Another 13 percent centralize DC plan management/oversight at the regional level.
More than one-third of the multinationals are planning to move toward greater centralization of DC plan oversight in the next one to two years. Of the companies that plan to do so, 48 percent cite risk management as one of their top two priorities, 44 percent cite economies of scale and 39 percent note a desire for consistency in benefit design across geographies.
From Defined Benefit to Defined Contribution
The majority of companies that responded to the survey have closed their defined benefit (DB) pension plans to new employees and are providing these employees market-competitive, but perhaps not fully “adequate,” DC plans along with education to enable them to make adequate provision for themselves. These employers are encouraging employees to take more responsibility for their retirement savings.
“However, we don’t believe that all employees are ready to be ‘on their own,’” said Marder. “For years, employees have looked to their employers and to the government to provide financial security in retirement, and few are equipped to take on the responsibility. Some governments around the world have, or are planning to, reduce social security benefits and extend retirement ages. If two of the three legs of the three-legged retirement stool are simultaneously shortened (government- and employer-based support), the third leg (employee savings) is bound to be unsteady.”
Stephen Miller is an online editor/manager for SHRM.
Employers, Employees Take 'Wait and See' Approach to Retirement Plan Changes, SHRM Online Benefits Discipline, October 2009
401(k) Stats: Benchmarks for Plan Sponsors, SHRM Online Benefits Discipline, October 2009
Answers to 401(k) Questions that Matter Most, SHRM Online Benefits Discipline, October 2009
Retiring a Defined Benefit Plan: Freeze vs. Terminate, SHRM Online Benefits Discipline, July 2007
SHRM Online Benefits Discipline