Many U.S. employees are waiting for a more certain economic recovery before moving forward with retirement—and their employers are taking the same attitude with retirement program changes and risk issues, according to a study by Aon Consulting.
Aon surveyed 1,313 U.S. employers for its 2009 Benefits & Talent Survey and found that the vast majority of respondents are not changing their retirement programs in response to the economic downturn:
• Most defined contribution (DC) plan sponsors have not made changes to their benefits, with 90 percent reporting no change in their contribution levels compared to the previous year.
• 64 percent of employers have seen an increase in investment-related questions by employees, but only about a third of these organizations increased their communications around the importance of saving for retirement, while 62 percent said their communication remained unchanged from the previous year.
• With regard to defined benefit (DB) pension plans, an overwhelming 92 percent of respondents who sponsor a DB plan said they are not making any changes.
• While the turmoil in financial markets highlights the financial volatility of DB plan costs, two-thirds of respondents continue to employ traditional investment strategies and take investment risks, with most sponsors appearing to have a wait-and-see attitude.
"The wait-and-see attitude is not surprising," says Amol Mhatre, senior vice president responsible for retirement innovation with Aon. "We may continue to see dramatic economic swings as interdependencies grow in the global economy, and retirement programs and savings can't stop with every downturn. Retirement security for working Americans will soon become a challenge for policy-makers and employers, along the lines of health care reform. With a trend toward individual responsibility, increased mobility, complex investment choices, rising cost of health care and improved life expectancy, employers may have to do more to help workers understand and plan for their retirement needs."
Defined Benefit Pensions: Deep Freeze
The survey found that 45 percent of U.S. employers offer a DB plan to their employees. That said, 41 percent of these employers have frozen their pension plans to new entrants, 25 percent have frozen their plans entirely and do not have a strategy regarding plan termination, and 20 percent have frozen their plans and intend to terminate the plans once funding allows.
"We do not subscribe to the wait-and-see attitude for employers with frozen pension plans," says Kemp Ross, head of Aon Investment Consulting. "Employers have no real upside for taking on the financial risks and costs of frozen pension plans, so organizations need to establish an exit strategy for such plans which can be executed with a balanced approach to funding and investments during the next few years as financial markets recover."
Trends in 401(k) Matches/Auto Enrollment
The survey revealed that 56 percent of respondents offer matching contributions on DC plans. Of those, approximately half provide a match larger than 3 percent. Additionally, 41 percent of employers have an automatic enrollment plan, with 53 percent implementing a default contribution of 3 percent and 99 percent planning to keep their default percentage the same.
"While most of our survey respondents did not cite changes to matching contributions, some financially constrained companies did suspend or modify their 401(k) match in response to the economic downturn," says Mhatre. "Companies should take this opportunity to look strategically at their retirement programs in the context of total reward strategies.
"We had a third of survey respondents suggest that their fiduciary risks have increased since only a year ago," Mhatre adds. "It's surprising that most companies have not taken actions to mitigate such risks by taking measures such as fiduciary training and review of their governance processes."
Stephen Miller is an online editor/manager for SHRM.
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 Compensation & Benefits Focus Area, July 2007
Expert: How to Weigh Alternatives for Defined Benefit Plans, SHRM Online Benefits Discipline, April 2007
SHRM Online Benefits Discipline