Employers Doubtful of Employees' Retirement Readiness

Higher participation and simplified investment lineups highlight 401(k) changes

By Stephen Miller, CEBS October 10, 2012

Despite successful efforts to increase employee participation and raise deferral rates in 401(k) defined contribution plans, most U.S. employers lack confidence in the retirement readiness of their employees, according to a new survey.

The Towers Watson 2012 Defined Contribution Plan Sponsor Survey, conducted among large U.S. employers with 1,000 or more employees, found that more than half of respondents (56 percent) reported 401(k) plan participation levels at or above 80 percent in 2012, compared to 50 percent in 2010. The higher participation rates are primarily the result of employers using automatic enrollment, with nearly two in three respondents (65 percent) now using this feature, compared to 51 percent in 2009.

According to the survey, employers encourage adequate participant savings in the following ways:

Automatic contribution escalation, which allows a gradual increase in contribution levels over a certain period of time, is used by 71 percent of those that provide auto-enrollment.

Fee transparency, with more companies now charging participants direct, equal-dollar recordkeeping fees. One-third of respondents pay recordkeeping fees through less-transparent revenue sharing, which represents a decline from 42 percent in 2009.

Uninformed Decisions

Even with these efforts, the survey reveals significant employer concern that their 401(k) plans are underused and misunderstood by their employees:

Only one in five respondents (22 percent) believes employees generally make informed decisions about their retirement savings.

Only 26 percent believe their employees have realistic expectations about what 401(k) plans can provide.

Nearly one-half of respondents (48 percent) expect a greater number of older workers will ultimately delay retirement.

“While employers have made recent strides by automating retirement plan savings features and offering investment choices that help employees diversify their savings, the intended impacts of these moves have fallen short of their goals,” said Robyn Credico, a senior retirement consultant at Towers Watson, in a media statement.

“There are several steps employers can take to help their employees generate an adequate income at retirement,” added Alec Dike, a senior retirement consultant at Towers Watson. “These include enhancing communication efforts to provide employees with a better understanding of how 401(k) plans work, including how much to save, investment options, risk and return, and how to monitor and adjust assets.”

The survey also includes these findings:

The average number of investment optionsoffered in a 401(k) plan is decreasing. The number of employers offering 20 or more options declined from 32 percent in 2010 to 24 percent in 2012. Nearly seven in 10 (69 percent) respondents offer between 10 and 19 investment options. Nearly one-half of respondents offer a brokerage window as an option.

The use of lifetime income distribution options, such as annuities, is low. Currently, only 6 percent of respondents offer a lifetime income distribution option; of this group, 82 percent report that less than 5 percent of participants elect the annuity option. Forty-five percent offer the option only at the time of retirement, and the plan is responsible for providing the lifetime income distribution.

While nearly three-fourths of respondents (74 percent) said the most prevalent reason for offering a 401(k) plan is to provide their employees with an adequate retirement at a reasonable age, more than half of the respondents cited benefit competitiveness, benefit plan cost, and attraction and retention as the top three issues driving plan design.

The survey was conducted in April and May of 2012 among 401(k) plan sponsors with more than 1,000 employees and $10 million or more in plan assets.

Stephen Miller, CEBS, is an online editor/manager for SHRM.​

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