Plan Participants Confused About Retirement Fundamentals

Participants indicate plan features influence their savings

By Stephen Miller Jul 5, 2010

More than half of 401(k) retirement savings plan participants report that their plan has become more important to them since the financial crisis of 2008, according to a nationwide survey by asset management firm BlackRock.

BlackRock's second annual Survey of 401(k) Participant Attitudes and Behaviors indicates that employers have a significant opportunity to improve the effectiveness of their defined contribution plans by focusing on key plan features that are instrumental in strengthening retirement preparedness.

The BlackRock survey was fielded to 1,000 401(k) participants in March 2010.

"We heard two clear messages from participants,” said Chip Castille, head of U.S. and Canada defined contribution plans at BlackRock, in a statement about the survey. “First, saving for retirement is a top priority for them and, second, they are confused about how to turn retirement savings into retirement income."

Although seven of 10 plan participants ranked retirement savings as a priority well ahead of other key savings goals, participants' savings rates are not sufficient to meet their retirement needs, the survey results showed.

"When it comes to planning for retirement, the truth is we're asking employees to perform complicated actuarial accounting related to longevity and inflation risk," Castille said. "If participants are being asked to shoulder the risks of managing their retirement, then we are obligated to minimize those risks by understanding their concerns and challenges and then responding with more-effective plan design, product innovation and effective communication."


Participants peg contributions to receive the

employer match, regardless of their

retirement savings needs.


Employers Can Prompt Better Savings Behavior

While the majority of participants (74 percent) reported retirement savings as a top priority, they are uncertain about setting a proper savings rate. Among the survey findings:

77 percent of participants reported that they knew the rate at which their employer would match their savings; 23 percent didn't know or weren't sure.

Of those who knew their employer's match rate, a large majority (83 percent) said they were investing only up to the rate in order to receive the full match.

The employer's matching contribution was ranked by a plurality of respondents (45 percent) as the most powerful influence on their own savings rate.

One-third of participants ranked the plan feature to automatically increase their savings rate each year (automatic escalation) as the next most powerful savings incentive.

"If the company match and auto escalation can prompt better savings rates, we should be doing all we can with these features to help participants achieve better savings behavior," Castille said. "We know from behavioral finance research that employees won't do it on their own. Employers have the tools right at hand to improve savings rates."

Employees Lack Guidance on Retirement Income

The survey indicates employees are not knowledgeable about retirement realities that shape a retirement spending strategy. For example, employee views about how long they plan to be in retirement and at what rate they can deplete their savings don't align. The "disconnection" illustrates the challenges employees face in understanding how to secure a self-funded retirement. Additional findings include:

More than six of 10 (62 percent) plan participants believe they will live in retirement more years than they believe their retirement nest egg will need to last.

Over half (57 percent) of plan participants would prefer to receive a steady stream of income in retirement vs. a lump-sum payment (9 percent).

The great majority of participants (82 percent) said they had little or no experience in managing a sum of money over $100,000.

"When the vast majority of participants say they are not prepared to manage $100,000 or more, then how can we ask them to manage longevity risk or secure a stream of income on their own?" Castille asked. "Participants are telling us they want income solutions in their 401(k) plan, and there's no question that providers and employers must create solutions that help employees achieve their objectives."

The BlackRock survey findings suggest that additional guidance from plan sponsors would be welcomed by most 401(k) plan participants. For example, almost three-fourths of participants (72 percent) said they would accept their employer's guidance to shift their balances to a well-diversified managed account.

A New Generation of Plans

The defined contribution plan was born 30 years ago as a supplemental savings plan and has worked hard to keep up with the demands of a changing retirement landscape. "More and more, workers are looking to the defined contribution plan as their primary method of financing their retirement," Castille said.

"The next decade will be a turning point for the defined contribution plan. Employers can start now by increasing savings rates," he said, noting that employer-driven plan design, public policy and product innovation must play a part in the evolution. Employers and providers "must commit to taking the necessary steps to create defined contribution plans that are genuine retirement plans—plans that effectively turn hard-earned savings into retirement funding."

Employers Consider Annuities

One aspect of 401(k) plans that is receiving attention at the employer, regulatory and legislative levels is the use of lifetime income options such as annuities. The Towers Watson Defined Contribution Survey conducted during April and May 2010, with responses from 334 large U.S. employers, found that about 18 percent currently offer annuities to participants or plan to do so by year-end 2010 or 2011. In addition, 30 percent of respondents were considering offering this option.

Of the employers that offer annuities as a distribution option, 79 percent reported that only 5 percent or less of their plan participants choose this option.

“With the continuing shift in corporate America away from traditional defined benefit plans and toward account-based plans like 401(k) and cash-balance pension plans, annuities and other distribution designs can provide a steady stream of retirement income and help retirees’ nest eggs last through their lifetimes,” said Robyn Credico, senior retirement consultant at Towers Watson. “But we’re still not at the point where annuities are being widely used in 401(k) plans to bridge the gap between traditional-style pensions and defined contribution plans.”

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

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