The Next Step to Increasing DC Plan Participation
By Seth Masters
February 13, 2013
Defined contribution (DC) plans can deliver benefits only if workers choose to participate. Unfortunately, about one in every five eligible US employees chooses not to, according to research from Aon Hewitt.
So it’s encouraging that 77% of DC plan sponsors stress the importance of increasing participation in their plans, according to a recent survey we conducted. Automatic enrollment has helped lift participation in many DC plans. But how can plans take the next step toward 100% participation?
Our recent survey of plan participants shows that a well-designed lifetime income solution can change the minds of many employees who currently do not participate in their DC plan. Workers who already contribute to their DC plan like these solutions, too.
More and more indicators from our survey suggest that a steady stream of income for life can significantly improve retirement confidence. And incorporating lifetime income into the default investment option of DC plans is the most likely way to connect workers with that steady income.
Playing to a Tough Crowd
DC nonparticipants don’t typically change their minds and suddenly decide to join their company’s plan. While inertia keeps many participants in their DC plan, it also keeps many nonparticipants out.
What might change the behavior of nonparticipants? In our survey, 31% of nonparticipants said they would participate if their companies offered better matching contributions. But a slightly larger number—33%—said that nothing would get them to join the retirement plan.
That’s a tough crowd to please.
Something for Everyone
Our survey shows that the vast majority of both participants and nonparticipants want the same thing from their company’s retirement plan: a steady income stream in retirement.
We then asked our survey respondents if they’d like a target-date fund with a secure income stream feature. Nearly 80% of current target-date users found this appealing or extremely appealing. So did over half of target-date nonusers, and 47% of nonparticipants.
How would employees feel if their employer automatically enrolled them in such a fund?
As you might expect, current target-date users responded most positively to this option, with three-fourths saying they’d stay in the default if secure income were added. Over half of target-date nonusers were fine with being automatically enrolled in a target-date option with secure income.
The surprise was among nonparticipants. Fully 61% said they would remain in a secure income target-date solution.
That means they’d also stay in the plan. And that “thumbs up” from 61% is higher than the response we received when we asked about any other plan-joining enticement—fully twice as high as their response regarding a better company match.
Incorporating a lifetime income solution in the plan default option answers several DC plan objectives: it appeals to participants and it may help get more nonparticipants into the plan.
Certainly, DC plan sponsors have a number of important questions and concerns about in-plan lifetime income solutions. We’ll look at some of the major issues in upcoming posts.
“Target date” in a fund’s name refers to the approximate year when a participant expects to retire and begin withdrawing from his or her account. Target-date funds gradually adjust their asset allocation, lowering risk as participants near retirement. Investments in target-date funds are not guaranteed against loss of principal at any time, and account values can be more or less than the original amount invested¾including at the time of the fund’s target date. Also, investing in target-date funds does not guarantee sufficient income in retirement.
Our survey description of a secure income target-date fund: The income stream payments would be based on a percentage of your highest account balance in the years leading up to your retirement. This enhanced target-date fund would offer you: an income stream that will last as long as you live; payouts based on a percentage of your highest account balance in the years leading up to your retirement; income protection in down markets¾negative market performance won’t reduce the size of your payments; the potential to increase the size of your payments with gains in your investments; the flexibility to take part or all of your money out of your account at any time without incurring withdrawal fees/penalties; and a competitive market investment-management price/fee.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.
Seth J. Masters is Chief Investment Officer of Defined Contribution Investments and Asset Allocation at AllianceBernstein and Chief Investment Officer of Bernstein Global Wealth Management, a unit of AllianceBernstein.