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With the economy in a state of perpetual uncertainty, employers are becoming increasingly worried about their employees’ ability to save for retirement, according to a survey by Aon Hewitt. As such, many employers are adding innovative features to their plans in order to help employees better prepare for retirement.
According to the survey of more than 500 large U.S. employers, just 4% of respondents said they’re very confident that their workers will retire with adequate retirement assets, down substantially from 30% in 2011. Additionally, only 10% of plan sponsors feel very confident that their employees are taking accountability for their own retirement, and just 18% are confident that workers will be able to manage their income during retirement.
“The stark drop in the confidence of employers is troubling,” said Pamela Hess, director of retirement research with Aon Hewitt. “We’ve known for a while that workers weren’t saving enough for retirement, but it seems that with continued tough economic times, employers are realizing just how dire the situation has become for much of their workforce. Fortunately, they’re not sitting idly by—they’re actively taking steps to help their employees get on a better path.”
Of those surveyed, 44% said they plan to focus on helping workers retire with enough money, and 60% say that they will place greater emphasis on helping employees to understand and make use of the employer-provided resources available to them.
Employers are also enhancing their DC plans, adding automatic features, expanding savings choices and offering employees more resources to help them meet their needs while in retirement.
Automatic enrollment has been one of the biggest retirement trends in recent years; currently, 55% of U.S. plan sponsors automatically enrol workers in their DC plan, up from 24% in 2006. Looking ahead, 34% of plans are likely to add this feature for new hires in 2012. However, while auto-enrollment can be beneficial to increase participation, it is just one step in the process. In fact, Aon Hewitt found that of workers who are subject to auto-enrollment, 63% aren’t saving enough to get the full employer match. In response, 24% of employers surveyed said they plan to make changes to their automatic features in 2012. Of those making changes, 26% will apply auto-enrollment to existing non-participants, 26% will add an automatic contribution escalation feature, and 24% will increase the initial default rate.
“Automatic enrollment alone isn’t enough to get workers where they need to be,” explained Hess. “Plan sponsors need to step it up by encouraging employees to save at a higher rate. Adding features such as contribution escalation to get workers saving at least at the employer match level—or ideally even more—is key to helping them meet their savings goals.”
Plan sponsors are also adding investment advisory solutions and features. Currently, 79% offer target date portfolios. More than half (59%) offer online investment guidance, while nearly four in 10 now offer online investment advice or managed accounts (39% and 38%, respectively). For those plans that do not already offer it, 26% plan to offer online advice, and 24% will likely add managed accounts in the year ahead.
“Our research shows that when defined contribution investors use employer-provided professional investment advice, they greatly outperform those who invest on their own,” said Hess. “Offering a variety of help services to workers better positions them to make smarter savings decisions that keep them moving in the right direction.”
As many employers have moved away from DB plans in favour of DC, workers are now left with an annuity gap once filled by those DB plans. As a result, more plan sponsors are introducing retirement income solutions outside, within or alongside the plan. Currently, 16% of employers offer an “in-plan” income solution—including an insurance product, managed account with a drawdown feature or a managed payout fund—while 9% offer an out-of-plan option. Looking ahead, 22% plan to adopt one of these solutions in 2012.