The defined contribution market in the United States will likely double by 2015 and assets under management will reach between US$7.5 trillion to $8.5 trillion—three times larger than the market for private defined benefit pensions, according to a report by McKinsey & Company.
Its report, Redefining Defined Contribution, says a number of forces have made the DC market the backbone of the U.S. retirement system: the decline of employer-funded pensions, the potential erosion of Social Security Benefits, the aging workforce, and new regulations, such as the Pension Protection Act.
“Plan providers, asset managers, and retail financial advisors/wealth managers, among others, will enjoy access to a revenue pool projected at $20 billion to $25 billion for the mega 401(k) plan segment alone,” says the report. “Massive flows from DC into IRAs will create further opportunities for integrated players and wealth managers among others.”
Industry players must act now to position themselves in this new DC industry, the report concludes. Those that stand still, or take only incremental action, risk missing out on one of the biggest growth opportunities in today’s financial services industry.
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PPA Helps Employees Save
A report by the Employee Benefits Research Institute finds that the automatic features in the U.S. Pension Protection Act—such as auto-enrollment and auto-escalation of contributions—are likely to have a very significant positive impact in generating additional retirement savings for many workers.
The Impact of PPA on Retirement Savings for 401(k) Participants reveals that when results are aggregated across all income categories, the increase in the value of 401(k) accumulations at age 65 as a multiple of final earnings for those currently ages 25 to 29 would be approximately 2.4 times to 2.6 times final salary by switching from voluntary enrollment to automatic enrollment.
“To the extent that 401(k) sponsors decide to switch from voluntary enrollment systems to the new automatic enrollment plan designs in PPA, many workers will have increased retirement savings, especially those in the lowest-income quartile,” says Jack VanDerhei, EBRI research director and co-author of the analysis. “For example, a 25-year-old worker making US$25,000 a year would be likely to have a median increase in 401(k) accumulations of between $92,000 and $166,000 in today’s dollars by age 65 as a result of these changes.”
The “automatic” provisions of PPA created incentives for 401(k)-plan sponsors to automatically enroll workers in the retirement savings plan, to automatically increase their savings rate over time, and to direct their contributions into a default mix of investments appropriate for their age.
Workers can choose to opt out or to change their savings rates or investments, but must take positive action to do so. The PPA provisions reflect an attempt to overcome workers’ well-documented inertia and inaction when left to make savings and investment decisions on their own.
For a copy of the report on EBRI’s website, click here.
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Wages Rise More in the West
Wages are rising all across the country, but they continuing to grow at a better-than-average pace in Western Canada.
Statistics Canada says Alberta and Saskatchewan had the strongest year-over-year earnings growth of all provinces at 6% and 5.4%, respectively, in April
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The average weekly earnings of employees stood at $789.99, up 0.3% from March and compared with a year earlier, average weekly earnings rose 3.2%.
In the country’s largest industrial sectors, earnings rose 4% in health and social assistance, 3% in manufacturing, 2.7% in retail trade, and 1.9% in educational services compared with last year.
Click here for more about how employers in Western Canada are dealing with the labour shortage in the October issue of Benefits Canada.