Robust Implementation of Auto Features Key to Improving 401k Retirement Savings
SAN FRANCISCO, CA, October 7, 2010 -- New research published today by the Defined Contribution Institutional Investment Association (DCIIA) finds that changes to the implementation and utilization of automatic features in defined contribution plans can have an enormous impact on workers' retirement income.
A key finding in "Raising the Bar: Pumping Up Retirement Savings", co-authored by Lori Lucas, DC practice leader at Callan Associates and chair of the research committee at DCIIA, finds that DC plans with automatic enrollment and automatic contribution escalation can significantly boost participants' chances of meeting retirement income goals-but their success depends upon how these features are implemented and communicated by plan sponsors.
Lucas found through her research with DCIIA that the success rate of younger employees with 31-40 years of 401k eligibility reaching an 80 percent pre-retirement income replacement target (in real terms) increases from 45.7 percent to 79.2 percent for lower income workers and 27 percent to 64 percent for higher income earners in auto 401k plans with:
- A higher automatic enrollment contribution rate cap;
- A successful program to reduce in automatic contribution escalation opt outs;
- A higher annual automatic contribution escalation rate.
"We've known the positive influence auto enrollment and auto contribution escalation features in 401k plans can have on workers' retirement savings," said Lucas.
"This research is seminal because it actually allows us to quantify how different approaches to implementing and utilizing these auto features can materially improve retirement income for all employees-both at high and low income levels."
There are some important steps that plan sponsors, providers, and policymakers can take to improve outcomes in plans with auto features, Lucas points out. These include:
For Plan Sponsors:
- Revisiting the matching contribution so that it accommodates a robust implementation of default contribution levels and auto escalation amounts.
- Using state of the art tools and communication to support better utilization of auto features.
For Providers:
- Arming plan sponsors with statistics on opt-out rates for automatic enrollment and automatic contribution escalation for higher versus lower deferral defaults.
- Supplying information on benefits center experience for plans with automatic enrollment and automatic contribution escalation for plans with higher versus lower defaults.
For Policymakers:
- Examining the signals sent by the deferral defaults that are used in the requirements for qualified automatic contribution arrangements (QACA)
- Potentially amending these regulations to encourage more robust implementation of QACA plans.
Lucas notes that in years past, DC participants-and plan sponsors-may have relied on the stock market to fill in the gap of low savings by workers to help them generate a sufficient 401k retirement nest egg.
"The last few years have shown us that employees cannot depend upon the market to bail them out if they don't save enough," said Lucas. "To ensure retirement income security for workers becomes a reality, plan sponsors must commit to contributing more funds to their plans or find more innovative ways to increase participant savings-auto features can assist in that effort."
The full report, "Raising the Bar: Pumping Up Retirement Savings", is available online at www.dciia.org.
About Callan Associates
Founded in 1973, Callan Associates is one of the largest independently-owned investment consulting firms in the country. Headquartered in San Francisco, Calif., the firm provides research, education, decision support and advice to a broad array of institutional investors through five distinct lines of business: Fund Sponsor Consulting, Independent Adviser Group, Institutional Consulting Group, Callan Investments Institute and the Trust Advisory Group. Callan employs more than 160 people and maintains four regional offices located in Denver, Chicago, Atlanta and Florham Park, NJ. For more information, visit www.callan.com.
About DCIIA
The Defined Contribution Institutional Investment Association (DCIIA) is a non-profit association dedicated to enhancing the retirement security of American workers. To do this, DCIIA fosters a dialogue among the leaders of the defined contribution community who are passionate about improving defined contribution plan design. DCIIA members include investment managers, consultants, law firms, record keepers, insurance companies, plan sponsors and others committed to the best interests of plan participants. Visit www.dciia.org.
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