Engaging Under-35 Workers a Challenge for DC Plans

CHICAGO, IL, November 14, 2011 -- U.S. companies must act now to engage younger workers in employer-sponsored defined contribution plans if up-and-coming generations are to have a realistic chance of achieving a financially secure retirement, according to a new study from Northern Trust.

The Path Forward: Engaging the Younger Employee in DC Plan Participation, the second installment of Northern Trust's research series on the future of DC plans, notes that workers under age 35 are likely to be more dependent on DC plans for their retirement savings than previous generations, as the future appears less certain for both defined benefit pension plans and Social Security. While the 75 million-strong Baby Boom generation receives extra attention as it moves closer to retirement, Northern Trust's report argues that the time has come for employers to direct time and resources specifically to the approximately 61.5 million workers who are under age 35.

"Employers should focus on this group of younger workers for two reasons," said Bob Browne, Chief Investment Officer of Northern Trust. "First, this is a generation of workers for whom company-sponsored DC and 401k plans represent the primary — and in many cases the only — vehicle for retirement savings. Second, these young workers still have time to make and implement choices that will have a meaningful, positive effect on their financial situation later in life."

To assess the current status of DC plans and develop recommendations for reaching younger workers, Northern Trust engaged Greenwich Associates, the leading research-based strategy management services firm, to interview 45 DC plan sponsors at some of the largest and most well-regarded companies in the United States, and 11 leading DC investment consultants. Altogether the DC plans included in the analysis represent more than 1.5 million participants and more than $175 billion in assets.

While most plan sponsors expressed confidence in their plan's ability to prepare younger workers for retirement, nearly 40 percent of plan sponsors and a majority of consultants interviewed were neutral or less than confident on that question. The study indicates that plan sponsors could take a number of steps in the near, medium and longer term to better engage these younger workers:

• Segment plan participants by age groups (near-term) –- Only 4 percent of plan sponsors participating had established specific goals for engaging younger workers in their DC plans, and just 24 percent have strategies aimed at increasing participation by different age groups.
• Tailor education plans to participant needs (near-term) -– Plan sponsors reported that under-35 workers lag their older colleagues in both participation rates and contribution levels; respondents also noted that younger workers are typically more receptive to new media such as social networking as an education tool.
• Reduce ‘leakage' from cash-outs and loans (near term) –- 91 percent of plan sponsors allow participants to take loans on their retirement savings, and participants under age 35 were more likely to have loans outstanding.
• Implement more auto plan features (medium-term) –- 86 percent of respondents say that auto-enrollment, auto-escalation and similar features have proven effective for younger employees.
• Align target retirement date funds with participant needs (medium-term) -– Under-35 employees are highly likely to select the target date investment option. Plan sponsors should profile their participants – based on age and savings demographics, other retirement benefits and risk tolerance, among others – and select a glidepath that most closely matches that profile.
• Require participation (long-term) -– 63 percent of those participating in the study believe DC plan participation should be mandatory, which would have a disproportionate impact on younger workers, who enroll at lower rates than those over age 35.

"Setting goals and building marketing strategies to reach these younger workers is a critical early step in improving DC plan funding effectiveness," said Jim Danaher, Managing Director of the Defined Contribution Solutions Group at Northern Trust. "Workers who wait until the age of 40 or older to begin saving for retirement very likely will fall short of their financial goals. By contrast, workers who begin participating in DC plans in their 20s or even early 30s have an opportunity to achieve their goals—if they stay engaged and make the right decisions."

More details of the study, including comments from participants, can be found in the full report on Northern Trust's website.

This research is the second in a Northern Trust series focusing on The Path Forward, launched in 2010 to examine candid perspectives of leading industry practitioners regarding DC industry challenges and potential solutions. The first report in the series, Designing the Ideal Defined Contribution Plan, outlined the structures, practices and features that DC plan sponsors and investment consultants would include in their visions of the ideal plan. Insights generated from these research-driven initiatives are intended to inform the decisions of companies, public plan sponsors and policy makers alike.

The Defined Contribution Solutions Group at Northern Trust is committed to helping plan sponsors meet the varied needs of their plan participants. Our experienced team employs a consultative approach to help clients design a comprehensive service suite that leverages Northern Trust's broad range of investment strategies and asset servicing options. Northern Trust manages DC plan assets in excess of $60 billion and has more than $190 billion in DC assets under custody.

About Northern Trust

Northern Trust Corporation is a leading provider of investment management, asset and fund administration, banking solutions and fiduciary services for corporations, institutions and affluent individuals worldwide. Northern Trust, a financial holding company based in Chicago, has offices in 18 U.S. states and 16 international locations in North America, Europe, the Middle East and the Asia-Pacific region. As of September 30, 2011, Northern Trust had assets under custody of US$4.2 trillion, and assets under investment management of US$644.2 billion. For more than 120 years, Northern Trust has earned distinction as an industry leader in combining exceptional service and expertise with innovative products and technology. For more information, visit www.northerntrust.com.

###

Click here for more material dealing with current trends, opinion, news, legislative action, investments, marketing, sales, consulting, and legal issues on 401k plans.

This is a press release provided by the company or its representatives. 401khelpcenter.com, LLC is not the author of this release and is not associated or affiliated with any firm or organization mentioned unless otherwise noted. Use of any information obtained from this release is voluntary, and reliance on it should only be undertaken after an independent review of its accuracy, completeness, efficacy, and timeliness. Reference to any specific commercial product, process, or service by trade name, trademark, service mark, manufacturer, or otherwise does not constitute or imply endorsement, recommendation, or favoring by 401khelpcenter.com, LLC.