ARLINGTON, VA, November 19, 2014 — More than three-quarters of large and midsize U.S. employers that sponsor 401(k) and 403(b) defined contribution (DC) plans say retirement readiness has become a major issue for their employees, according to a new survey by global professional services company Towers Watson (NYSE: NASDAQ: TW). A vast majority of plan sponsors have taken steps to meet this growing challenge by boosting their savings and investment education programs, and continuing to embrace automatic features and target-date funds for their DC plans. However, concerns about retirement readiness are prevalent.
According to the Towers Watson 2014 North American Defined Contribution Plan Sponsor Survey, 78% of the 457 U.S. employers surveyed say retirement readiness has become a top issue for their employees. Additionally, 82% say retirement security will become a more important issue for employees in the next three years. Employers understand that more education is necessary. A mere 12% of respondents say employees know how much they need for a secure retirement, while only 20% believe their employees feel comfortable making investment decisions. More than half of the respondents (53%) are also concerned about older workers delaying retirement.
“In a world where DC plans are becoming the primary company-sponsored retirement program, retirement readiness has become a major concern for employers. Unfortunately, most employers have not yet moved the needle in preparing their workers for a financially secure retirement,” said Robyn Credico, Defined Contribution practice leader, North America, at Towers Watson. “Getting employees to understand their savings needs and feel comfortable about retirement remains a significant challenge. New plan features alone are not the answer. If employers are to make progress, they must also rely heavily on education and communication so their employees know their options and make informed savings decisions.”
The most common plan features include simple but diverse investment lineups, and automated enrollment and deferral features with flexibility for pre-tax and after-tax contributions. Yet participants do not always take advantage of the solutions that would optimize their retirement readiness. More than half of the respondents (54%) offer an automatic increase feature for participants’ contributions annually, but only 28% mandate it. While more than half (54%) offer an option to make Roth contributions, less than 11% of their employees take advantage of these features.
Health savings accounts (HSAs) are another tax-efficient vehicle for retirement savings. Virtually all companies (99%) that offer HSAs and DC plans allocate the contributions separately. Of those that offer HSAs, only 19% specifically educate their workers on the wealth accumulation benefits of a DC plan versus an HSA.
In support of more effective solutions, sponsors continue to simplify the investment offerings to align with participant needs. Two-thirds (66%) offer between 10 and 19 investment options, and 86% of respondents use target-date funds as their default option.
“We are very encouraged that most employers say they are committed to providing more education to their employees on retirement saving and investing,” said Jill Kleiner, senior consultant at Towers Watson. The survey noted that the majority of employers (61%) continue to focus their retirement education programs on traditional, passive methods, including account statements, newsletters, group meetings and online webcasts. Less than 10% use mobile apps extensively or have tried gamification, which uses game design to motivate employees to achieve savings goals.
“With concern over retirement readiness at such high levels, many employers face the risk of having older workers delay retirement. These delayed retirements can weaken productivity, since employees who stay on the job because they cannot afford to retire are more likely to be less engaged and productive than other workers. To minimize this possibility, employers should measure the effectiveness of their plans in meeting retirement goals and, if necessary, determine opportunities where various design, investment and communication features can be used more effectively to optimize the overall program. These efforts will need to be balanced with the benefit plan cost constraints most employers have,” said Credico.
About the Survey
The Towers Watson 2014 North American Defined Contribution Plan Sponsor Survey was conducted in June and July 2014, and includes responses from 457 large and midsize U.S. companies that sponsor a DC plan.