Increased savings is the best risk management tool in preparing for retirement, according to a new white paper by Manning & Napier.
For many employees, their only retirement savings comes in the form of an employer-sponsored defined contribution plan, such as their 401(k). The hardest part for most people is deciding to participate in the plan, how much to contribute and in which funds to invest their money.
Professionally managed solutions, like target-date funds, have become popular because they take that third piece out of the decision-making process.
“Given the uncertainty of future investment returns due to the inability to control the market environment, it is critical that participants maximize the other variables, over which they have control, namely how much they save and the length of time they save for retirement,” according to the report.
The paper examined the many ways employers can help employees save more for retirement, including offering professionally managed portfolios. Most employees will make their choices when they enroll in a retirement plan and never revisit them again. Other participants may feel overwhelmed by their savings and investment choices and do nothing instead.
Target date funds adjust investments based on where an employee is in their life. If they are closer to retirement, their investments will be more conservative. If they are younger, more risk will be taken.
Even though the DC industry has done a lot to improve the retirement readiness of their participants, studies show that a high percentage of participants’ portfolio balances continue to fall below the projected levels necessary to provide an adequate retirement.
The Employee Benefit Research Institute projects that 44 percent of Baby Boomers and Gen Xers will lack adequate retirement income for basic expenses and uninsured health care costs. EBRI noted that the percentage of participants at risk for inadequate retirement income is 5 percent to 8 percent lower than it was in 2003, mostly due to the introduction of automatic enrollment by plan sponsors.
The biggest impediment to people saving for retirement is not having access to a retirement plan at work, according to the report. Recent research by the Investment Company Institute found that only 50 percent of private-sector wage and salary workers between the ages of 21 and 64 have access to a retirement plan at work.
Many employers, mainly small businesses, think it is too expensive and takes too much effort to offer such a plan.
Congress is considering legislation that would encourage businesses that don’t offer retirement plans to automatically enroll their employees in Individual Retirement Accounts.
For participants who have access to a retirement plan, the goal of plan sponsors should be to encourage employees to contribute as much as they can to the plan. Because of the uncertainty surrounding Social Security and Medicare, rising health care costs and the fact that people are living longer, something has to be done to get employees to save more.
Some solutions to this problem include using automatic enrollment, not just for new hires, but for everyone in the company. Increasing the default contribution rate and using an auto escalation feature, also can go a long way toward getting participants to save what they need to for their futures, the report stated.
Manning & Napier recommend that plan sponsors promote the use of voluntary automatic escalation features, like increasing their deferral by 1 to 2 percent a year, or altering the employee match provisions to encourage employees to save more. In the past, employers might offer a 50 cent match on every dollar contributed, up to 6 percent of pay. The company recommends structuring the match differently and offering a 25 cent match per every dollar contributed up to 12 percent of pay to encourage employees to save more.
Plan sponsors also can offer retirement tools and helpful tips. Many employees don’t know how much they will need to retire. They have never calculated it. The report also recommends that plan sponsors tailor their messages to participants based on age group and projected years to retirement.