Auto-enrollment

According to "Rethinking Defined Contribution Retirement Plan Design," a research report by TIAA-CREF Institute, in the absence of a willingness to mandate plan participation, auto-enrollment is the most effective design to maximize participation, with 57 percent of respondents viewing it as "extremely effective."

By comparison, no respondents considered a traditional opt-in design to be effective.

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An active (forced) choice design fell in between; 57 percent viewed it as an effective mechanism, with 35 percent considering it extremely effective.

By definition, mandatory enrollment would be most effective at maximizing performance, but respondents didn't consider it to be as appropriate as auto-enrollment. Ninety-six percent of respondents viewed auto-enrollment as an appropriate enrollment mechanism for a primary DC plan, versus only 42 percent who viewed mandatory enrollment as appropriate.

(TIAA-CREF Institute surveyed experts in behavioral economics, actuarial science, decision-making, and financial education and advice to examine creative uses and combinations of plan features, product designs, and participant services to address the retirement income needs of a heterogeneous work force.)

Contribution 

The appropriate level of total contributions (participant and sponsor combined) is at least 10 percent of salary.

Because contribution rates will impact the level of retirement income generated through a DC plan, surveyed experts agree a contribution rate of at least 12 percent of salary is generally necessary to produce a pre-retirement income replacement rate of 70 percent when combined with Social Security.

When asked the appropriate level of total contributions (employer and employee combined) in a primary DC plan, 45 percent responded 15 percent of salary.

One-third of respondents thought contributions should be split 50/50, one-third thought the employer should bear the largest share, and one-third thought that the employee should contribute the most.

Investment Menu

There are three design considerations regarding a DC plan investment menu:

  • The number of investment options offered
  • The specific options offered
  • The default investment

The appropriate number of investment options lies in the range of 5 to 10, according to TIAA-CREF Institute survey responses. This allows for the construction of an appropriately diversified portfolio without participant decision-making becoming too difficult.

Target-date funds should be the investment default.

 

Payout Options

Participants should have the opportunity to annuitize through a primary DC plan, but should not be required to do so.

Experts generally agree it's appropriate for a primary DC plan to offer a payout annuity distribution option, which includes an immediate fixed annuity (63 percent of respondents), an immediate graded annuity (75 percent), an annuity with payments beginning at a later age (75 percent).

Lump-sum distributions were considered appropriate by 59 percent.

Only 21 percent thought it's appropriate to require annuitization of employer contributions; and in the initial survey round, 31 percent considered it appropriate to require a minimum level of annuitization in a primary DC plan (while 48 percent did think that such a requirement would be effective in promoting retirement income security).

Education and Advice

Experts agree it's appropriate if a plan offers personalized advice regarding contribution levels, asset allocation and decumulation strategies. In fact, this level of advice would benefit decision-making more so than education programs.

Most respondents believe it's necessary for the typical participant to receive personalized advice in order to experience good outcomes in a primary DC plan.

Retirement Income Projections

More than 80 percent of respondents thought it would be valuable to provide a participant with projections of a likely range of income replacement that could be expected in retirement given the individual's current contribution rate, account balance and years to retirement.

Eighty-three percent thought it would be valuable to provide projections of the likely impact on retirement income replacement from changes in the contribution rate; 88 percent for changes in the years to retirement; and 58 percent for changes in asset allocation.

 

 

 

 

 

 

 

 

 

 

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