The Ideal DC Plan May Be Closer Than You Think - NorthernTrust.com

3 downloads 56 Views 2MB Size Report
THE IDEAL DC PLAN MAY BE CLOSER THAN YOU THINK. Understanding what participants say and do uncovers opportunities to enhance plan design.
line of

Sight

The Path Forward The Ideal DC Plan May Be Closer Than You Think

T h e i d e a l D C p l a n m Ay b e c lo s e r t h a n yo u t h i n K

We hope you enjoy the latest presentation from Northern Trust’s Line of Sight. By providing research, findings, analysis and insight on the effects and implications of our changing financial landscape, Line of Sight offers the clarity you need to make better informed decisions.

line of

Sight

the path forward: The ideal DC pl an m ay b e c lo s e r t h a n yo u t h i n k Understanding what participants say and do uncovers opportunities to enhance plan design.

September 2013

During the last decade, 401(k) plan design has dramatically evolved as defined contribution (DC) plans became the primary retirement savings vehicle for most corporate U.S. workers. Automatic defaults are becoming more commonplace, and target date funds reflect investment strategies once found in defined benefit plans. While nearly 70%1 of plan sponsors believe 401(k) plans are capable of providing sufficient retirement income to working Americans, many are concerned that participants aren’t fully optimizing their 401(k) plan value. At Northern Trust, we believe more can be done to drive financial success at retirement. Our 2013 Path Forward survey, which builds on our past surveys of plan sponsors and consultants, reveals what participants think about plan sponsors’ efforts to help them achieve more desirable results at retirement. Actionable and meaningful enhancements to existing plan features can take DC plans to the next level. The ideal DC plan may be closer than you think.

1. The Path Forward 2012, “Importing Winning DB Strategies into DC Plans,” Northern Trust, October 2012

ABOUT THE SURVEY: In June 2013, we partnered with Greenwich Associates to conduct an online poll of 1,000 current or past participants in a 401(k) plan. Results from our fourth annual survey reveal participants’ perspectives regarding: n Investment selection n Liquidity n Loans n 401(k) vs. Rollover IRAs

take the path forward These are the key findings from our 2013 Path Forward survey.

1

Re-enroll. Repeat. Some plan sponsors are concerned about re-enrolling participants in target date funds, believing it may disrupt their investment strategy. ■





54% of participants would be pleased or indifferent to being re-enrolled into target date funds. 49% of those defaulted to a target date fund said they “selected investment mix on my own, based on my knowledge.”

Our Take Participants believe plan sponsors are acting in their best interests. Opt-out re-enrollment to target date funds helps participants focus on informed decision-making. Participants decide to accept the default or choose an alternative.

Action: Keep re-enrolling: once is not enough. Maximize the value of auto-features to direct appropriate investment choices.

2

Focus on the Long-Term Many plan sponsors believe participants prefer the ability to make decisions about their investments whenever they want. For example, daily valuation has been offered for many years so participants can track their investments and respond quickly.

56% of participants say it’s important to have daily access to change their investment mix, yet 91% say they would be willing to sacrifice daily access to their account to invest in something offering greater return potential. ■ What participants do supports what they say: many participants do not access their accounts regularly despite having daily access. — ­ 51% haven’t changed their investment mix for at least 12 months, including many who haven’t made a change in two or three years. ■

3

Our Take Plan sponsors and participants agree a 401(k) plan should focus on outcomes at retirement. To achieve this goal, participants need a long-term strategy. Professional investment managers don’t necessarily change their investment mix each day. So why enable participants to change investments daily?

Action: Focus participants on time in market, not timing the market. Consider pre-mixed portfolios with less liquid investments that have greater long-term return potential.

Commit to Retirement The majority – 91%1 – of plan sponsors allow participants to take loans because they believe participants need access to their balances in order to drive participation. ■ ■



76% of participants have never taken a loan. 57% of participants consider loans only for significant emergency expenses. Only 13% of participants consider borrowing from their account in the future.

Our Take Participant actions demonstrate 401(k) balances should only be accessed under special circumstances. Despite hard economic times, participant borrowing has not dramatically increased.

Action: Restrict loans to financial hardship. Limit access to employee contributions only and keep employer sources invested for retirement.

4

Extend the Benefit The majority1 of plan sponsors aren’t focused on retaining participant balances in-plan when they change employers. ■





51% of participants left savings in a prior employer’s plan or rolled to a new employer’s plan. 24% of participants rolled into an IRA because it was simpler than moving to their new employer’s plan. Only 13% of participants withdrew account balances as lump sum taxable distributions when they changed employers.

Our Take Participants want to retain their retirement benefit but may not realize the value their 401(k) plan provides through its fiduciary oversight and institutional pricing. Attracting and retaining assets in the plan gives more participants access to the proper oversight and pricing they deserve.

Action: Be clear about the benefits of their 401(k). Simplify the process; encourage new hires to roll over their savings to, and participants who are leaving to keep their balances in, the plan. Make sure you control the distribution counseling.

take the path forward You can learn more about our findings, summarized here, by subscribing to our 2013 Path Forward Action Plans. You’ll receive insights and recommendations before we release them to the general public. Subscribe today at northerntrust.com/pathforward.

The Path Forward: DC Research Series The Path Forward, our annual DC research series, explores topics at the forefront of DC plan design and offers actionable solutions plan sponsors can take – today and in the future – to help their participants achieve better retirement outcomes. line of

Sight

2012: Importing Winning DB Strategies into DC Plans identifies areas where DC plan sponsors can improve their plans by importing DB plan practices and presents “winning” strategies industry leaders are embracing. 2011: Engaging the Younger Employee in DC Plan Participation highlights tactics to address the challenges of engaging employees younger than 35 in DC plan participation. 2010: Designing the Ideal DC Plan reveals how DC plan sponsors and investment consultants would design the “ideal” plan and identifies action steps that could be implemented. Explore our past research and DC capabilities at northerntrust.com/dcsolutions.

line of

SighT line of

the Path Forward

SighT The Path Forward The Path Forward

Importing Winning DB Strategies into DC Plans

Engaging the Younger Employee in DC Plan Participation

Designing the Ideal Defined Contribution Plan

© Northern Trust 2013. Northern Trust Corporation, Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A., incorporated with limited liability in the U.S. Asset management at Northern Trust comprises Northern Trust Investments, Inc., Northern Trust Global Investments Ltd., Northern Trust Global Investments Japan, K.K., The Northern Trust Company of Connecticut and its subsidiaries, including NT Global Advisors, Inc., and investment personnel of The Northern Trust Company.

IRS CIRCULAR 230 NOTICE: To the extent that this message or any attachment concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law. For more information about this notice, see http://www.northerntrust.com/circular230.

northerntrust.com/pathforward

Q 54268 (9/13)