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The economy may be slowly improving, but 401(k) plan
sponsors are growing more pessimistic, according to a new
study.
In the consulting firm Aon Hewitt’s most recent annual
survey of 500 U.S. employers, conducted in early fall and
released in late January, just 4 percent of the respondents
said they were “very confident that their workers will
retire with adequate retirement assets.” This was a sharp
plunge from an already meager 30 percent the prior year.
And while another poll does not show a steep decline, it is
because the lack of employer confidence has been ongoing. For
the past 11 years, Deloitte Consulting has been querying 400 to
600 employers on the topic, and consistently, only about 15
percent say they think their employees will be financially
ready to retire — even as the plans keep adding
inducements that are intended to spur more savings.
“It’s hard to tell if things are getting worse or if
we’re just stuck,” says Scott Cole, a senior manager
in Deloitte’s human capital practice who has run the
survey for the past three years.
While no one seemed to have a good explanation as to why the
Deloitte and Aon Hewitt findings were so different, experts
offered plenty of reasons for pessimism.
Pamela Hess, Aon Hewitt’s director of retirement
research, blames “the duration of the downturn.” As
time goes on, benefits officials see more and more employees
requesting hardship withdrawals and loans from their
401(k) accounts or ending their contributions altogether, she
says. “When you’re on the front lines and you’re
seeing the hardships day in and day out, I think it’s
wearing.”
More information may be another reason, suggests Kristi
Mitchem, the head of global defined contributions at State
Street Global Advisors. Thanks to better projecting tools, she
says, “we’ve been increasing the amount of data plan
sponsors have on individual participants. We can forecast with
more specificity what they’ll have at retirement.”
Once they realize just how skimpy their employees’ account
balances are, employers apparently get more depressed.
To Damon Silvers, director of policy and special counsel to
the AFL-CIO, such laments are somewhat ironic. “These
folks need to look in the mirror,” he scoffs. “They
have this concern that their employees don’t have
retirement security, yet they took it away from them” by
eliminating defined benefit plans. And if 401(k) balances are
skimpy, he adds, “it’s not surprising that people
don’t save, because their wages are declining.”
“There’s an easy solution,” he continues.
“Just increase the employer contribution.”
Asset managers and benefits consultants find other faults
with the plans. Despite inducements like automatic enrollment
and automatic escalation of contribution rates, says
Deloitte’s Cole, “oftentimes these changes
aren’t being done in the most effective way
possible.”
Perhaps the main complaint among experts is that employers
are not implementing programs like automatic enrollment and
automatic escalation aggressively enough. Typically, the
default contribution rate begins at 2 percent to 3 percent of
pay when people are first automatically enrolled, gradually
increasing to 6 percent at the pace of 1 percent per year,
unless the participants specifically choose other amounts. But
to build up a big-enough nest egg, people need to start at 6
percent and quickly rise to 10 percent or more, experts
say.
In light of these problems, State Street’s Mitchem
says, “The drop in confidence is actually a good thing. An
understanding of the problem is a precursor of
action.”