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 Hewitts 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. Its hard to tell if things are getting worse or if were just stuck, says Scott Cole, a senior manager in Deloittes 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 Hewitts director of retirement research, blames the duration of the downturn. As time goes on, benefits officials see more and more employees requesting hardship withdrawalsand loans from their 401(k) accounts or ending their contributions altogether, she says. When youre on the front lines and youre seeing the hardships day in and day out, I think its 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, weve been increasing the amount of data plan sponsors have on individual participants. We can forecast with more specificity what theyll 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 dont have retirement security, yet they took it away from them by eliminating defined benefit plans. And if 401(k) balances are skimpy, he adds, its not surprising that people dont save, because their wages are declining.
Theres 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 Deloittes Cole, oftentimes these changes arent 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 Streets Mitchem says, The drop in confidence is actually a good thing. An understanding of the problem is a precursor of action.