As defined contribution plans continue to transition from being a supplement to defined benefit pensions to become a mainstay of the retirement system, plan sponsors have plenty of options to boost member outcomes, said Katie Taylor, director of thought leadership at Fidelity Investments.
“Plan sponsors should implement plan design features that encourage enrolment, higher levels of savings, offer a diverse investment lineup and set an income-replacement goal for the plan,” she said.
Plans, according to Taylor, should aim to replace 45 per cent of pre-retirement income. And to get there, “people need to save 15 per cent of their income over the course of their working years,” she said.
Among the hurdles, however, is low participation. “In the U.S., 30 per cent of people don’t participate in a plan at all, 70 per cent are saving less than 15 per cent and nearly 50 per cent may not be appropriately allocated based on the equity glide path for their age,” said Taylor.
The participation rate has, in fact, improved since the introduction of the U.S. Pension Protection Act in 2006, which dealt with features like automatic enrolment. The savings gap remains, however, because “a large percentage of plans that have auto enrolment have a default deferral rate of just three per cent,” said Taylor.
One of the ways plan sponsors can spur savings is by offering an “annual auto increase program to help members save a little bit more each year,” she added. Over time, that can have a big impact.
“With a six per cent contribution at the start and an auto increase of one per cent per year, going up to 18 per cent, they could potentially reach the 45 per cent income-replacement rate,” said Taylor.
Read more articles from the 2016 DC Investment Forum