With defined contribution(DC)plans now being the primary retirement-savings vehicle for American workers, Prudential Retirement has released a report with proposals to energize DC programs.
The report, entitled Defined Contribution Plans: 12 Practical Recommendations to Help Encourage Better Outcomes, is both a call to action and a plan for action, says Jim Mallozzi, senior vice-president, Prudential Retirement.
“Among workers with access to DC plans in 2006, more than 20% chose not to participate, and those who did were not saving enough or not increasing their savings rates over time,” he explains. “Moreover, the latest industry figures show that 50% of participant portfolios lack proper diversification, with many over-weighted in company stock.”
The report offers recommendations for the following aspects of plan design and management:
Automatic Enrollment—1. Applying automatic enrollment to new hires and to individuals not participating in the plan; 2. Revisiting enrollment with non-participants on an annual basis; and 3. Employing a “contribution accelerator” program as part of automatic enrollment.(The September issue of Benefits Canada will have more about automatic enrollment in the cover story, Switching to Autopilot.)
Default Savings Rate—4. Setting the automatic enrollment default savings rate at either 6% contribution or at the plan’s maximum match percentage.
Asset Allocation—5. Defaulting participants into age-appropriate investments that offer professional asset allocation.
Contribution Increase—6. Adopting a “contribution-accelerator” program for new and existing participants; 7. Adding a contribution-increase feature to plans that already employ automatic enrollment; 8. Offering contribution accelerator as an opt-out or default option; 9. Increasing deferrals in contribution-accelerator programs by 2% a year; and 10. Using the plan’s maximum deferral as the cap for a contribution-increase feature.
Planning—11. Delivering comprehensive counseling and assistance on how to help grow, protect and enjoy DC assets, with special emphasis on rollover and transition guidance for job changers and retirees.
Lifetime Income—12. Offering an in-plan income solution that does not require annuitization, but still offers a guaranteed income stream, upside potential, downside protection, asset control and flexibility, and an optional spousal benefit.
“The study of behavioral finance tells us that, when it comes to managing money, individuals are primarily guided by inertia and risk avoidance,” Mallozzi says. “We believe the proposals in this report constitute the right remedies at the right time because they allow inertia to work for participants, rather than against them, and because the risk management features inherent in the proposals help minimize the fear of investing.”
Click here for more about plan design, and communication and education in our special section, CAP 101.
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