Regulatory action isn't needed to act now, DCIIA report says
The Defined Contribution Institutional Investment Association is exhorting sponsors to improve their plans by greater use of best practices rather than hoping for more government guidance.
"The current DC system can do better even without additional legislative or regulatory action," the association said in a report to be published July 24.
Encouraging more and earlier savings by retirement plan participants "doesn't need a lot of legislative or regulatory involvement if sponsors are willing to take advantage" of existing opportunities, said Lori Lucas, one of three principal authors of the DCIIA report, called "Design Matters."
"There's no one silver bullet, but the system has a lot of tools that are underutilized," said Ms. Lucas, the Chicago-based executive vice president and defined contribution practice leader at Callan Associates.
The DCIIA report said some legislators have proposed promoting greater defaults under automatic enrollment and automatic escalation through laws to change existing safe harbors or to offer harbors. "DCIIA believes, however, that current regulation is supportive of robust defaults," the report said.
"There is no regulatory reason not to implement robust defaults unless the DC plan is among the small group of plans that adheres to the Pension Protection Act's non-discrimination testing safe harbor," the report added.
The DCIIA report defined "robust" as an initial auto-enrollment default above the common practice of 3% of a participant's salary, an auto-escalation rate of 1% to 2% of salary per year and a cap on total auto features of 15% of annual salary per year.
The report cited a Callan Associates survey of DC plans last year that said the median auto-enrollment deferral was 3% of annual pay and the average was 4%. DCIIA recommends a deferral of at least 6%.
Citing the same Callan survey, the DCIIA report said the median and most common cap for auto features is 10%, up from 6% in 2014. Despite the gain, there's room for improvement, the report said.
DCIIA also recommended that plans conduct auto-enrollment sweeps to get non-contributing employees to save. Ms. Lucas conceded the auto-enrollment sweep can be "challenging" because sponsors might fear pushback from employees "who are used to receiving a routine paycheck" and might object to more money being moved into their retirement accounts. Executives also might be worried about perceived extra costs.
The DCIIA report recommends sweeping in eligible employees who are not participating in the 401(k) plan. The report cited a 2015 DCIIA survey in which 35% of employers who offer auto-enrollment also swept existing employees into the plan.
In addition to improving auto features, the report also advocated reducing plan leakage caused by cash-outs, lump-sum payments, loans and hardship withdrawals.
Sponsors should provide more information to participants about the benefits of keeping money in their retirement accounts after they leave or retire from their employer, illustrating the pros and cons, said Robin Green, another principal author of the DCIIA report.
Some employers want people to transfer their retirement assets from the company plan when they retire, said Ms. Green, senior vice president at Ann Schleck & Co., a retirement consulting and data research firm in Woodbury, Minn., which is an affiliate of fi360 Inc., a provider of fiduciary services.
"A lot of plan design is set up for (participants taking) lump sums" when they retire or take another job, she said.
The association also recommends restricting the number of loans available to 401(k) plan participants "because multiple loans are a setup for disaster," she said. "They take the loans because they don't have other savings."
The DCIIA report recommended plan executives ask their service providers to "invest in tools and resources to highlight the negative impact that borrowing from the plan will have on long-term savings potential."
One way sponsors can reduce participants' reliance on loans is to design a plan so that a payroll deduction feature incorporates putting some money into a non-retirement savings account as well into a checking account, the DCIIA report said.
"Employers are not encouraging employees to save a certain amount" from each paycheck, Ms. Green said. Establishing a system in which a portion of a paycheck goes to a regular savings account "could remove the need to tap the savings" in a retirement account, she said.
The association supported its recommendations for improving auto features and reducing leakage via economic models from the Employee Benefit Research Institute, Washington. One EBRI model showed that participants taking advantage of auto features would have 33% more retirement savings during their careers than comparable participants making voluntary contributions.
Participants using "optimized" auto features — an initial deferral of 6% and auto-escalation to a cap of 10% — would have 56% more lifetime retirement savings than participants making voluntary contributions, the EBRI model said. And when EBRI analyzed the impact of the "optimized" auto feature plan incorporating leakage-reduction strategies, participants would save 70% more than their peers in a voluntary contribution-only plan.
The DCIIA report also called on sponsors to eliminate barriers for participants to achieve the most efficient retirement savings. For example, instead of participants having multiple 401(k) plans through former employers, the DCIIA report encouraged sponsors to step up efforts to encourage roll-ins — allowing employees to transfer 401(k) balances from former employers into their new employer's plan. When providing financial education, sponsors must determine "when it is the right time to reach people," said Brett Hammond, research leader at Capital Group Cos. Inc., Los Angeles. For example, when hiring a new employee, "part of their intake should be to explain roll-ins," said Mr. Hammond, a principal author of the DCIIA report.
As for 401(k) loans, Mr. Hammond said plans could provide a "cooling off period," such as giving participants a few days to think about their decision before the loan took effect.
Eliminating barriers to enhanced retirement savings also means targeting financial education to specific groups, the DCIIA report said. For example, younger workers will be interested in information about student-loan repayment options while older workers will need more information about retirement issues.