Sponsors of defined contribution plans and money management executives are convinced employees aren't saving enough and are investing what they do save too conservatively, according to Pensions & Investments' Reader Advisory Panel.
Of the 113 respondents to P&I's defined contribution plan issues survey, 89.4% said employees are generally contributing too little to their 401(k) plans to secure a satisfactory retirement income.
One respondent cited the "tendency of employees to save too little" as one of the primary drawbacks to defined contribution plans as a retirement savings vehicle. Another noted: "I think those that need the retirement income the most are generally those who do not participate in the plan."
One major weakness in defined contribution plans, said several of those surveyed, is participation in most plans is optional, rather than compulsory.
More than half of those responding to the survey (60.2%) said defined contribution plans generally will not provide as much retirement income for average employees as would defined benefit plans.
Inappropriate asset allocation decisions of defined contribution plan participants also were a concern to panel respondents, with 88.5% agreeing plan participants usually invest their retirement account assets too conservatively.
The lack of investment management sophistication of plan participants generally also was named as one of the primary weaknesses of the defined contribution plan model.
One panelist said defined contribution plans "may not provide sufficient retirement income if too conservatively invested over the life of the contribution payments." Another said: "Poor investing (choices) or bad luck could leave a person without enough to retire on." Generally, most of those who filled out the P&I survey agreed with one respondent who said: "Most employees are not well educated enough to make the best decisions on asset allocation and savings deferral amounts."
Half of the survey sample (50.4%) believe employers should not make their matching contributions in company stock, possibly because of the volatile nature of the asset class and the lack of account diversification such a contribution encourages.
P&I's panelists, however, do not think that merely providing a bit more investment education to plan participants will solve the problem of investment naivete. A respondent noted one big problem with defined contribution plans is "the cost of educational services required to make participants' investments as efficient in the long run as institutionally run portfolios" is prohibitive for most companies.
Despite their lack of confidence in the investment and savings savvy of their employees, 32.7% of respondents work for companies where a defined contribution plan is the company's sole retirement vehicle, with another 51.3% working for companies with both a defined contribution plan and a defined benefit plan.
The number of respondents working for companies offering only defined benefit plans was just 9.7%.
Survey respondents were split on whether employees prefer defined contribution plans (42.5%) to defined benefit plans (43.4%).
Despite their reservations about plan participants' ability to use defined contribution plans properly for retirement planning purposes, many of those surveyed found many reasons - largely from the employer standpoint - to like defined contribution plans.
Nearly 80% of respondents agreed defined contribution plans are less expensive for employers, and 70% said defined contribution plans entail less government regulation. In theory, said one respondent, the defined contribution plan model is a good one "because it's easy to explain and gives plan participants a good sense of the value of the benefit their company is providing." Many said they liked the ease of administration with a defined contribution plan design.
Also, many of those responding to the P&I advisory panel survey said the high visibility of most company-sponsored plans is a plus for companies eager to provide "feel good" benefits to employees.
Giving employees control over their assets and responsibility for preparing for retirement, said one respondent, removes the burden of funding the plan from the company's shoulders, thus reducing unfunded liability problems with the Pension Benefit Guaranty Corp.
"At least a 401(k) plan provides some benefits in a changing work force, in which most employees no longer stay at one job long enough to ever qualify for the defined benefit plan, anyway," said one panelist.
A big segment of the survey universe (93.8%), said they thought the portability of defined contribution plan assets was an appealing feature to participants. However, many were concerned about "too easy access to the money," as one panelist phrased the problem.
Other frequently expressed concerns were lump-sum distributions at the termination of employment, in-service loans from plan assets and hardship withdrawals.
While employees may like the portability, survey respondents generally were worried about how easy it is to squander retirement assets if they are too accessible to employees.
Questionnaires were sent to 200 panel members; 113 responded to all or most questions.