Market fiasco puts premium on saving

Defined contribution plan professionals say getting participants to save enough to ensure an adequate income at retirement is more critical than ever because of the market meltdown that wiped out huge chunks of DC plan balances.

At Pensions & Investments' 17th Annual East Coast Defined Contribution Conference in Miami Beach, Fla., Feb. 8-10, Darrell Spence, vice president and economist at Capital Strategy Research Inc., Los Angeles, said market returns no longer can hide the fact DC participant contribution rates are subpar.

“People are going to have to save more,” Mr. Spence said, in response to an audience question on consumer saving habits in the future. “There was a party where the market was doing it (increasing savings amounts) for you (the plan participant) and that is now over. It's another message we need to say and need to present to participants — the market can help, but it will not be the only thing to rely on to boost your savings. We're going to have to contribute a little bit more than we have been in the past. “

Dallas Salisbury, president and chief executive officer of the Employee Benefit Research Institute, Washington, said in his keynote address that only 11% of those over the age of 65 have more than $250,000 in total assets saved for retirement, according to EBRI's Retirement Confidence Survey.

“People need to understand they will live longer,” he said, noting “understanding longevity risk” needs to be addressed.

And when it comes to longevity, people tend to focus on health care rather than retirement. Mr. Salisbury cited EBRI survey data that reported 81% of active workers want health-care insurance before any other retirement benefit.

“Sixty-seven percent of workers think it (Social Security) will be their primary source of (retirement) income,” Mr. Salisbury said.

Increased contribution rates would be central in offsetting the losses 401(k) participants suffered in 2008 and increasingly stagnant savings rates. Most DC plan participants, once enrolled in a plan, fail to increase their contributions above the initial enrollment default level, usually 3% of annual salary, said Jaime Erickson, manager of defined contribution plans at Akzo Nobel Inc., Chicago.

Ms. Erickson said that while the initial 3% default rate does combat employee inertia and is not a bad starting point for savings, officials at her company are looking to automatic escalation as a means of bumping up the savings rate for the company's $1.2 billion plan. (Automatic escalation involves automatically increasing an employee's DC plan contribution at a given date, such as when he/she receives a pay raise.)

“Auto escalation is coming,” Ms. Erickson said. Akzo Nobel is planning to institute the feature effective April 1. “The automatic increase is timed to coincide with our merit increase date, but the problem is there won't be any merit increases this year.”

Despite the lack of a pay increase, which Akzo Nobel officials have told employees about, the company will automatically increase employee contributions up to 6% of pay, in 1%-per-year increments. Also, the company will match employee contributions dollar for dollar up to 6%.

“Based on participant inertia and where we see participants who have been automatically enrolled in our plan at 3%, I'm guessing folks won't notice the additional 1% is being taken out,” Ms. Erickson said.

Employees are going to have to save much more to have enough replacement income to live comfortably during retirement, according to Robert Reiskytl, a defined contribution plan consultant at Hewitt Associates LLC, Lincolnshire, Ill.

Mr. Reiskytl said the goal of saving to reach a 70% replacement ratio of retirement income to current income is insufficient given longer lifespans, increased health-care costs and account balances that have plummeted due to market woes.

“We think a replacement ratio of 125% of income is needed to retire, not the 70% to 80% historically used,” he said. “People need to aim high.”

Donald Salama, senior managing director and head of retirement plan services at New York Life Retirement Services, Westwood, Mass., agreed with the need for a 125% replacement rate. But he cautioned that getting people to take small steps to save more for retirement and 70% of replacement income seemed daunting enough.

“You hear a number like this (70%) and it's overwhelming,” Mr. Salama said.

Plan executives, already faced with the task of getting employees to begin saving for retirement, are implementing more automatic and passive features to boost employees' retirement ante and make the process less intimidating.

Dena Zezulka, benefits manager at Kwik Trip, Inc. La Crosse, Wis., said her company recognized the need for greater employee savings and in October 2007 implemented a 401(k) planto get workers on track. Previously, the company only offered a profit-sharing plan. The new $65 million 401(k) plan has all the automatic features, including auto escalation, to maximize employees' ability to save as much as they can without much thought.

“Our plan was an archaic profit-sharing plan that had committee-driven investments,” said Ms. Zezulka.   “Our co-workers were used to not doing anything and still have their plan. They also had the misunderstanding that the profit sharing was all they needed to retire comfortably.  We knew this was going to be an issue going forward. We also decided that automatically increasing the contribution rate  1% each year, to a maximum of 10%, would be easiest for the co-worker. With both of these features, co-workers are able to stop (and restart) them at anytime. “

Automatic escalation will begin with Kwik Trip employees' first paycheck in March. 

The move by plan executives to get more involved in an employee's financial or retirement health seems to be a natural offshoot of other initiatives companies have taken, said Martha Tejera, principal at Bainbridge Island, Wash.-based Tejera & Associates LLC. By approaching retirement savings as a lifestyle issue — much the same as, say, quitting smoking — employers could reap long-term benefits and maximize employee productivity with some basic education.

“Organizations own a part of this problem (lack of adequate retirement savings) and CFOs have a hard time grasping this aside from their own worries,” said Ms. Tejera.