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.)