Survey explores DC execs' idea of the perfect plan

The perfect defined contribution plan would feature automatic enrollment and auto escalation, with no more than 15 investment options and a target-date fund as the default option, if plan executives and consultants had their druthers.

Those are the findings of a survey of 50 corporate defined contribution plan executives and five consultants by Greenwich Associates, on a commission from Northern Trust Corp.

All but one of those interviewed said automatic enrollment would be a key feature of the ideal DC plan; 63% of the plan executives and four of the five consultants said DC plans should be mandatory for employees; and three-quarters of the plan executives and all of the consultants surveyed also support automatic escalation to work in tandem with the automatic enrollment.

Jim Danaher, senior investment product manager for defined contribution solutions at Northern Trust Global Investments, Chicago, and author of the report, said in a telephone interview that for decades DC plans were considered supplemental to defined benefit plans, but they since have become the primary retirement vehicle for many employees. The move from DB plans and a declining savings rate in DC plans over the past decade has created a retirement savings gap for many retirees, Mr. Danaher said.

“Defined benefit plans were created to say, "We are going to provide this benefit for you at retirement. It's a given. You don't need to have any say on how you invest that pool of money,' ” he said. “Defined contribution plans shifted (to employees) the responsibility of participation, how much you're saving, where you're investing and cost. I don't know if (employees) knew where the shift was occurring.”

The report notes that while consultants have consistently expressed the desire to take decisions on enrollment, contribution levels and investment options out of the hands of employees, many plan sponsors have viewed these concepts as “paternalistic.”

“Forced savings for both the employee and the employer runs counter to our culture,” one consultant was quoted as saying in the report. “But if people want to retire, we have to get our arms around this. We can't have our cake and eat it, too. We can't have this be optional and expect the population in any way, shape or form to be ready for retirement. Too many people in America think Social Security is a retirement program. It's not — it's a safety net.” (None of the respondents quoted in the report was identified.)

Dev Clifford, managing director of Greenwich Associates, Stamford, Conn., said he sees more plan sponsors accepting the concepts of automatic enrollment and mandatory participation.

“The compelling logic here is the recognition that there is no other retirement benefit absent Social Security,” he said in a telephone interview.

He noted, however, that he believes some plan sponsors oppose automatic escalation because of the view that “personal responsibility is part of managing your own life and funds.”

“There is a perspective that they ought to be involved in this,” Mr. Clifford said. “But they don't want to put them in a position that causes them financial distress.”

The one-quarter of corporate plan executives who oppose automatic escalation cite a greater cost for employers and infringement on employee freedom, according to the report.

“The reality is that some significant segment of the population lives paycheck to paycheck and it's easy to say you should be saving more, but it's hard for folks in the bottom quartile from a compensation perspective to actually make that happen,” one plan executive said in the report.

Mr. Danaher acknowledged that while some employers are concerned about administrative and other costs associated with automatic enrollment, taxpayers could end up footing the bill through government assistance programs.

“We're all going to end up paying in some way or the other,” he said.

While there is some consensus on automatic enrollment and escalation, there was less agreement among plan executives on the ideal default contribution for employees.

About 41% of plan executives said the ideal default contribution for auto enrollment should be 5% to 6%, while 26% favored a contribution of 3% to 4%, and 21% of the plan executives said 7% or more.

Eleven percent said the ideal default contribution should be 1% to 2%.

One consultant noted in the survey that a contribution of 10% is not enough to reach a full replacement benefit ratio. Several consultants suggested that contributions escalate up to 15% of salary.

Consultants and plan executives also expressed divergent opinions on the amount of control employees should have over the management of their accounts.

Sixty percent of the consultants supported the idea of plan sponsors controlling investment decisions such as asset allocation, while 20% each supported participant-led decision making and shared decision making.

Sixty-four percent of plan executives preferred shared decision making, while 26% supported participant-led decision making and 10% supported plan sponsor-led decision making.

Mr. Danaher said the vast majority of employees could be lured toward hot investments such as emerging markets and long-term bond funds because of the direction of the economy and the attention they receive in the financial press. Despite the fact that such investments could decline rapidly in a volatile economy, some plan sponsors are still averse to limiting participant decision making.

“Plan sponsors are playing a balancing act,” he said. “They understand the consultants but (they've) got a pool of employees to deal with, too.”

Many plan executives supported a “less-is-more approach” to investment options, including a “limited number of investment alternatives, including some annuity-type component and some minimum cash payment choices.”

One suggested that the ideal plan have “three doors”: “The first door would be a balanced/target date fund. The second would enable the employee to set up his or her own investments from a menu of not-too-complicated options from broad categories like equities, fixed income and alternative investments,” the unnamed survey respondent suggested. “The third door would be a brokerage option in which employees could buy individual stocks and use individual managers.”

Forty-four percent of plan executives suggested a menu of 11 to 15 investment options; 28% said six to 10; only 4% opted for the extreme of more than 30 options. (The remaining responses were split evenly among other ranges.)

Consultants were more conservative in the number of investment options they would offer employees. Forty percent each said three to five and six to 10 options should be offered, while 20% of consultants supported 11 to 15 options.

None of the consultants supported fewer than three options or more than 15.

Plan sponsors also overwhelmingly (76%) supported target-date funds as the best default option for auto enrollment.

Mr. Clifford said he is encouraged by the rapidity with which target-date funds have come to be considered the “de facto default option.”

“Target-date funds mitigate the destructive behavior individuals exhibit in their own management of their retirement,” he said. “Target date funds allow individuals to focus on what they should be worried about, which is the outcome rather than the selection of investment managers.”