Increasing automatic enrollment and auto escalation levels for DC plan participants to help them secure a more adequate retirement income was among the recommendations defined contribution industry leaders presented at a Thursday hearing of the U.S. Senate Health, Education, Labor and Pensions Committee.
Lori Lucas, executive member of the Defined Contribution Institutional Investment Association and defined contribution practice leader at Callan Associates Inc., San Francisco, said 401(k) plans now are limited by law to starting an employee’s deferral at 3% and automatic escalation of up to 10%.
A study by the Employee Benefit Research Institute and DCIIA shows that when combined with Social Security retirement savings, increasing automatic enrollment deferral to 6% and automatically raising that over time to 15% provides a majority of workers with 80% of their working salary in retirement, Ms. Lucas said.
“Inertia among participants keeps them from increasing above 6%,” she said.
Jeffrey R. Brown, a professor at the University of Illinois at Urbana-Champaign College of Business, told the committee that defined contribution plan sponsors should change the way they frame their discussion of retirement savings — away from a focus on wealth accumulation and toward how much income their account balances will provide them in retirement.
He encouraged the committee to revisit the proposed Lifetime Income Disclosure Act, introduced in 2009, which requires reframing the discussion with participants in a way that encourages them to consider the outcomes of annuitization.
“(Participants) think $100,000 is a lot of money, but when it translates to monthly income they don’t feel that rich anymore,” Mr. Brown said.
The HELP committee hearing aimed to discuss how to encourage participants to make retirement decisions.