Behavioral research has suggested that default levels do matter. Just yesterday, I was in the supermarket. Yogurt was 10 for $10, so what did I do? I bought 10, of course. The interesting thing is that it still would have registered as $1 each if I bought a smaller quantity. Cucumbers were 3 for $2, so I naturally bought 3, even though the price would still have been 66 2/3 cents each had I bought a quantity that wasn't a multiple of 3. Limes were 10 for $2, so I bought 10, right? Not this time - but I did buy a multiple of 5 - that is, 5 for $1.
What does this have to do with 401(k) plans? More than you might think. For the longest time, the most popular employer match was 50 cents on the dollar up to the first 6% of employee deferrals. Now, according to Aon Hewitt's "2013 Trends & Experience in Defined Contribution Plans: An Evolving Retirement Landscape," the most popular match is a full dollar on the dollar. According to Aon Hewitt, three-fourths of employees save at or above the company match level, so if that holds, savings would rise substantially.
Other noteworthy trends reported by Aon Hewitt include:
For the most part, it appears that employees appreciate the help they get through automated programs and other tools designed to make their decision-making easier. . Few ever decide to opt out. The higher employer match should greatly benefit those who stay with their plan and contribute at the higher employer match level. For those who contribute at lower levels, it would be helpful to determine the obstacles - for example, are other financial challenges standing in the way? If so, is there a way to get these participants to both save more and more effectively address the other financial factors?
Saving for retirement, of course, is a long-term process. Along the way, there may be bumps in the road. In 2008 and 2009, the economic crisis tested the mettle of both experienced and inexperienced investors. Retirement account balances declined, often precipitously. The Employee Benefit Research Institute (EBRI) and the Investment Company Institute (ICI) team regularly to analyze retirement savings data. One of the key metrics EBRI and ICI offer the financial services community and the population at large is the ability to look at data over a longer period. Account balances of 401(k) participants provides a prime example, as numbers may be skewed due to frequent job changes or large numbers of new employees.
EBRI and ICI get around this obstacle by looking at what they call a "consistent group" of participants. In other words, to get a more accurate view of the impact of the economic downturn on retirement savings, EBRI and ICI look at the figures for those participants who remained in the same plan from 2007 through 2011. For this group, there was good news - while there was a sharp drop in 2008, account balances rose and then some for those who remained in their employer's plan. In 2007, the average account balance for this consistent group was $76,534. In 2008, this figure plummeted to $49,912. By the end of 2011, the rebound had reached to an average balance of $94,482. The report contains other interesting data as well, such as breaking down the balances by tenure with the employer and by age, as well as looking at asset allocation and the increasing concentration on equities.
According to the Center for Retirement Research (CRR) at Boston College, the implementation of automatic enrollment is causing some employers to lower the default match rate, based on the belief that this will keep cost pressures in check. The CRR notes that National Compensation Survey data supports the finding that plans with auto-enrollment have slightly lower match levels than do plans without auto-enrollment. The CRR took this a step further, finding that in reality, there was no evidence of higher costs for plans with auto-enrollment. Auto-enrollment naturally improves participation rates, particularly as few individuals opt out of it. The lowering of the match can hurt employees who otherwise would have contributed more to their plan, thus adversely impacting savings over the long term.
According to the latest data from the Investment Company Institute (ICI), total retirement assets grew slightly between the first and second quarters of 2013. The total U.S. retirement market stands at $20.9 trillion as of June 30, up from $20.7 trillion as of March 31. IRAs lead the way with $5.7 trillion in assets, followed by defined contribution (DC) plans at $5.3 trillion, government plans at $5.2 trillion, private DB plans at $2.8 trillion,and annuity reserves at $1.8 trillion. Target-date mutual fund assets have grown from $160 billion in 2008 to $540 billion as of June 30, 2013.
Blog Author - Ken Felsher
With over 25 years of writing, editing, and research experience. I enjoy sharing with my readers my love of working with content on a variety of subjects.
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