Employers Expressing Doubt in Retirement Readiness of 401(k) Plan Participants, Towers Watson Survey

Employers Expressing Doubt in Retirement Readiness of 401(k) Plan Participants, Towers Watson Survey Finds

Higher participation, deferral rates and simplified investment lineups highlight changes since 2010

NEW YORK--(BUSINESS WIRE)-- Despite successful efforts to increase employee participation and deferral rates in 401(k) and other defined contribution (DC) plans, a vast majority of U.S. employers lack confidence in the retirement readiness of their employees, according to a new survey by global professional services company Towers Watson (NYSE, NASDAQ: TW).

The Towers Watson survey of 371 U.S. employers that offer a 401(k) plan as their primary DC retirement plan found that more than half of respondents (56%) reported employee participation levels at or above 80% this year, compared to 50% two years ago. The higher participation rates are primarily the result of employers using automatic enrollment, with nearly two in three respondents (65%) now using this feature, compared to 51% in 2009. To encourage adequate participant savings rates, 71% of those that use auto-enrollment also use automatic contribution escalation, which allows a gradual increase in contribution levels over a certain period of time. Employers are also becoming more transparent about fees, with more companies now charging participants direct, equal-dollar recordkeeping fees. One-third of respondents now pay recordkeeping fees through revenue sharing, which represents a decline from 42% in 2009.

Even with these efforts, the survey reveals significant employer concern that their DC plans are both underutilized and misunderstood by their employees. Only one in five respondents (22%) believe employees generally make informed decisions about their retirement savings, and only 26% believe their employees have realistic expectations about what DC plans can provide. Nearly one-half of respondents (48%) expect a greater number of older workers will ultimately delay retirement.

"Plan sponsor confidence is severely lacking in retirement readiness," said Robyn Credico, a senior retirement consultant at Towers Watson. "While employers continue to offer various communication vehicles, education and advice tools, and have made recent strides by automating retirement plan savings features and offering investment choices that help employees diversify their savings, it appears that the intended impacts of these moves have fallen short of their goals."

While nearly three-fourths of respondents (74%) said the most prevalent reason for offering a DC plan is to provide their employees with an adequate retirement at a reasonable age, more than half of the respondents cited benefit competitiveness, benefit plan cost, and attraction and retention as the top three issues driving plan design.

"There are several steps employers can take to help their employees generate an adequate income at retirement," said Alec Dike, a senior retirement consultant at Towers Watson. "These include enhancing communication efforts to provide employees with a better understanding of how DC plans work, including how much to save, investment options, risk and return, and how to monitor and adjust assets."

Other findings from the survey include:

  • The average number of investment options offered in a DC plan is decreasing. The number of employers offering 20 or more options declined from 32% in 2010 to 24% this year. Nearly seven in 10 (69%) respondents offer between 10 and 19 investment options. Nearly one-half of respondents now offer a brokerage window as an option.

  • The use of lifetime income distribution options (i.e., annuities) is low. Only 6% of respondents currently offer a lifetime income distribution option; of this group, 82% report that less than 5% of participants elect the annuity option. Forty-five percent offer the option only at the time of retirement, and the plan is responsible for providing the lifetime income distribution.

About the Survey

The Towers Watson 2012 Defined Contribution Plan Sponsor Survey was conducted in April and May of 2012. A total of 371 401(k) plan sponsors with more than 1,000 employees and $10 million or more in plan assets participated. Ninety-two percent have over $100 million in DC plan assets, and 64% have at least 5,000 employees. The survey report can be found at http://towerswatson.com/research/8056.

About Towers Watson

Towers Watson (NYSE, NASDAQ: TW) is a leading global professional services company that helps organizations improve performance through effective people, risk and financial management. The company offers solutions in the areas of benefits, talent management, rewards, and risk and capital management. Towers Watson has 14,000 associates around the world and is located on the web at towerswatson.com.

Towers Watson
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