The past few years have been tough ones for individuals investing through retirement plans and the companies offering those plans. Stock market volatility has been tough on individual plan participants and economic problems have caused many companies to reduce or suspend matching contributions. But what does the future hold?
A newly released study, Prescience 2015: Expert Opinions on the Future of Retirement Plans, a Delphi study conducted by retirement plan services provider Diversified, offers some ways in which the retirement plan landscape might be changing for plan sponsors and for plan participants through 2015. The study examined trends in mid-size retirement plans with $25 million to $1 billion in assets. A Delphi study gathers input from a structured group of experts to make predictions about future trends. This study relied on input from 68 retirement plan experts. Here are some of the key findings:
• Although the experts surveyed see changes ahead affecting retirement plans, plan sponsors may not be paying much attention. Thanks to the demands of health care reform compliance, at least until 2014, the experts predict that CFOs and HR are unlikely to have much bandwidth left over for retirement plans. Nearly all of the experts surveyed do not expect HR and Finance to have the time or resources to commit to retirement plan issues, even though retirement security concerns are likely to remain high among the workforce.
• Automatic enrollment will become nearly ubiquitous in the coming years and available in three-quarters of 401(k) plans, predict the surveyed experts. However, the safe harbors for plans with auto enrollment need to be tweaked a bit because the allowed default contribution level (3 percent of pay with allowable annual increases of 1 percent of pay to a maximum of 10 percent of pay) is not high enough to secure most individuals' retirements. Fortunately, half of the surveyed experts see the potential for Congress to expand automatic enrollment safe harbors to include default deferral rates of more than 10 percent. These experts think that the standard automatic deferral rate must increase dramatically—to 12 percent or more.
• CFOs should not assume that establishing a 401(k) plan with automatic enrollment and a default contribution percentage is enough to help employees save for retirement. The inertia that gets people enrolled in and contributing to the plan can also take hold when it comes to managing their investments and contributions. The experts surveyed project that nearly two-thirds of new plan participants will never change their investment election from anything other than the chosen Qualified Default Investment Alternative (QDIA) and that 42 percent of all plan assets will be invested in QDIAs. Therefore, CFOs need to make sure that the plan fiduciaries use an airtight process for selecting and evaluating QDIAs.
• By 2015, these experts predict the following to be best practices among mid-size 401(k) plans:
- Immediate eligibility for participation and employer contributions.
- Matching contributions of $0.25 on the dollar up to 10 percent of compensation.
- Automatically enrolling participants with a default contribution of 10 percent of compensation with 2 percent automatic annual escalation to a maximum of 20 percent.
- QDIAs that are managed portfolios of the funds offered by the plan.