Nearly half of employees (46%) polled by BlackRock said that their DC plan will be their most important source of monthly income in retirement – three times as many as those citing Social Security, which was the next most important income source mentioned.
Importantly, American workers believe that DC plans have been helpful in providing support for retirement saving and investing during their employment years.
But these same workers want DC plans to be significantly more helpful to them in coping with critical retirement issues – especially, understanding how to use their retirement assets to support themselves when they are no longer working.
At the same time, relatively few employers feel “a great deal of responsibility” toward their employees for these issues, according to the BlackRock survey.
“Defined contribution plans have become critical to the retirement security of millions of American workers, but a troubling gap has emerged in the DC approach,” said Chip Castille, Managing Director and head of BlackRock’s US & Canada Defined Contribution Group.
“Ever since DC plans were introduced, the primary emphasis, rightfully so, has been on the saving and investing phase – that is, helping employees to accumulate assets throughout their working years to support themselves in retirement,” Castille said. “The plans have matured, from what were first called ‘supplemental savings plans’ to ‘retirement savings plans.’ But there has been relatively little focus on the spending phase – the years in retirement when employees need to turn those accumulated assets into their primary source of sustainable spending.
“With more and more Americans fast approaching retirement’s threshold, we’ve reached a critical inflection point – and there is no clear roadmap for helping them use their savings to support themselves in retirement,” he said. “We need to further strengthen the DC approach so that we can deliver on our moral commitment to help sustain American workers in retirement.
“And we can do that. As these plans have become dominant, a distinctive and powerful ’DC community’ has emerged, comprising employer DC plan sponsors, asset management firms providing plan design and investment approaches, and administrative firms delivering systems and infrastructure for ongoing plan implementation. There is an urgent need for everyone in the DC community to come together and develop effective approaches for long term retirement spending.”
As Traditional Pensions Wane, DC Takes Hold
An estimated 51.6 million American workers are now enrolled in DC retirement plans – employer sponsored retirement savings plans funded by employee contributions deducted on a pre-tax basis from income. Assets under management in DC plans now exceed $4 trillion, exceeding assets in traditional defined benefit pension plans; it is estimated by McKinsey’s Financial Services Practice that those assets will swell to $5.5 trillion by 2015.
The employees polled by BlackRock participate in a variety of DC plans, including 401(k) plans, 403(b) plans, profit sharing and stock purchase plans. The corporate executives polled all have responsibility for their employer’s DC plan, and represent plans with more than $525 billion in plan assets and about 4.1 million plan participants.
The sample of 1,000 employee participants in DC plans has a maximum sampling error of +/- 2 percentage points at a 95% confidence level. Participants were drawn randomly from across all sized plans and from all sized employers, and were polled from Feb. 25 to March 4.
The sample of 119 plan sponsors represents “mega” DC plans with median asset size of $2 billion; 46% of the plans represented have more than $1 billion in participant assets. The sample was intentionally designed to represent extremely large plans to capture the opinions of thought-leaders among the plan sponsor universe. Sponsors were polled from March 3 to March 31.
“Few polls have examined corresponding beliefs and attitudes among both employees and employers regarding corporate sponsored defined contribution retirement plans,” said Warren Cormier, President of Boston Research Group. “As such, the BlackRock research offers uncommon insight into the sometimes divergent views of these groups regarding fundamental retirement planning needs. At the same time, the polls clearly point toward key steps that employers and employees must take together to make the DC plan an even more beneficial tool for retirement financial security.”
Employees: Highly Responsible, Yet Concern Persists
Employees in DC retirement plans feel highly responsible for their personal retirement planning, and many say they are comfortable deciding on their own how to save and invest for retirement. Yet, relatively few express strong belief that their retirement planning efforts are truly effective or will get them the retirement they want.
Just one in five participants (19%) rate their own efforts toward reaching retirement goals as “very effective,” and only 16% are “confident” they’ll have enough money to retire on time.
DC plan sponsors are even more pessimistic about employees’ retirement prospects. About 55% of participants disagree with the statement “I don’t know enough to achieve a financially secure retirement on my own.” However, nearly eight of 10 plan sponsors believe that only half or fewer of the participants in their DC plan will have saved enough money to live comfortably in retirement; 44% believe that only a quarter or fewer of their employees will have done so.
“Many employees are at sea when it comes to their planning for retired life, and these same employees also tell us that their DC plan is completely critical to their retirement financial security,” said Castille. “The message, clearly, is that the DC community needs to find ways to make the plans work even harder on behalf of employees struggling with the complex planning demands of retirement.”
Employers, DC Community Delivering Valued Help for the Planning Process
Employees feel employers have been helpful in the saving and investing stage of their retirement planning, particularly during their working years.
More than seven in 10 employees view their employer as at least somewhat responsible for their financial planning for retirement and, of these, about a third say their employer has been “very helpful,” while a little more than half say “somewhat helpful.”
In the minds of employees, employers have been most helpful to them in such pre-retirement planning activities as “contributing money to my retirement nest egg,” “giving me an incentive to save and invest for retirement,” “helping me understand my retirement plan investment options,” “helping me learn about investing and building my nest egg,” and “educating me on how much money I will need to accumulate for retirement.”
DC plan innovations geared toward saving include target date funds, which are designed to offer participants a professionally managed portfolio that has a well diversified asset mix and automatically rebalances over time based on the employee’s expected retirement date. Eight of 10 plan participants find the idea of target date funds appealing.
“Employees are telling us that, in the pre-retirement years, the DC community has been doing what it needed to do -- that is, help employees come to grips with their new saving and investing responsibilities as participants in DC-style retirement plans,” Castille said.
“However, with 35 million Americans due to retire in the next 10 years, we are entering a critical watershed period – a period when we must shift much more of DC’s focus toward helping workers transition into retirement with a spending strategy for their retirement assets,” he said. “Our poll unmistakably signals that employees urgently want this support – and currently, it is lacking.”
Support Needed to Manage Post-Retirement Life;
Regulators Slow to Define Employer Responsibility
Many employees, the poll suggests, expect their employers to take a highly “paternalistic” role in providing retirement planning support, but many employers don’t feel that kind of responsibility.
More than half of employees say their employer has been “not very” or “not at all helpful” in such key post-retirement areas as “helping me make sure my money lasts all through my retirement,” “educating me on the realities of life in retirement,” “warning me if I am not saving enough for retirement” and “helping me safeguard my assets in retirement.”
It’s not that employers are unconcerned about the future financial security of their people. In fact, nearly nine of 10 sponsors indicate they are at least somewhat responsible for employee financial security in retirement, and many claim “a great deal of responsibility” for employee saving and investing activities. For example, 83% of sponsors feel this level of responsibility for “helping employees understand retirement plan investment options,” 56% for “giving employees an incentive to save and invest for retirement,” and 51% for “helping employees learn about investing and building a nest egg.”
Employees recognize employers’ concern: More than half say their employer has their best interest in mind in helping them reach a secure retirement.
But fewer than one in five sponsors feels “a great deal of responsibility” for such things as “helping employees make sure their money lasts all through retirement,” “helping them safeguard assets in retirement,” or “warning employees if they are not saving enough for retirement.”
Some of the problem can be laid at the feet of the regulatory community. “Regulators provide helpful cues to sponsors regarding their retirement plan obligations and, in our experience, many sponsors are looking for additional regulatory clarity around how to handle post retirement issues,” Castille said. “This guidance has been slow to arrive, and many sponsors feel that they are not likely to get it in time to avert a retirement crisis.
“However, we believe that sponsors already have the necessary options and regulatory support to do what is needed,” he said. “Regardless of the additional direction – or not – that comes from the regulators, there is no mistaking that sponsors now have an opportunity to fundamentally re-examine their plan, assess the interests and concerns of their employees when it comes to sustaining a retirement lifestyle, and consider specific steps to address this critical gap in DC. The cost of waiting – while necessary spending cannot be maintained -- is too great.”
What Employees Want: Secure Income in Retirement
Employees are clearly signaling what they need and want from plan sponsors.
More than half say that, since the economic downturn, they want more help from their employer regarding retirement planning. Notwithstanding their strong feelings of personal responsibility for their retirement, 80% of employees said they would like their employer to notify them if they were not investing properly for their age.
Looking toward their retirement years, three in four say they want more information and guidance on key aspects of the spending phase, including such critical concerns as how to make sure their money lasts in retirement and how to keep their money safe in retirement.
Employees also provide some strong clues about how they would like to approach the key challenge of sustaining necessary spending in retirement. For many, the prospect of secure income – not just accumulated assets – makes the key difference.
Nearly two thirds – 62% - of employees said they would prefer to receive a steady income stream at retirement, compared with 6% who would like to receive a lump sum. About three of 10 employees said they would like to receive both.
Forty percent of employees said they would like “a great deal more information” on generating secure income.
“Employees don’t want merely to be handed a big sum of money at retirement and then be left to figure out on their own how to use those assets for sustainable, long term spending,” Castille said. “Instead, many want to begin retirement with a mechanism for long term income already in place.”
But many sponsors are not yet focusing on income solutions for their plan participants, the poll indicates. Nearly eight of 10 sponsors don’t currently offer investment options for steady income at retirement. Just 25% say they want to offer employees “a great deal more information” on how to generate secure income in retirement.
Nor is employer responsibility for retirement income a well established concept. Just 13% of sponsors say they feel “a great deal of responsibility” for helping employees secure an income stream in retirement.
The Future of DC
About two thirds (64%) of employees think that their employer should “care more about whether I achieve a financially secure retirement.” Interestingly, about two thirds of DC plan sponsors agree.
“Employees and employers alike believe that the DC approach has effectively focused employee attention on the need to save and invest for retirement,” Castille said. “But both groups believe too that when it comes to assuring the security of the retirement years, we have a lot more work to do.”
The good news, Castille said, is that DC investment options geared toward generating retirement income and administrative systems to ease their implementation are beginning to emerge across the DC marketplace. “We believe that sponsors already have sufficient regulatory guidance to start using these options now, just as many sponsors started using target date funds even before the Pension Protection Act of 2006 made special provisions for those products,” he said. “Sponsors can lead in closing the DC gap, but they also need the support of providers who can deliver innovative products and approaches to support retirement spending via secure income.
“When DC was introduced, employers and employees, with the help of providers, rallied to meet the challenges of a new era of retirement responsibility,” Castille said. “These groups can do it again, heightening their focus on retirement’s ‘spending phase’ - and working together to extend DC’s power and value with responsive income-based solutions for retirement financial security.”
