There seemed to be some good news reported recently on employee participation in 401(k) plans. A new study from the Employee Benefit Research Institute (EBRI) and the Investment Company Institute (ICI) indicated the average participant balance increased from $67,760 in 1999 to $121,202 at year-end 2006. Could it be employees are finally getting the message and taking control of their retirement?
Let's not go to this conclusion so quickly. First, let's look at the study itself. The EBRI/ICI tracked participants who held an account with the same employer during that time period. They were active participants in 1999 and they continued to be active participants at the end of 2006–with the same employer. Thus, the study looked at a group that had already established participation and had maintained continued employment with the same employer for seven more years.
The study shows the average balances of these participants has increased. Well, of course these balances should be higher seven years later! The key questions to ask are whether these balances increased enough and if these participants are closer to hitting their retirement savings goals now when compared to 1999.
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A quick calculation shows that if this group had invested just $4,000 per year and achieved only a 5% rate of return, their average balances would be more than $129,000. Neither a $4,000 annual contribution nor a 5% rate of return seem extraordinary. It is difficult to determine if these participants are in better shape in 2006 than they were in 1999.
Second, this study doesn't even look at employees outside of this specific subset of participants. EBRI, through its 2006 annual Retirement Confidence Survey, shows that almost 25% of employees who are eligible for a retirement plan choose not to participate at all. It's pretty safe to conclude these workers are not faring too well.
The 2006 Retirement Confidence Survey determined the average account balance for all participants (not just the group studied) was $61,346 at year-end 2006. But the median account value (half higher and half lower) was just $18,986.
So is there anything your credit union can do to help your employees save enough to achieve a retirement income without facing a severe drop in their standard of living? The answer is an emphatic YES. As a plan sponsor, there are several practical steps you can take in designing your plan to help your employees do better.
-Automatic enrollment. Automatically enroll your employees into your plan unless they opt out. According to a study by Richard Thaler and Schlomo Bernardski, this can boost your participation by up to 30%. As of 2006, only about 23% of plan providers offered this feature. You need to insist on this feature for your plan. We believe this is the single, most effective way to increase your employee participation.
-Automatic increases. This feature automatically increases your employees' contribution each year by a pre-determined percentage. People are more receptive to agreeing to future gradual increases over time instead of jumping to the level they need to be at all at once. Brooks Hamilton, founder of pension plan consulting firm Brooks Hamilton and Partners, which has designed plans for major corporations, claims participants need to save "15% to 18% of pay" each year (which includes any match your credit union may provide) in order to save enough. It may take your employees a few years to gradually get to this level.
-Consider fewer investment options combined with target date or target risk funds. Target-date investment options offer the advantages of managing an account to meet future needs. An account might be managed more aggressively (mostly in stocks) while an employee is younger and then more conservatively managed (more bonds, for example) in later years as retirement nears. Target risk funds are simply managed to the risk preference of the participant (conservative, moderate, or aggressive, for example). Offering target funds that are managed by investment professionals eases the portfolio management burden for employees, which can sometimes be so daunting that employees choose not to participate at all.
The 2006 EBRI study concluded that new employees are embracing the lifestyle/lifecycle and balanced funds. At the end of 2006, 24% of the account balances of recently hired participants in their twenties were invested in these funds, compared to 19% in 2005 and about 7% in 1999.
-Offer Principal Guarantee Riders. These offer a level of guarantee that will often provide enough comfort for hesitant participants afraid of losing money to diversify into equities. This feature also helps these same employees "ride out" rough market performance instead of "bailing out" at the wrong time. It's easier to stay in for the long haul when your money is guaranteed to be there for you.
Most credit unions indicate a main goal of their retirement plan is to help their employees successfully achieve retirement savings. As a plan sponsor, you can't force your employees to behave in a certain way. But by including some plan design features listed above, you can make it easier for them to achieve their goals.
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