Posted on 27 Jan 2012
As the economy continues to falter, employers have become increasingly reticent about their employees' ability to successfully save for retirement, according to a new survey by Aon Hewitt, the global human resources consulting and outsourcing business of Aon Corporation. In response, employers are embracing innovative solutions to help rethink their retirement benefits plan strategies and assist their employees in better preparing for retirement.
Aon Hewitt surveyed more than 500 large U.S. employers, representing over 12 million employees, to determine their current and future retirement benefits strategy. According to the findings, just 4 percent of employers are very confident that their workers will retire with adequate retirement assets, down substantially from 30 percent in 2011. Additionally, only 10 percent of plan sponsors feel very confident that their employees are taking accountability for their own retirement success. Fewer than one-in-five employers (18 percent) are confident that workers will be able to manage their income during retirement.
"The stark drop in the confidence of employers is troubling," said Pamela Hess, director of Retirement Research at Aon Hewitt. "We've known for a while that workers weren't saving enough for retirement, but it seems that with continued tough economic times, employers are realizing just how dire the situation has become for much of their workforce. Fortunately, they're not sitting idly by—they're actively taking steps to help their employees get on a better path."
While more than half (52 percent) of employers will focus on encouraging workers to take greater accountability for their retirement savings in the year ahead, they aren't asking employees to do it all on their own. Almost half (44 percent) of employers will focus on helping workers retire with enough money and most (60 percent) say that they will place a greater emphasis on helping employees understand and use the employer-provided resources available to them.
Employers also continue to enhance their defined contribution (DC) plan features. As in years past, plans will continue to add automatic features, in addition to expanding savings choices and offering employees more resources to help them meet their needs while in retirement.
Automatic enrollment has been one of the biggest retirement trends in recent years, and will continue to be in the year ahead, albeit with an enhanced focus on outcomes. Currently, 55 percent of plan sponsors automatically enroll workers in their employer-provided defined contribution plan, up from 24 percent in 2006. Looking ahead, more than a third (34 percent) of plans are likely to add this feature for new hires in 2012. While automatic enrollment can be beneficial to increase participation, it is just one step in fixing savings challenges. In fact, Aon Hewitt found that of workers who are subject to automatic enrollment, most (63 percent) aren't saving enough to get the full employer match. In response, nearly one quarter (24 percent) of employers plan to make changes to their automatic feature in 2012. Of those making changes, 26 percent will apply automatic enrollment to existing non-participants, 26 percent will add an automatic contribution escalation feature, and 24 percent will increase the initial default rate.
"Automatic enrollment alone isn't enough to get workers where they need to be," explained Hess. "Plan sponsors need to step it up by encouraging employees to save at a higher rate. Adding features such as contribution escalation to get workers saving at least at the employer match level—or ideally even more—is key to helping them meet their savings goals."
To further help workers meet their retirement savings goals, while also helping them to become more accountable, plan sponsors are increasingly adding investment advisory solutions and features. Currently, most employers (79 percent) now offer target-date portfolios. More than half (59 percent) offer online investment guidance, while nearly four in ten now offer online investment advice or managed accounts (39 percent and 38 percent, respectively). For those plans that do not already offer it, 26 percent plan to offer online advice and 24 percent will likely add managed accounts in the year ahead.
"Our research shows that when defined contribution investors use employer-provided professional investment advice, they greatly outperform those who invest on their own," stressed Hess. "Offering a variety of help services to workers better positions them to make smarter savings decisions that keep them moving in the right direction—towards a sound retirement."
As employers have moved away from offering defined benefit (DB) plans in favor of DC plans, workers are now left with an annuity gap once filled by DB plans. As a result, more plan sponsors are introducing retirement income solutions either outside, within, or alongside the plan. Currently, 16 percent of employers offer an "in plan" income solution—including either an insurance product, managed account with a drawdown feature, or a managed payout fund—while 9 percent offer an out of plan option. Looking ahead, 22 percent plan to adopt one of these solutions in 2012. Further, 42 percent of employers allow employees to elect an automatic payment option from the plan over an extended period of time. Nearly one quarter (24 percent) are likely to add this option in 2012.
Beyond offering retirement income solutions, employers are increasingly trying to help workers understand how much they can spend each year during retirement. Nearly three quarters (71 percent) of plans provide online modeling tools for this purpose and 64 percent are likely to add these tools in the year ahead.
"Once, workers could count on a steady income stream throughout their retirement years," said Hess. "Now, more people are relying exclusively on their DC plan for their retirement savings and that regular "paycheck" has disappeared, leaving many employees struggling to effectively balance retirement expenses. Employers recognize this challenge and are adding features and resources to help workers manage their savings."
Other Key Retirement Findings
*39 percent of plans offer a Roth savings option, up slightly from 34 percent in 2011. Recognizing the strong benefits of Roth as well as the increased use that many plans have seen in recent years, 29 percent of plan sponsors are likely to add this option in 2012.
*Less than one quarter (23 percent) of defined benefit plans (DB) provide benefits accruals to new employees, down from 27 percent in 2010.
*14 percent of DB plans are likely to freeze accruals and 18 percent plan to close the plan to new hires.
*86 percent of DB plans were underfunded as of January 1, 2011.
*61 percent of employers provide some type of post-retirement medical coverage to current or future retirees. However, most of these plans (40 percent) are closed to new/future hires.
*To help manage costs, 78 percent of employers that currently offer retiree health benefits are likely to increase premiums in the year ahead. More than half (53 percent) plan to increase cost-sharing in the year ahead.