A new report from Aon Hewitt, the global talent, retirement and health solutions business of Aon plc, shows that employee participation in company defined contribution (DC) plans is at an all-time high and DC plan balances have reached pre-recession levels. However, Aon Hewitt's analysis also shows employee savings rates remain flat, suggesting more work is needed to continue to help workers achieve retirement security.
Aon Hewitt's analysis of more than 140 defined contribution plans representing 3.5 million eligible employees found that participation rates in DC plans have reached their highest levels since Aon Hewitt began tracking this data in 2002. On average, 78 percent of employees participated in a DC plan in 2012, up from 75 percent in 2011, and 68 percent in 2002. Aon Hewitt's report also shows that, as the markets have rebounded, average DC plan balances have reached their highest levels since 2006. The average total plan balance in 2012 was $81,240, up significantly from $57,150 in 2008.
"It is encouraging to see more people participating in DC plans-the impact of automatic enrollment has been astounding," said Patti Balthazor Bjork, director of Retirement Research at Aon Hewitt. "Companies are definitely moving in the right direction when it comes to encouraging financial wellness among their workers, but there is certainly opportunity to do more."
According to Aon Hewitt, the rise in participation rates is largely driven by an increase in the number of employers that automatically enroll employees in their DC plans. Today, 59 percent of employers automatically enroll employees in their company DC plan, compared to just 34 percent in 2007. On average, participants subject to automatic enrollment had a participation rate of 81 percent, nearly 20 percentage points higher than those without automatic enrollment.
In addition, Aon Hewitt's study shows employees continue to save at rates insufficient to support adequate long term savings goals. The average before-tax contribution rate remained flat from 2011 at 7.3 percent of pay. Most concerning, workers are not saving enough to take advantage of company matching dollars. Nearly 28 percent of employees contributed below the company match threshold, potentially sacrificing tens of thousands of dollars in retirement savings over the course of a person's career.
"Once they are enrolled in the plan, inertia takes over for many employees and they make few adjustments to their DC plans," said Bjork. "Employers can help by coupling automatic enrollment with other features, like contribution escalation, that enable employees to increase their savings rate over time. Combined, these can make a big impact on employees' long-term financial outlook."