The latest survey conducted by JP Morgan Asset Management about the needs (and wants) of plan participants was hardly ground-breaking in its findings. That is not to diminish the survey, its efforts or JP Morgan. The point is that once again we learn that participants report: not having enough savings for retirement, being confused about investments and that they generally not motivated to act upon advice. These are very familiar themes indeed. But there is something in this report that bears closer attention and it has to do with plan sponsor behavior.
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As a plan sponsor it is hard not to form a preconceived notion of employee likes and dislikes, what will be popular and what may be unpopular. Considering that many plan sponsors are also part of the Human Resources department of many companies (or in fact, constitute the entire Human Resources department), making assumptions about employee behaviors may be deep-rooted in familiarity. That is, many plan sponsors also handle employee benefits and general Human Resource issues so they have a lot of familiarity with employees. But can this familiarity (and making assumptions based on repetitive behaviors) be working against your plan?
The JP Morgan survey suggests that plan sponsors may forego important “auto” features such as auto-enrollment, auto-escalations and re-enrollments based on a belief that such compulsory actions would be unwelcome by participants. According to the JP Morgan Survey, an overwhelming majority of respondents favor these auto features.
The bottom line? The JP Morgan survey hints, if not outright states, that the biggest impediment to achieving better retirement outcomes may simply be human nature. In particular plan sponsor behavior; but also participant behaviors such as: procrastination, fear and erroneous assumptions which may be the difference between success and failure. JP Morgan seems to agree, favoring a more “automatic” approach to retirement investing.
Below are some of the highlights of the JP Morgan Survey:
DEFINED CONTRIBUTION (DC) PLANS, NOW ENTERING THEIR FOURTH DECADE, HAVE BECOME THE FOUNDATION OF RETIREMENT SECURITY FOR MOST MEMBERS OF THE U.S. LABOR FORCE, LARGELY REPLACING DEFINED BENEFIT (DB) PLANS. As a result, participants now shoulder a far greater share of the responsibility for their retirement saving and investing.
Plan sponsors have worked hard to strengthen their plans, spending time, energy and money to educate participants on how to save and invest for retirement. Yet after 30 years of DC plan evolution, many participants are still not saving enough, investing appropriately or feeling secure about their retirement.
A major advancement in efforts to improve retirement outcomes was the passage of the Pension Protection Act of 2006 (PPA). The PPA helped encourage the adoption of automatic enrollment and automatic contribution escalation, introduced the concept of a qualified default investment alternative (QDIA) and led to the development of a strategy known as re-enrollment. Plan sponsors are using these features and strategies, in combination with QDIAs such as target date funds (TDFs), to put more participants on a sound, simplified path to a secure retirement. But our years of research and experience suggest that broader adoption has been tempered, in part, by concern among some plan sponsors that employees may perceive these plan features and strategies as taking away their control over personal retirement saving and investing decisions.
If DC plans are to continue to evolve and strengthen, their development must be aligned with the needs, wants and capabilities of the employees they are designed to benefit. But an important question remains unanswered: What do participants want?
In January 2016, we conducted our fourth participant research study to better understand the perspectives of employees enrolled in these plans, canvassing 1,001 DC plan participants to update our findings and gain further insight into their views:
- How confident are they about achieving a financially secure retirement?
• Do they feel they are saving enough and have the time, talent and interest needed to make appropriate investment decisions for their retirement?
• What would motivate them to save more?
• Perhaps most important, 10 years after passage of the PPA, what are their views of and experiences with automatic features, TDFs and re-enrollment?In addition to looking at results for participants as a whole, we also examine similarities and differences across investor types (“do it for me” and “do it yourself” investors)1 and include some high-level findings for two age cohorts—those under 30 years of age and those 30 years of age or older. In this report, we discuss our research findings, draw implications for the continued evolution of DC plans and explore what plan sponsors and their industry partners can do to help as many participants as possible achieve a financially secure retirement.
KEY FINDINGS
Our latest participant research, together with our 2015 Plan Sponsor Research, reveals three defining issues with implications for the direction of DC plan evolution:
- When it comes to participants’ retirement saving and investing, a knowledge gap remains, despite years of educational efforts on the part of plan sponsors. This suggests to us that resources could be more effectively directed elsewhere and that a more simplified approach to saving and investing is needed.
- There appears to be a very human disconnect between participant intent and action (that is, inertia). Many participants are interested in doing more financial planning and acknowledge their need to save more but have not acted on these intentions. Automating the saving and investing process (while allowing participants to opt out) could help address participant inaction.
- There is a potential misperception among plan sponsors. A key reason given by many plan sponsors for not implementing automatic features and conducting a re-enrollment is anticipation of employee pushback. Survey results, however, suggest that participants recognize their need for saving and investing guidance, and most are in favor of, or at least neutral toward, these features and strategies. While those who classify themselves as “do it yourself” investors may have a less pronounced need for guidance, their views of these features and strategies are, to a large extent, in line with those of investors as a whole. Our analysis of the “under 30” age cohort shows that this large contingent, who will be working their way toward retirement for the next 35 to 45 years or more, are among the strongest proponents.
We believe our findings point to a clear opportunity for plan sponsors to strengthen their DC plans and potentially improve participants’ retirement outcomes. An important step in achieving that goal is to evaluate the benefits of shifting toward a more “automatic 401(k),” a term we use here to refer to a plan that utilizes some combination of automatic features, QDIAs such as target date funds, and re-enrollment. Such plans use the tools provided by the PPA to simplify saving and investing and proactively place more employees on a path to a secure retirement—while leaving ultimate control over personal saving and investing decisions in participants’ hands.
