There’s a myth that DB pension plans used to cover most of the U.S. workforce, with flawed historians harkening back to the “golden age” of retirement plans upended by a DC plan like 401k’s. At their height, DB plans covered 40% of workers but much fewer stayed in their job long enough to reap the benefits as the world moved to a post-war knowledge based economy. So 401k plans seemed perfect – workers take their account balances with them when they change jobs. Except reality took over just like DB plans.
Millennials who now make up a majority of the U.S. workforce change jobs frequently with those aged 20-24 moving every 16 months. The most important factor in preparing for retirement is to save early and as much as possible and the DC industry is making great strides to help younger people through auto enrollment and auto escalation in a DC plan. Except that every time a worker changes jobs, they are enrolled at the new plan’s default percentage which can be as low as 3%. Even with auto escalation, the transient worker loses precious time. They also start leaving a trail of low balance DC accounts that linger and are sometimes cashed out. Ouch!
So what can plan sponsors do about it? With guidance from their advisor and the support of their record keeper, why not have a new participant start deferring in the new plan the same amount they deferred in their previous plan? They are already used to having that amount taken out and arguably they are making more money in their new job. Let’s get creative – ask if they want half of the pay raise to go into their new 401k plan.
Impossible? Because of consolidation, there are only a few major national record keepers left so it’s not a stretch to ask them to share data about deferral rates of participants. There are privacy issues but it’s not really sensitive data and these mammoth providers should be able to work it out. Most small regional record keepers clear through three major custodians who should be able to cooperate.
Because if the industry cannot figure this out because they won’t cooperate or they try to protect data hiding behind privacy issues, then the government will be happy to step in and put everyone in the federal Thrift Savings Plans which is almost as bad as low deferrals rates hurt by job hopping.
