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Northern Trust Finds Participants Open To Defined Contribution Plan Design Changes

Workplace retirement plan participants may be more open to plan reforms than 401(k) plan sponsors previously thought, a new study by Northern Trust shows.

Based on a survey of 1,000 current and former participants in U.S. 401(k) plans, the Northern Trust study finds that significant numbers of workers and retirees would be inclined to agree with changes that plan sponsors and consultants believe would improve outcomes in defined contribution (DC) plans. The study, titled The Ideal DC Plan May be Closer Than You Think , is the fourth installment in The Path Forward research series exploring the future of DC plans and allows for comparisons with the earlier reports, which surveyed plan sponsors and consultants on similar topics.

"This year, we hit the pause key on soliciting plan sponsor feedback, to find out where participants concur -- and differ -- with those who are responsible for designing and overseeing their DC retirement programs," said Jim Danaher, Managing Director of Defined Contribution Solutions at Northern Trust. "The results are encouraging, because they indicate that participants would accept limits on longstanding DC plan features such as daily liquidity or taking loans if the reforms could lead to improved savings rates, investment returns and retirement outcomes.”

The report finds several areas where participant and plan sponsor views could lead to important changes in DC plans:
  • Investment choice: 54 percent of participants surveyed would not object to re-enrollment into target date funds from their current investment selection. Plan Sponsors and consultants surveyed in 2012 identified a streamlined investment menu that includes simplified pre-mixed default options as a best practice for DC plans.
  • Daily liquidity: While 56 percent of participants said it is important to have daily access to change their investment mix, more than half (51 percent) had not made investment changes for at least 12 months, and 91 percent said they would be willing to sacrifice daily access in exchange for the opportunity to invest in something with greater return potential. This may allow plan sponsors to consider including alternative asset classes in pre-mixed options - enabling access to alternatives as favored by plan sponsors and consultants in the 2012 survey.
  • Loan access: 76 percent of participants surveyed had never taken a loan from their 401(k) plan and only 13 percent would consider borrowing from their account. Well over half (56 percent) said loans should only be taken for significant emergency expenses. Plan sponsors consider loans a key risk to retirement savings, but 91 percent of those surveyed in 2012 allowed loans for a variety of reasons due to a belief that such access was needed to drive participation in DC plans.
  • Mandatory participation: 21 percent of participants agreed that participation in a DC plan should not be optional, compared to 63 percent of plan sponsors who were in favor of mandatory participation in the 2010 survey. However, participant respondents who were older and closer to retirement were more likely to say participation should not be optional, corroborating the views of plan sponsors.
  • 401(k) vs. Rollover IRA: Nearly half (47 percent) left their balances in prior employer plans or rolled into their new employer’s plan when changing jobs. 24 percent rolled their balances into an IRA. While a 401(k) plan provides for institutional oversight, better pricing than retail IRA plans and other benefits, two-thirds of plan sponsors surveyed in 2012 were ambivalent on the issue of encouraging participants to stay in their plan after ending employment with the company, in part for fiduciary liability reasons.

“The evolution of DC plans from a supplemental benefit to the primary retirement vehicle for most U.S. corporate workers is well under way, and the plans are adjusting to reflect their changing role,” said Susan Czochara, Senior Product Manager for Defined Contribution Solutions at Northern Trust. “While differences remain between the views of plan sponsors and participants, our survey shows the potential for greater shared responsibility, with both constituents acting toward the goal of securing sufficient income in retirement.”

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