What That 1% Increase Can Do for Participants

February 26, 2014 (PLANSPONSOR.com) – For those plan sponsors who may be hesitant to add an automatic deferral escalation feature to their Employee Retirement Income Security Act (ERISA) defined contribution (DC) plans, here’s something to consider.

An analysis by Fidelity Investments shows that for a 25-year-old, a 1% deferral increase—about $33 per month for someone making $40,000—could result in an additional $200 to $330 per month in retirement income. For a 35-year-old making $60,000, that 1% increase—about $50 monthly—could result in an additional $180 to $270 in monthly retirement income.

Of course, the analysis makes certain assumptions about wage increases, rates of return and retirement plan leakage, but it is still a message with a big impact. “I think the data definitely shows that by making an automatic annual increase, plan sponsors will benefit many more participants,” Beth McHugh, vice president of Thought Leadership and Market Insights at Fidelity in Albuquerque, New Mexico, tells PLANSPONSOR.

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McHugh also notes that Fidelity’s analysis of 21,200 Fidelity recordkept 401(k) plans, finds one-third of all participant deferral increases through December 31, 2013 can be attributed to use of its automatic increase program. Among individuals younger than 35, more than half the increases are attributable to the automatic increase program.

While McHugh doesn’t think DC plan sponsors are as timid as they used to be about automatic deferral increases offered as an opt-in feature for participants, they are more timid about marrying automatic enrollment with automatic increase and making it an opt-out feature. The analysis shows 76.9% of Fidelity plans offer automatic deferral increases, but only 11.6% offer it as a true automatic feature, making employees opt out if they do not want it.

“If you start automatic enrollment at a 3% deferral rate, you need automatic increases to get participants to that recommended 15%-of-income savings rate, McHugh says. She points out that Fidelity has found employees are not likely to opt out; the average opt-out rate is about 13.4%. “People are not likely to opt in, but they are also not likely to opt out. [Automatic deferral increases are] a great tool considering participant inertia.”

McHugh adds that education about auto deferral increases is also important. Plan sponsors like the analysis showing the outcome of a 1% increase. “It educates participants more about the power of savings and the power of compounding,” she says.

Participants Concerned About Retiree Health Care Costs

February 26, 2014 (PLANSPONSOR.com) – Health care issues may be causing employees to dial back their saving for retirement, says a new survey.

“From virtually nowhere five or six years ago, health care expenses in retirement today are the driving anxiety for pre-retirees, now in the same league as having adequate overall retirement savings to begin with,” say the authors of the most recent edition of the Mercer Workplace Survey. “It’s not a stretch to acknowledge that health care issues today have more urgency than before, and that this shift puts retirement savings under stress.”

The survey results show just how important health care costs during retirement have become to employees. The 2007 version of the survey found that only 17% considered health care expenses in retirement as a major savings objective, while the newer 2013 data shows that 34% now mark this as a priority. Those between age 50 and 64 are especially concerned, with 45% saying their main focus is savings for health care expenses in retirement, a 13-point increase from 2012 and nearly double the level six years ago.

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Many employees are in a holding pattern with retirement savings stalled until the health care outlook crystallizes, the economy brightens, or both happen, according the survey results. Findings show that:

  • Most financial worries are noted as being within a point or two of last year;
  • Workers’ expected sources of retirement income and the proportion of income associated with each source have been virtually flat since 2006; and
  • Most expectations about retirement are about where they were in 2012, with working part time during retirement being seen as the likeliest solution to income challenges.

The survey covered a national cross-section of active 401(k) participants. Respondents were also enrolled in their employer’s health plan. The survey was conducted online with 1,506 participants between May 28 and June 5, 2013.

A report covering the results of the survey can be found here.

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