Participants Need Good Choices, Education and a Focus on Income

Not only do plan participants of all plan sizes expect the majority of their income to be from defined contribution (DC) plans, they also perceive it to be the most important source of income in retirement, finds a survey from Guardian Retirement Solutions.

Respondents indicated that they expect one-third (34%) of their retirement income to come from DC plans, 24% from Social Security and 12% to come from personal savings, including individual retirement accounts (IRAs). Seventy-seven percent ranked income from DC plans as a very important income source in retirement, 62% ranked Social Security as very important, and 61% ranked personal savings as such.

However, the survey found participants in small plans do not have the same features and investment options available to them as participants in larger plans. In terms of plan design, for example, a match is much less prevalent at firms with fewer than 25 employees than with employees of firms of all sizes. Other features which are also less prevalent in small plans include retirement income planning tools, telephone service representatives, automatic enrollment and automatic deferral escalation, and managed account programs.

In addition, smaller plans are less likely to offer target-date and target-risk funds, company stock and fixed rate accounts in their investment lineups.

“Some things we point out are not necessarily positive or negative, just things we noticed,” Douglas Dubitsky, vice president at Guardian Retirement Solutions in New York City, tells PLANADVISER. “Small plans don’t necessarily have bad options, but they don’t have the same options. Participants are overwhelmed by too much choice, but they should have a good selection.”

Dubitsky says Guardian is a firm believer in diversification of funds offered inside DC plans; the investment lineup should not be overly concentrated in one investment type. “Plans shouldn’t have a lot of funds, but they need to include core sectors,” he adds.

The survey also reveals a lack of comprehension of terms by participants. Most participants, for example, have heard the term “contribution rate” (82%) or “vesting” (77%) or have heard about loans (75%) from their accounts. However, comprehension is lacking. For example, among those who have heard of vesting, fewer than half assert that they understand the term completely.

Only half or fewer have heard of target-date funds (50%), dollar cost averaging (45%) or target-risk funds (39%). Two-thirds of participants who have heard of target-date or target-risk funds assert they do not understand the term.

Another troubling finding of the survey is that participants are still focused on accumulated balance and not retirement income. More than half (54%) say they pay a “great deal” of attention to their account balance; only 29% pay a “great deal” of attention to how much income their balance will generate.

“Participants may have what seems like a lot of money, but they are not looking at what that translates into as income over 30 or 40 years,” Dubitsky says. He suggests that putting income projections on participant statements is a good first step, but plan sponsors need to have conversations with participants about how much income their balances will generate. During meetings or during the open enrollment period, plan sponsors can remind participants to focus on income.