Three major themes move to the forefront
The latest DC market research shows how plans continue to evolve by:
• Propelling employees beyond their irrational behaviors
In response to behavioral finance studies documenting irrational saving and investing
tendencies, plans are using new approaches to move employees toward financial security.
• Building momentum to improve retirement preparedness
Despite the stagnating savings rate, workers’ misplaced confidence about their financial
preparation grows. Plans are offering services to enhance retirement readiness, even as the
idea of a traditional retirement disappears.
• Accelerating into a new future
Plans are confronting changing attitudes as the Baby Boom generation begins its long
march into what have been traditionally called “the retirement years.” Product and service
innovations proliferate as plans work to keep pace.
This review will help you learn on-the-go so you can accelerate into the constantly changing future.
1 DC Market Review
Propelling employees beyond their irrational beha
Behavioral finance studies show that educating Plans using automatic enrollment
employees is not enough to motivate them to
save and invest rationally. They continue to be
driven by fear. In response, more DC plans now
Percent of plans using automatic enrollment
offer a range of automated participant services.
Automatic enrollment, salary deferral increase,
and investment services continued to grow in 20 18.2%
popularity in 2005.
Of course, automatic services are not a panacea. 9.8%
An average of 10.5% of plans use automatic
enrollment, up from 8.4% in 2003. It typically 5 3.4%
results in participation rates from 85% to 95%, up 0.9%
from the national average of 75%.1 The most 0
1-49 50-199 200-999 1,000-4,999 5,000+
common default deferral percentage is 3% of pay,
Number of Employees
present in 55.8% of plans.
Source: Profit Sharing/401(k) Council of America’s 48th Annual
The problem of too much choice Survey, 2005.
Asking participants to select among a vast array The larger the plan, the more likely it is to
of investment options may result in information have adopted automatic enrollment. Often,
overload, which can lead to making poor decisions larger plans lead the way and suggest the
or none at all.2 This overload reaction appears in services that will become more important
everyday consumer transactions. A behavioral among smaller plans in the future.
experiment conducted in a grocery store included
two displays of jams: One had six flavors, the other
24. The 24-jam display attracted six out of 10 shop-
pers, but only 3% bought a jar there compared to
30% buying a jar at the display with six choices.
DC Market Review 2
Reconsidering the defaults Employees rate appeal of plan features on decision to enroll
In the past, plan sponsors typically used a money
market option as their default investment because Target date-based fund 66%
it is considered a safe, short-term option. But that Automatic increase 55%
same inertia that kept employees from voluntarily
enrolling, also keeps them from moving their Matching contribution (up to 3% of employee pay) 51%
money into a long-term allocation that may better Lifestyle fund (a fixed allocation) 49%
meet their retirement investing goals. Now more
Managed account 35%
plans are reevaluating the default investment
option and choosing target date-based funds as a
0% 10% 20% 30% 40% 50% 60% 70%
more appropriate solution.
Percent of employees who would be likely to enroll because of each feature
Source: EBRI 2005 Retirment Confidence Survey.
By automatically investing participants’ assets in
target date-based funds, sponsors may protect Eligible employees rated these as the top five features that would make them “much more” or “somewhat
themselves from fiduciary concerns related to more” likely to participate in the plan if offered.
poor allocation. For example, many plan partici-
pants offered company stock tend to overindulge
A match that fails to spark
in it. Among plans that offer company stock and
Research designed to isolate the impact of the
no stable value option, nearly 27% of the account
match reveals that it may not pack as much punch
balances of the plan are in company stock. About
as previously thought. While the match certainly
a quarter of those who invested in company MOVING YOUR BUSINESS AHEAD
appeals to a majority of employees, researchers
stock have more than 40% of their account bal- • Do we (or are we considering) offering automated
have discovered that about 60% of non-highly
ance in it.3 plan services?
compensated workers would participate in the
plan regardless of the match. The match would • Have we evaluated our investment lineup to
induce just 10% more to join the plan.4 assess if it results in information overload?
• If automatic enrollment is used, have we recently
evaluated the default investment option?
• In what ways do we assess the real impact of our
plan features and design on participant behavior?
3 DC Market Review
Building momentum to improve retirement prepare
In the story Alice in Wonderland, nonsense reigns Workers’ beliefs lack a factual basis
and the illogical is celebrated. Each year, findings At the root of workers’ misplaced confidence is a
from the Employee Benefit Research Institute lack of knowledge. For example, EBRI’s survey
(EBRI) Retirement Confidence Survey uncover shows that 66% believe they will reach their sav-
workers’ own version of a retirement wonderland. ings goal by the time they stop working, even
It is a world in which employees say they are con- though they have not calculated how much they
fident they’ll have enough savings at retirement, will need. Perhaps the most overlooked retirement
while only half report savings of $25,000 or more expense is health care. Experts estimate health care
and the percentage of Americans who have saved alone could add 20% (or more if long-term care is
any money for retirement has stalled since 2001. included) to the amount of preretirement income
that workers will need to replace in retirement.
Participants’ average account balances
$200,000 Replacement income projections
180,000 DC plans are replacing DB plans as the primary
160,000 employer-sponsored retirement benefit. In light
140,000 of this, the plan industry is asking itself whether
120,000 DC plans will yield enough income for retirement.
A recent study showed that the replacement
60,000 $56,878 income for the first year in retirement would be
half of pre-retirement earnings for the lowest-
20,000 $19,926 income worker, and two-thirds for the highest-
income worker (assuming steady employment
Median All participants in their 60s and a continuous savings rate).5
Source: EBRI 2005 Retirement Confidence Survey.
The average account balance of partici-
pants in their 60s with a tenure of 30+
years is down 13.5% since 1999.
DC Market Review 4
Retiring later may boost projected retirement income at all income levels
Retiring at age 60 Retiring at age 70
Lowest — 38%
Lowest — 67%
Low Middle — 41%
Low Middle — 74%
High Middle — 45%
High Middle — 82%
High — 50%
High — 94%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Replacement Income Rate
Source: Pension Research Council of The Wharton School, 2005.
By delaying retirement 10 years, workers at all four income levels born between 1965 and 1974 can
radically improve their replacement income rates.
MOVING YOUR BUSINESS AHEAD
• Do we provide tools to help employees calculate
how much they’ll need for retirement?
• Do we educate employees about total potential
expenses in retirement?
• Do we provide tools to project retirement
replacement income from DC plan savings?
5 DC Market Review
Accelerating into a new future
The traditional picture of retirement is obsolete Prepare for a grayer workforce
as the Baby Boom generation begins its long With the sheer numbers of Baby Boomers plan-
march into retirement. This group sees retire- ning to stay in the labor force past the traditional
ment differently, according to a recent national retirement age, the labor force will age. In fact, by
survey.6 For example, two-thirds view this period 2014, the percentage of workers between ages 55
as a time for continued productivity and only 13% and 74 in certain fields is expected to skyrocket
expect to stop working entirely. to 41%, according to the Government
Compare the Boomers’ orientation of retirement
as a “productive period” to responses from More older workers stay on the job
today’s retirees who are working for a more
immediate reason—54% say they’re back at work
because they needed more income, the same
Percent of workers age 65-69 staying on the job
Boomers expect to work after retiring 60 57%
Expect not to 20
Expect to work
Source: Congressional Research Service 2005.
Since 1996 the percent of men and
women between ages 65-69 staying on
7 out of 10 expect to continue to work full-time the job increased 11%.
or part-time after retiring from their main job.
DC Market Review 6
Americans retiring later—just as they did in the past
Percent age 65+ still working
20 22% 19% 18%
Will it go this high or higher?
5 This graph shows the percentage of Americans
age 65 or older still working full time. Note that
0 in 1995 the trend began to reverse as more
1965 1970 1975 1980 1985 1990 1995 2000 2004 2010 2015 2020 seniors remained at work after age 65.
Source: U.S. Department of Labor, Bureau of Labor Statistics, 2005.
More workers phase into retirement retirement income. When offered within the plan,
Plan sponsors must acknowledge and respond to participants have the choice to purchase guaran-
teed income through their regular salary contri- MOVING YOUR BUSINESS AHEAD
the trend of a grayer workforce, many of whom
butions. • Are we prepared to accommodate an older work-
will want to “phase out” of their jobs gradually—
force and the expectations they bring, including
in their 60s and beyond. It means sponsors must
Finally, from a service perspective, these new more flexible schedules and customized benefits?
adjust their communications materials and plan-
ning tools to accommodate an older, part-time work patterns will require more hands-on guid- • Do our current plan investments and services
employee base sooner rather than later. ance to help participants determine both an fully take into account the demographic trends?
appropriate retirement transition strategy and a • Have we considered offering annuities in our
It also suggests that more plans may add sustainable withdrawal rate from their accumu- investment lineup?
deferred annuities to their 401(k) investment lated assets.
• Have we developed communications to guide
lineup. Annuities respond to the concern of out-
workers planning to phase into retirement?
living assets by providing a guaranteed source of
7 DC Market Review
Staying ahead in this dynamic arena
As you review the information presented in this report and consider its implications for
your organization, you will recognize the importance of staying current in this dynamic
arena. New research is being conducted continually to enhance our understanding of the
DC market. We will continue to share our insights as we accelerate into a new future.
For more information, contact your T. Rowe Price internal sales consultant at 1-866-244-1762. DC Market Review 8
“The Automatic 401(k): A Simple Way to Strengthen Retirement Savings,”
supported by The Pew Charitable Trusts in partnership with Georgetown
University’s Public Policy Institute and the Brookings Institution, 2005.
A study by Sheena S. Iyengar and Mark R. Lepper, “When Choice Is
Demotivating: Can One Desire Too Much of a Good Thing?” at Columbia
University, reported in The Journal of Finance, Vol. 52, No. 4, August 2002.
Employee Benefit Research Institute (EBRI) and Investment Company
Institute (ICI) participant database.
A study by Olivia Mitchell, Stephen Utkus, and Tongxuan Yang, “Turning
Workers into Savers: Incentives, Liquidity, and Choice in 401(k) Plan
Design” at The Pension Research Council of The Wharton School, 2005.
A working paper by Sarah Holden and Jack VanDerhei, “The Role of
401(k) Accumulations in Providing Future Retirement Income” at the
Pension Research Council of The Wharton School, 2005.
Scott Reynolds, Neil Ridley, and Carl Van Horn, Ph.D., “A Work-Filled
Retirement: Workers’ Changing Views on Employment and Leisure,” at
Rutgers University, August 2005.