Northern Trust Study Charts How to Make Defined Contribution Plans Work for U.S. Employees

CHICAGO--(EON: Enhanced Online News)--Large U.S. retirement plan sponsors believe participation in defined contribution plans should be mandatory, with immediate vesting of employer contributions and automatic increases in contributions each year until workers are setting aside more than 10 percent of their salaries, according to a study released today by Northern Trust.

“The study participants describe the ideal DC plan as simple, automatic and cost effective”

The Path Forward: Designing the Ideal Defined Contribution Plan, a research study conducted for Northern Trust by Greenwich Associates, asked 50 large U.S. defined contribution (DC) plan sponsors and five leading investment consultants to outline the steps they think would be required to make defined contribution plans more efficient retirement savings tools for U.S. workers. Participants included leaders of DC plans for multinational corporations in the retail, energy, manufacturing and technology sectors, and represent more than 970,000 participants and over $100 billion in plan assets.

In addition to mandatory participation and automatic enrollment, savings escalation and employer contributions, a majority of respondents also favored government and employer policies – including tax incentives, restrictions on taking loans against plan balances and transparent fee structures – to strengthen DC plans for their emerging role as the primary retirement savings vehicle for U.S. workers.

“The study participants describe the ideal DC plan as simple, automatic and cost effective,” said Jim Danaher, senior investment product manager for Defined Contribution Solutions at Northern Trust Global Investments. “These traits are necessary to satisfy the requirements of three different constituencies: employees who need an efficient means of accumulating assets for retirement; employers in need of a cost-effective benefit to attract and retain valuable employees; and policymakers in need of a reliable savings vehicle in an age of lengthening life spans, pension funding crises, and chronic under-saving.”

Northern Trust launched the study to discover how industry leaders would design the ideal workplace DC plan if freed from existing laws, structures, history and standard industry practices. Respondents participated in candid, detailed interviews with Greenwich Associates in July and August 2010. Among the findings compiled from the interviews:

63 percent of plan sponsors and four of five consultants think participation in DC plans should not be optional for employees. Respondents had mixed feelings but one consultant summed up the prevailing view: “We can’t have this be optional and expect the population in any way, shape or form to be ready for retirement.”
49 of the 50 plan sponsors participating in the study and all of the investment consultants believe automatic enrollment would be a key feature of the ideal DC plan construction; only 19 percent of private industry workers are enrolled in plans currently utilizing automatic enrollment, according to Federal statistics.
Three-quarters of plan sponsors and all consultants support automatic escalation features that work in tandem with auto-enrollment. Auto-escalation would build on the default level for employee salary contributions that most respondents set at between 3 and 7 percent for auto-enrollment plans.
Virtually all plan sponsors and consultants agree that the ideal DC plan structure would include significant contributions from employers, and 60 percent of plan sponsors believe employer contributions should vest immediately, rather than waiting until an employee works for a year or more at the company.
Nine of 10 plan sponsors and consultants consider government incentives – tax credits or deductions – a critical component of a vibrant private sector retirement savings system.
In order to prevent retirement savings “leakage,” two-thirds of all plan sponsors and all consultants participating in the study believe workers should not be allowed to take loans against their defined contribution account balances, except in cases of proven hardship.
60 percent of plan sponsors believe plans must go beyond “total cost” disclosure and offer full transparency regarding administrative expenses, investment management fees and participant-initiated transaction fees.

The study revealed some tension between consultants and plan sponsors over levels of control regarding enrollment, contribution levels and investment options. While investment consultants were inclined to suggest that plan sponsors assume much of the responsibility for decision-making within the DC plan, plan sponsors countered that employers should design efficient retirement programs but allow employees to make informed decisions about what is best for them and their money.

More details of the study, including comments from participants, can be found in the full report on Northern Trust’s website.

“Our aim with this research is to advance discussion on the structure of defined contribution plans by engaging the expertise of the people who manage and advise them,” said Susan Czochara, senior investment product manager for Defined Contribution Solutions at Northern Trust Global Investments. “As other sources of retirement funding traditionally relied upon by U.S. workers come under increased pressure or disappear entirely, DC plans are becoming the cornerstone component of the nation’s retirement system. Given these trends, there is too much riding on the success of the DC system to risk getting it wrong.”

This research represents the first in a Northern Trust series focusing on The Path Forward, which will examine candid perspectives of leading industry practitioners regarding DC industry challenges and potential solutions. Insights generated from these research-driven initiatives are intended to inform the decisions of companies, public plan sponsors and policy makers alike.

Northern Trust Global Investments (NTGI) is the multi-asset class investment management business of Northern Trust Corporation. NTGI comprises Northern Trust Investments, N.A., Northern Trust Global Investments Limited, Northern Trust Global Investments Japan, K.K., the investment advisor division of The Northern Trust Company and Northern Trust Global Advisors, Inc. and its subsidiaries.

About Northern Trust

Northern Trust Corporation (Nasdaq: NTRS) is a leading provider of investment management, asset and fund administration, banking solutions and fiduciary services for corporations, institutions and affluent individuals worldwide. Northern Trust, a financial holding company based in Chicago, has offices in 18 U.S. states and 16 international locations in North America, Europe, the Middle East and the Asia-Pacific region. As of September 30, 2010, Northern Trust had assets under custody of US$3.9 trillion, and assets under investment management of US$657.2 billion. For 120 years, Northern Trust has earned distinction as an industry leader in combining exceptional service and expertise with innovative products and technology. For more information, visit www.northerntrust.com.