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THE PENSION PROTECTION Act of 2006 calls attention to the need for employers to
implement more tools and services that compel employees
to take action and control of their retirement savings.
Automatic enrollment, once thought of as the answer to
participant inertia, is now simply not enough, nor is it
the only tool that should be considered. Ongoing
participant education and involvement, in conjunction
with additional automatic services may be the key to
helping participants get on and stay on the path to
retirement readiness.
In an
August 2007 study conducted by Diversified Investment
Advisors, 69% of employees said they would stay in the
plan and even increase their salary deferral rate if
automatically enrolled at 3%. There is however a
disconnect between employee intention and their
actions. According to Retirement Services Roundtable,
of those automatically enrolled in a plan at a 3% salary
deferral rate, only 18% increased their default
percentage1.
To
bridge this disconnect, you and your clients may wish to
consider implementing industry best practices of
offering automatic services such as auto deferral
escalation and rebalancing as well as a Qualified
Default Investment Alternative (QDIA) in addition to
automatic enrollment. Furthermore, offering such
services may close the large gap between the current
level of participant retirement savings and how much
they are actually going to need to retire comfortably.
Indeed, automatic services have a major impact on income
replacement rates, especially for lower income workers.
According to recent research from Employee Benefit
Research Institute (EBRI), when automatically enrolled
at 6% with investments going into an asset allocation
fund, the median income replacement rate for the
lowest-income quartile increased to 52% from 23%.
The
trend is clearly for plan sponsors of all industries and
sizes to move towards automatic services. As you meet
with your clients to perform year-end evaluations and to
craft an action plan for the coming year, consider
implementing automatic enrollment and contribution
escalation as well as increasing employer match. In
addition, demonstrate added value by working with your
client in evaluating investment options that qualify as
a QDIA.
To
learn more about Diversified, call 800-770-6797 or visit
their Web site at
www.divinvest.com.
1Retirement
Services Roundtable, “Cracking the Participant Code”
2007
©Diversified Investment Advisors, Inc. (2007)
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