Wednesday, November 10, 2010

The ideal DC plan: auto-enrollment, escalator and quicker vesting

Employee Benefit Adviser
Posted November 8, 2010 by Editorial Staff at 10:43AM.
CHICAGO - FEBRUARY 25:  Pedestrians walk by th...Image by Getty Images via @daylifeThe ideal defined contribution plan should be mandatory, and include auto-enrollment, savings escalation and employer contributions, sponsors of large retirement plans believe.
That’s the conclusion of a new study from Northern Trust Global Investments, “The Path Forward: Designing the Ideal Defined Contribution Plan.” Northern Trust surveyed 50 large DC plan sponsors, representing more than 970,000 participants and over $100 billion in plan assets, as well as five leading investment consultants.
The survey found that 63% of plan sponsors and four out of five consultants think participation in DC plans should not be optional. Forty-nine of the 50 plan sponsors and all of the investment consultants believe automatic enrollment should be a key feature of DC plan construction. Currently, federal data indicate that only 19% of private industry workers are enrolled in plans with automatic enrollment, according to Northern Trust.
Seventy-five percent of the plan sponsors and all of the consultants support automatic escalation, which would build on the default level of between 3% and 7% for employee salary contributions to auto-enrollment plans.
Almost all plan sponsors and consultants report that the ideal DC plan structure would include significant contributions from employers, while 60% of plan sponsors believe employer contributions should vest immediately, instead of waiting until an employee works for one year or more at the company.
The majority of those surveyed also said they were in favor of government and employer policies, including tax incentives, restrictions on taking loans against plan balances and transparent fee structures, to strengthen plans.
ceramic piggy bankImage via Wikipedia“The study participants describe the ideal DC plan as simple, automatic and cost effective,” says Jim Danaher, senior investment product manager for Defined Contribution Solutions at Northern Trust. “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.”
— By Ruthie Ackerman, an online editor for Financial Planning, a SourceMedia publication.
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