Employer-Sponsored Retirement System Plays “Critical Role”

The employer-sponsored retirement system plays a critical role in helping American workers adequately save for retirement and offers numerous benefits not otherwise available to them, according to Aon Hewitt. Aon says that recent research shows that employees who participate in their company’s retirement savings plan are significantly more prepared than those who do not. Employees who do not contribute to their employer savings plan have an average retirement savings shortfall of 10.8 times pay, Aon reports, compared to a shortfall of just 2.2 times pay for the full–career contributor. For the average employee making $70,000, that equates to a savings shortfall of $756,000 at retirement.

“Saving for retirement is no easy feat, and many U.S. employees struggle to save enough,” said Alison Borland, vice president retirement solutions and strategies at Aon. “Through automation, education and investment tools, employers have made it very simple for employees to save for retirement and it’s having a positive impact. In addition, larger plans are able to leverage their scale to provide tools and investments at much lower costs than available outside of the retail market. Our research shows employees who participate in an employer-sponsored retirement plan are significantly more prepared to meet their savings goals in retirement, so it’s critical that they understand and take advantage of the benefits this system provides.”

Advantages

Aon contends that the employer-sponsored retirement system offers employees security and resources they cannot get if they go it alone in the individual market. These include:

Fiduciary oversight. As plan sponsors, employers are required to serve as fiduciaries and must act in the best interest of the employee. Employees benefit from the oversight and expertise of the employer, as well as outside experts that provide insights, which may include selecting investment options and reviewing plan design alternatives.

Access to tools and resources. Through the employer-provided system, employees have access to unbiased tools and resources that may not be available to many employees through the retail environment. These tools include education, modeling tools, online advice, managed accounts, lifetime income solutions, and access to experienced, non-commissioned phone representatives.

Lower fees. Savings plan fees can significantly impact an employees’ savings over time. For example, an employee participating in a typical large employer 401(k) plan will pay 0.5 percent in investment management fees annually, compared to 1.3 percent for someone participating in a retail mutual fund as part of an individual retirement account (IRA). That means an individual investing in higher-cost retail mutual funds could lose 25 percent of their ultimate savings to fund expenses over the course of 30 years.

Under ERISA, plan sponsors are responsible for negotiating and managing fees. According to Aon’s research, 95 percent of plan sponsors that have not yet reviewed total plan costs are likely to do so in 2013, up from 34 percent a decade ago. In addition, nearly a third of plan sponsors have recently hired a third party to evaluate or benchmark plan costs and more than half (52 percent) are somewhat or very likely to do so in 2013.

Employers appear to be actively managing plan costs on behalf of employees by increasingly moving to lower-cost institutional funds. Aon’s data shows one third of plan sponsors changed all or some funds from mutual funds to lower-cost institutional funds in 2012, while another 30 percent are somewhat or very likely to do so in 2013.

“Managing fund expenses is one of the most important ways for employers to positively impact the financial security of their employees,” explained Borland. “Choosing low-cost institutional fund options is one way to cut fees for workers, ultimately leading to larger plan balances.”

Steps To Take

To strengthen the employer-provided retirement system further, Aon suggests employers take the following actions:

1. Automatically enroll workers at a higher savings rate. Aon’s Universe Benchmarks research shows that 29 percent saved at a level below their company match threshold. To increase employee savings, companies should default employees at a higher initial savings rates, preferably at or above the employer-matching threshold. Additionally, adding features such as automatic contribution escalation to 10 percent of pay or more would help gradually increase savings rates to sufficient levels, ultimately aiding employees in meeting their long-term needs.

2. Take steps to minimize retirement savings leakage. Educating employees on the risks and long-term impact of withdrawing, taking loans, and cashing out savings can help limit the risk of leakage, or taking funds out of the retirement savings prematurely. In addition, employers can work together to make the 401(k) rollover process easier for employees, which will reduce the likelihood of cash outs upon job termination—a significant problem, according to Aon. A recent Aon report showed that 43 percent of employees who terminated employment in 2012 took a cash distribution.

3. Use your scale. Plan sponsors have an opportunity to immediately improve investment returns by reducing fees that come out of participant accounts. Investment management fees comprise the majority of fees in savings plans. Sponsors should evaluate using institutional fund vehicles, such as collective trusts, where available, Aon says, and ensure where not available that the least expensive share classes are utilized. In addition, consider innovative approaches that can leverage those lower fees, such as custom target date funds.

4. Know who’s giving advice to your employees. When employers provide access to participants by any third parties, it is crucial the employee understand the information and guidance that will be provided. Aon recommends that companies ask their providers to quantify the revenue generated from the services they are providing so both the employee and employer can evaluate any conflicts and understand how the third party is compensated. Employers should also be sure to ask about how employees will be made aware of any associated fees.

5. Provide help. Employees can always benefit from more and improved education on retirement and financial readiness. Aon advises companies to ensure that employees have access to the right information about how much they need to save for retirement, their investment options and plan details. This could include guidance, advice, and/or managed accounts, in addition to educational materials, and should consider the spend-down phase as well as the accumulation phase. Using multiple channels is crucial, says Aon, so that employees have options across self-service vehicles, such as online information, phone, or in-person support.

For more information, visit http://www.aonhewitt.com.