This week, there were some positive numbers on employee retirement investments.

Although U.S. workers who held 401(k) accounts from 2003 through 2008 suffered a 24.3% average drop in their account balance during 2008’s bear market, their accounts still grew at an average annual rate of 7.2%, according to new research from the Investment Company Institute. The average account balance at the end of 2008 was $86,513, up from $65,000 in 2007.

Furthermore, a survey of more than 1,000 employees by the ING Institute for Retirement Research found that most Americans who participate in employer-sponsored defined contribution remain committed to them. Eighty-four percent of the respondents said that their employer’s plan was a “very important” part of their retirement strategy and 92% stated that the best way to save was by having their investments automatically deducted from their paycheck.

Other ING findings further demonstrated that investors did not radically change their behavior or abandon these plans in response to the market downturn. For example, since the fall of 2008:

• More people (nearly 40%) reported joining an employer’s plan or increasing their contributions than decreasing or stopping contributions (less than 30%).
• While more than one-third of participants (37%) changed to a more conservative asset allocation, nearly one fifth (19%) saw an opportunity to become more aggressive in their investment strategy. 
• Very few reported either taking money out through a hardship withdrawal (6%) or a loan (5%).

“This survey underscores one simple fact: The economy and the critics have not discouraged those who are regularly participating in a defined contribution plan,” said Catherine Smith, CEO of ING U.S. Retirement Services

Not where we need to be 

Good news, but not good enough. Everyone agrees that 401(k) plan participants simply are not saving enough, but it’s not all because of behavior. 

“It is vital to address gaps in the defined contribution system,” says Christine Marcks, president of Prudential Retirement and co-author of a new white paper on ways to enhance retirement security for employees. 

First, says Marcks, retirement income is not protected from poor market conditions, as demonstrated by the recent market downturn. Market declines reduce the amount of retirement income a retiree can draw from their assets. Near-retirees are also vulnerable, as significant asset losses right before retirement impacts an individual’s future retirement income. 

Second, participants can outlive their retirement assets. Increased longevity means participants must “over-save” to ensure that their assets will last for an uncertain and potentially decades-long time horizon. A healthy 65-year-old retiree can expect to live, on average, another 19 years. Many, of course, will live longer. 

Third, too many people still do not participate in an employer-sponsored retirement plan, since nearly half of all private sector employers, particularly smaller firms with less than 100 employees, do not offer a plan. In 2006, 46% of private sector workers did not have access to a DC plan. 

The white paper suggests several changes to reverse these trends: 

• Autopilot retirement planning, which provides participants with an automated and pre-defined path, from their first day of employment through their retirement;
• Built-in risk protection that help mitigate fiduciary risk for plan sponsors, provides protection from market downturns for plan participants, and helps ensure that participants receive a guaranteed stream of income once retired; and
• Streamlined plan operations that automate and reduce the cost of plan administration, making defined contribution plans more affordable and easier to implement for small firms. 

Conversation on how to improve the defined contribution retirement system is picking up. Read other experts’ ideas in 401(k) plans: Achieving the Lake Wobegon effect,  Back to the drawing board, Hope is not a strategy, and Changes needed in DC retirement system.