Employers have conflicting opinions on the continued viability of 401(k) plans as a vehicle for retirement savings, and even supporters agree that changes in the current system are needed.
In a recent survey, Mercer asked 180 DC plan sponsors if they believe the 401(k) system can ever provide adequate retirement benefits. Half of the respondents indicated that the existing system is adequate (16%) or would be adequate with additional regulations (34%), while the other half said the 401(k) system cannot provide such benefits (29%) or were unsure (21%).
A more optimistic view of 401(k) plans is detailed in a joint report from CFO Research Services and Charles Schwab. Of the financial and HR executives surveyed, 56% give the current 401(k) system a "B" rating, meaning that "the current system works and needs only slight modification." An additional 32% graded the system "C," meaning that "the current system is generally working, but could use a number of improvements." Only 3% give the system a lower rating.
Responsibility
Respondents to the Mercer study also differ on whether the responsibility for achieving adequate retirement savings rests with the employer, belongs to the employee or is shared. Employers with DB plans open to new entrants tend to see it as a shared responsibility (81%)or predominantly the employer's responsibility (15%), Mercer reports. Among respondents that have suspended their matching contributions to the 401(k) plan, only 54 percent believe retirement is a shared responsibility, while 46 percent said that employees bear the bulk of the responsibility.
Savings obstacles
While market volatility brought about the recent decline in the value of 401(k) portfolios, employers know that this is not the sole reason for these plans' inability to generate adequate retirement savings.
The Mercer study finds that 70% think that the most critical obstacles to providing adequate benefits to employees via a 401(k) plan are the lack of employee participation and the employee's failure to save enough.
Employee education is the most effective way to increase employee participation and contribution rates, as well as to alleviate fears and boost confidence in 401(k) plans, Schwab maintains.
Automatic enrollment and automatic escalation can also remedy poor participation and contribution, but they do not generate employee confidence in 401(k) plans because they do not address the lack of knowledge that has fueled peoples' fears of declining account balances.
Power of consultations
Robyn Alcorta, VP of 401(k) plan services at Charles Schwab, explains "anecdotally, advice consultations will, on average, lead employees to double their savings rates."
Such consultations are one of the ways that Charles Schwab brings education and professional advice to the employee. Alcorta attributes Schwab's success in increasing plan contributions to the additional confidence that speaking with a professional provides. Professionals are able to highlight the strengths and weaknesses in their plan diversification and investments, which, in turn, creates clarity and increases understanding and leads to increased confidence.
The Charles Schwab report found that 57% of employers have seen an increase in employee requests for 401(k)-specific advice since September 2008. Over the same time span, 39% also observed an increase in requests for more general financial advice from their employees.
Alcorta sees this as part of a growing trend in the industry away from 401(k)-specific information and toward employee education encompassing a broader scope of financial and investment topics.
The Charles Schwab report finds that a majority of the executives polled support making investment advice more available to employees. Of the executives, 76% believe that such advice will have a positive impact on employees, while 44% believe it will have a positive impact upon the company as well.
In particular, there is room for improvement with regard to the general financial advice that the company provides, 42% responded negatively or with no opinion regarding their ability to provide such advice.
Increased employee education programs about 401(k) plans and the market are critical to increase participation and employee contribution rates, as well as to alleviate fears and doubts among employees.
As Alcorta points out, "providing employees with the right tools, advice and education can go a long way to helping them save for retirement."
