Pension markets of all kinds are seeing growing interest in defined contribution plans. Unfortunately, with defined benefit plans coming to a close, the risks of retirement are slowly but surely transferring hands. Instead of being in the hands of those who were unable to manage them, they are now in the hands of those who more than likely don’t understand them.
Currently, United States retirement is ruled by the 401-K. The US has seen low enrollment, inadequate contributions and poor investment choices among Americans. These things all lead to two well known, but poor, behavioral characteristics found in Americans when it comes to their retirement planning: inertia and procrastination. The Pension Protection Act of 2006 was supposed to help these issues by providing citizens with three innovations in plan design. These include automatic enrollment, automatic rises in contribution rates over time and a selection of investment options. Since this change, participants are less likely to opt out of the programs, but still very few understand all of their options.
Average retirement contribution rates range between 6-8%, as opposed to the 17% that is seen with decent retirement nest eggs.
From 2007 to 2012, the private sector has seen a 10% rise in the amount of employers offering a 401-K.
While these numbers are promising, the Act has not solved all issues associated with retirement plans. The “set it, forget it” mentality of the autopilot version creates the framework of desired behaviors at the onset. The necessary behavioral changes need to be reinforced and sustained, though.
Some human resource experts continue to feel that this revised 401-K model poses the employee as a planner; envisioning the employee with characteristics and behaviors that may not exist already.
Regardless of changes in circumstances, it seems that plan members very rarely change their initial asset allocation. It is like the blind leading the blind among employees of a company, as very few workers understand what they are actually choosing.
The autopilot kind of approach, while allowing employees to set it and forget it, does not take away long-term concerns on the behalf of workers. Over 60% of plan members said they had a constant concern about their long-term financial future. The resolution for this seemingly is beyond an autopilot approach. The approach would involve more guidance in the form of asset managers, plan members, plan sponsors and financial advisers.
HR experts feel that without a more holistic approach, DC plans are just as likely to fail as their predecessors.