Retirement Readiness: Even Employers Worry
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By Mark Miller,
Reuters
October 4, 2012

Numerous surveys show that U.S. workers are deeply pessimistic about their ability to save enough for a secure retirement. But it turns out their bosses are pretty worried, too. Only 14 percent of employees say they are confident they'll have enough money to retire, according to the Employee Benefit Research Institute.

But a survey of 401(k) plan sponsors released on Wednesday by consulting firm Towers Watson shows that only one in five respondents think employees make informed decisions about their retirement savings. Only 26 percent believe their employees have realistic expectations about what a defined contribution plan can provide, and nearly half expect a growing number of their older workers to delay retirement, the survey showed.

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And that's a best-case scenario: Towers Watson was studying attitudes among large companies that actually offer their workers a retirement plan. That's just the tip of the retirement readiness iceberg, because 58 percent of American workers have no coverage at all, according to the Center for Retirement Research at Boston College.

THE GOOD NEWS
There is some good news in the Towers Watson report, which includes responses from 371 plan sponsors with more than 1,000 employees and $10 million or more in assets. More employers are moving to low-cost passive index funds, and one in five offers only passive investment options. Plan sponsors also are focusing on reducing the record-keeping costs charged to their plans, which often are paid by employees.

They're accomplishing that by rejecting revenue sharing arrangements between record-keepers and fund managers, which obscure underlying costs. Thirty-seven percent of plan sponsors have moved to direct fees this year, up from 32 percent in 2009. "Larger employers want to know what their real record-keeping costs are on a per-participant basis," says Robyn Credico, a senior retirement consultant at Towers Watson.

Employees are also getting more transparent information on the fees they are paying through new quarterly 401(k) account statements, which plan sponsors were required to begin sending no later than the third quarter this year under new government regulations. The new forms will disclose expense ratios and actual dollar amounts paid in fees for each investment in a portfolio.

But there is still sometimes a big gap in workplace plans between effective communication and action. Nearly two-thirds of employers say they have provided adequate retirement investing resources to workers, but more than half don't think employees understand the design features of their 401(k) plan.

ENROLLED, BUT NOT SO READY
Plan sponsors also report that participation rates are up, thanks mainly to the growing use of automatic enrollment of new workers. Employers also are putting more intensive focus on reducing the fees charged to workers' accounts - one of the biggest drags on asset accumulation.

While higher enrollment is good, most of the auto-enroll plans driving increases are setting default contribution rates at 3 percent, which isn't high enough to allow workers to accumulate adequate savings at retirement. "Employees probably need to save 10 percent, and employers need to do a little more matching, too," Credico says. That indicates that Social Security will still play a critical role in keeping future seniors out of poverty. The Center on Budget and Policy Priorities estimates that 45 percent of Americans over 65 would fall below the government's official poverty line if they did not receive Social Security benefits. If today's workers don't start to save more, they will be in the same boat.

The Towers Watson study also uncovered these key trends:

1. Simplified investment options: Plans are simplifying their investment menus. The number of employers offering 20 or more options fell to 24 percent last year, from 32 percent in 2010. At the same time, nearly half of respondents offer a brokerage window - which lets more sophisticated retirement savers sidestep the standard investment menu and access a much larger number of mutual funds or stocks.

2. Low take-up for annuities: Despite all the talk about adding plan features permitting workers to easily convert nest eggs into lifetime annuities at retirement, adoption is low. Just 6 percent of plan sponsors offer a lifetime income distribution option - and among those who do, less than 5 percent of participants elect an annuity option.

3. Not much interest in Roths: A 2010 change in federal law encourages plans to add a Roth option, which permits retirement savers to avoid taxes on investment income down the road by paying income taxes upfront. Towers Watson found that 46 percent of plan sponsors have added Roths, but at more than half of those companies, less than 5 percent of participants are taking advantage of the option.

Credico chalks that up to the growing use of automatic plan features and confusion about the tax outlook. "With auto-enrollment, most participants simply pick default investment options, which usually are tax-deferred. So they're not really paying attention to the Roth option. And people find the Roth confusing. You're asking them to predict their tax status years down the road. Right now, no one is even sure what tax rates they'll be paying three months from now."

(The writer is a Reuters columnist. The opinions expressed are his own.)