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Retirement Plan Trends

November 19, 2000
Related Topics: Benefit Design and Communication, Retirement/Pensions, Featured Article
A television commercial for SunAmerica, a financial services company, shows abeautiful designer watch. "At $6,500," says the advertisement,"this world-renowned designer timepiece could cost you more than $30,000 inretirement savings." It goes on to say that a $13,000 pearl necklace couldcost $60,000 in retirement savings; a $70,000 luxury car, $326,000.

Hyperbole? Perhaps, but SunAmerica asserts that its "hypotheticalexamples assume 8 percent pretax annual growth compounded over 20 years."In other words, even if these examples are overstated, there’s some truth inthem: what you save or spend today directly affects the amount of money leftover at retirement.

For employers, retirement benefits packages are of the utmost importance, butthe advent of 401(k)s and other new options competing against traditionaldefined benefit plans has left some employers with a dizzying array of choices.

"Rapid technological innovation, changing employee demographics, and aproliferation of investment and financial information available to participantsare just a few of the societal forces that are challenging sponsors of 401(k)plans," says a study conducted by Hewitt Associates LLC. "These forcesrequire administrators of 401(k) plans to continually evaluate the effectivenessof and competitiveness of their plans, with the ultimate goal of increasingemployee satisfaction."

Defined Contribution or Defined Benefit?

Understanding Employee Needs

Picking a Program

The Choice

Defined contribution or defined benefit?

Although 401(k)s and other defined contribution plans get most of the pressthese days, defined benefit plans, such as pensions, continue to be the mostcommonly used retirement plans. According to Hewitt’s 1999 publication, SurveyFindings: Trends and Experiences in 401(k) Plans -- and contrary to popularbelief -- 401(k)s represent less than half of the primary retirement plans formost employees.

According to this study, 67 percent of the 484 employers surveyed are stillusing defined benefit pension plans and other financial security programs inaddition to 401(k)s. Of the companies Hewitt surveyed, 99 percent offered somesort of defined contribution plan and 76 percent offered some sort of definedbenefit plan, indicating that many employers offer both. Currently, 78 percentof all employees participate in 401(k) plans when they’re offered, a 7 percentincrease from 1991.

Jennifer Frighetto, a spokesperson for Hewitt, attributes the 401(k) plan’sincreasing popularity in part to "the mobility of the plan and theadvantage of not having to work at a company for 40 years to retain yourbenefits."

"Now, with people changing jobs an average of five times in theircareers, they need something they can take with them. It’s also a reason whyemployers are looking at other forms of pension plans, like cash balance plans,where the benefits are more evenly distributed throughout the person’scareer."

Hewitt’s research is supported by a similar study from the Employee BenefitResearch Institute (EBRI). Its report, Personal Account Retirement Plans: AnAnalysis of the Survey of Consumer Finances, concludes that "overall, ‘personalaccount plans’ represented nearly one-half (49.5 percent) of all the financialassets for those families with either a defined contribution plan account, IRA,or Keogh in 1998. This was a significant increase from 43.6 percent in 1992. Theaverage total account balance in personal account plans for families with a planin 1998 was $78,417, an increase of 54 percent in real terms over the 1992balance of $50,914 (expressed in 1998 dollars)."

Understanding Employee Needs

For employees, one of the 401(k) plan’s main attractions is that it allowsthem to maintain some control over their own retirement finances. According toEBRI, a mere 31 percent of workers today have confidence in Social Security’sability to maintain benefit levels for their retirement, along with a dismal 35percent confidence level in Medicare.

The study also shows an increase in the number of households that haveactually attempted to calculate what they need to save for retirement. Half ofthose who have done so report that this has "resulted in a change in theirbehavior, such as saving more and/or changing where they invest their retirementsavings."

Still, only 26 percent of all workers feel very confident about their overallretirement income prospects, with 47 percent feeling somewhat confident.

"A lot of people say they’re ready for retirement," says JoelRich, a senior vice president of the Segal Company, "but if you look atwhat they have in the bank, it’s maybe $100,000. It sounds like a lot ofmoney, but if you don’t have any other assets, I don’t know if that’sgoing to be enough."

The other side of retirement planning is that not everyone is eligible for a401(k) plan. Of the companies interviewed by Hewitt, 100 percent are currentlyoffering 401(k) enrollment to salaried employees, but only 71 percent areoffering it to non-union hourly employees, and only 19 percent to unionhourly-wage employees. Among those companies that did offer defined contributionplans to hourly employees, there was generally a high level of participation.

While employers often allow as much as 15 percent of an employee’s paycheckto be contributed to a plan, the average employee contribution is 6 percent.

Picking a Program

Perhaps the question that employers should ask themselves before committingto a retirement plan is, "What do we need it to accomplish?" For Rich,the answer is anything but clear-cut.

"I read a recent survey where retirement and investment education wererated as a number one priority for companies," says Rich, "especiallyin an era where attracting and retaining employees is difficult. It’sbeginning to take a lot more. It’s one thing if people were retiring and youcould get bright people in. People are retiring and no one knows what theyknow."

Rich is pointing toward one of the possible pitfalls of particularly generousretirement plans. People are retiring as early as age 55, with no one in placeto carry on that person’s knowledge and expertise -- a danger compounded bythe tight labor market. Seemingly, it’s becoming more and more essential forcompanies to have employees work to an older age, forcing HR into a precariousposition.

As for 401(k) plans, Rich concurs that they generally present fewer hasslesfor employers. With a traditional defined contribution plan, the employer has afirm grasp of how much money to allot toward retirement each year, whereas witha traditional pension, you have to look back at an employee’s whole career, orat least a certain amount of history. With a traditional 401(k) plan, "youput in a certain amount each year, and let the bank take care of the rest."

One common method of encouraging participation in 401(k) plans is the use ofmatching contributions from the employer. Seventy-two percent of all companiesprovide a fixed match, such as 50 cents for every dollar contributed up to 6percent of pay -- a formula that 32 percent of companies use.

The largest single factor in determining an employee’s participation in a401(k) plan, however, is simple education about the program. For example, asurvey conducted by financial consultants KPMG indicates that while highly paidemployees are about as likely to participate in a 401(k) plan whether there’sa training mechanism or not, the presence of educational seminars makes animmense impact in the numbers of lower-paid employees who participate. Anaverage of 77 percent of lower-paid employees participated in 401(k)s incompanies that offered educational seminars on investments, compared to 33percent in companies at which no education was offered.

Seminars and workshops, along with availability of written materials andonline access, are the methods most companies use to effectively educate theirworkforces on investments. Other methods, such as video conferencing andfinancial help lines, were considerably less common.

The Choice

The spectrum of benefit plans available is enormous, and changing. At themoment, 401(k) plans are favored because of their relative simplicity foremployers, but Rich observes that some of that ease comes from the fact thatthey are more commonly outsourced than, say, the traditional pension, which hepredicts will eventually become more commonly outsourced as well. A decline inthe bureaucracy and effort needed to maintain pension plans could shift thebalance away from 401(k)s to the pension, which has a more predictable outcomefor the retired employee.

In the end, the choice of which retirement benefit package an employerchooses rests within the company’s goals and values: balancing desiredbusiness results with what the company wants for its employees’ retirement.Moreover, the trick lies in providing retirement benefits that will entice notjust prospective employees, but also the kinds of prospective employees that thecompany needs.

"The question is, ‘How do I keep a workforce to do my business?’ Ina lot of ways, traditional pensions are better," Rich says. "Theyguarantee a certain level of benefits. On the other hand, in some high-techcompanies, for example, the people they’re trying to attract are young andwant stock options. It’s not a one-size-fits-all thing."

Workforce, November2000, Vol. 79, No. 11, pp. 68-76 -- Subscribenow!

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