"It will take years before our political leaders figure out how to reform health care and fix Social Security," she said. "But there is a great deal that financial service providers and plan sponsors can do right now." Johnson spoke last month at the East Coast Defined Contribution Conference in Palm Beach Gardens, Florida. The event was sponsored by Workforce Management and Pensions & Investments.
Johnson warned attendees that in the years 2020 to 2030, there is expected to be a $400 billion shortfall in retirement savings accounts. Johnson, who is expected to succeed her father, Fidelity CEO Edward Johnson, said the problem is that few employees participate in their 401(k) plans, and those who do often make poor choices. Citing Fidelity statistics, Johnson said that one-third of eligible employees do not participate in their 401(k) plans at all. One-fifth of participants don’t diversify and only invest in one investment option. Eighty-three percent do not seek out investment advice.
Johnson encouraged plan sponsors to automatically enroll employees into their 401(k) plans using lifecycle funds as the default. The funds reallocate money into more conservative investments as the investor ages. Companies also need to automatically increase the employee’s contribution to the plan on a periodic basis.
If employers do this, "inertia will work in (employees’) favor in most cases," she said.
By automatically enrolling employees in a lifecycle fund, companies could help low-income workers increase their retirement savings by 29 percent, she said.
Johnson’s remarks are supported by the findings of a recent study by Schlomo Benartzi, associate professor at the Anderson School of Management at UCLA. Benartzi’s study found that counterproductive investing tendencies and inadequate 401(k) plan design are the two main reasons that employees do not participate in their retirement savings plans. The study was sponsored by AllianceBernstein Investment Management, a New York investment management firm.
According to that study, employees don’t know what to do when 401(k) plans offer too many choices. As a result, they often invest in conservative mutual fund options, which won’t get them where they need to be to retire, the study says.
For every 10 funds added to the plan, there is a 5.4 percentage point increase in the allocation to money market and bond funds. In addition, there is a 1.7 percent increase in the probability that participants will allocate more than 50 percent of their contributions to money market funds.
And, as Fidelity also found, once employees choose investments for their plans, they fail to reallocate as they grow older. The study finds that 401(k) plan participants are more likely than not to leave their retirement plan accounts unchanged over a 10-year period.
In an interview with Workforce Management following her presentation, Johnson emphasized the need to address low-income workers’ needs, since they seem to be the ones who are most at risk of not having enough money for retirement. Managed accounts, while often a good solution for some 401(k) participants, may not make sense for this group because they are expensive, she said.
Creating more well-rounded advice programs to help employees save for both living and medical expenses in retirement is also a crucial task for employers, she said. "This issue is particularly urgent for lower-income workers," she said. Online advice tools may be sufficient for some employees, but companies need to think about advice that will reach all workers, she said.
Johnson’s speech hit home for Ray Oquendo, director of investment operations at Lucent Technologies, a Murray Hill, New Jersey, provider of communications technology. With 30,000 employees and more than 100,000 retirees, the topic of how to raise participation is "a constant conversation," at his company, he says. To address the issue, Lucent recently teamed up with Palo Alto, California-based Financial Engines to offer online advice to employees.
Jeff Maggioncalda, president and CEO of Financial Engines, says that Johnson’s speech was a watershed moment for defined-contribution programs.
"Her call to action represents the end of the chapter predicated on the assumption that we can create a generation of do-it-yourself investors," he says.