Retirement Readiness Can Employers Do More
Workers at DCP Midstream have a pretty sweet 401(k) plan.
DCP Midstream, a natural gas company, was ranked in July by online defined-contribution ranking company BrightScope as having the second best Denver-based 401(k) plan. The company matches 100 percent of employee contributions of up to 6 percent of base salary. In addition, DCP annually contributes between 4 and 7 percent of an employee’s pay, depending upon years of service, to their 401(k) plan account.
The company doesn’t automatically enroll its employees, but 2,720—or 82 percent of the employees— do participate, thanks to an intensive benefits education program, says Jill Sanford, DCP vice president of human resources. Employees are eligible immediately, and hold an average account balance of $78,600.
“We really view retirement readiness as a partnership,” Sanford says. “On top of the monetary role we play, we also play a role in educating employees to make the most of their contributions. We have a pretty sophisticated workforce that takes advantage of the 401(k) plan. They are quite focused on the role they play.”
Even so, the Employee Benefit Research Institute says that the funds DCP employees and other U.S. workers save may not be enough to last through retirement.
EBRI’s Retirement Readiness Rating examined retirement preparedness levels by age and income and found that no group is completely prepared. Nearly half (47 percent) of early boomers, people ages 56 to 62, won’t have enough for regular living expenses and uninsured health care costs. Nearly two-thirds (64 percent) of Americans in the two lowest pre-retirement income levels will likely exhaust retirement savings after 10 years.
While higher-income workers fare better, 5 percent may run out of cash after 10 years, and 13 percent may run out after 20 years of retirement, the study says.
“We have to do more than worry about whether people are saving; we have to worry about whether they are saving enough,” says Jack VanDerhei, EBRI’s research director.
The study, which was last conducted in 2003, took into account new pension funding trends including an increased number of defined-contribution plans (versus defined-benefit plans), automatic enrollment and automatic escalation of employee deferrals. (Under automatic escalation, the employee’s contributions are increased unless the employee specifically intervenes to halt the escalation.) People were considered to be at risk if their projected savings fell below a combination of certain estimated spending levels, including the Bureau of Labor Statistics’ Consumer Expenditure Survey.
Compared with 2003, Americans are saving more today, lowering risk levels. That year, early boomers had a 59 percent chance of being at risk, versus 47 percent today; late boomers, ages 46 to 55, had a 54 percent change of being classified as at risk in 2003, versus 43 percent now. With the growing trend of plan sponsors moving from defined-benefit plans to defined-contribution plans, the higher savings rate does show that 401(k) plans can work, VanDerhei says.
While some people still may ignore putting money into their retirement accounts, at least today they are more aware of their need to save than in 2003, says David Wray, president of the Profit Sharing/401k Council of America. “That’s a huge step in the process.”
While the Pension Protection Act of 2006 made it easier for plans to automatically enroll employees and automatically escalate employee contribution rates, through various mechanisms, many of the law’s provisions weren’t implemented until 2008, Wray says. Then, the 2008 financial crisis hit, delaying the expansion of defined-contribution plans.
“The system still has tremendous potential for growth,” Wray says. “The defined-contribution system is still in its adolescence. You don’t have people with 40 years [of] defined-contribution participation experience.”
In fact, there are many people with no employer-sponsored retirement savings experience at all. In July, the Bureau of Labor Statistics reported that 26 percent of all full-time workers in private industry do not have access to an employer-provided retirement plan.
According to 2008 data from the National Council of La Raza, the nation’s largest national Hispanic civil rights and advocacy organization, more than 65 percent of Hispanic workers were employed by companies that didn’t offer retirement plans. Leticia Miranda, associate director for economic and employment policy, says that 76 percent of the 3.4 million U.S. Hispanics ages 62 and older rely only on Social Security for retirement benefits.
“Even if Hispanics wanted to save, they do not have the ability,” through an employer, Miranda says. “That’s why it’s so important to ensure the solvency of Social Security.”
In a separate EBRI study focusing on retirement plan participation, 50 percent of the 17 million working African Americans had access to a retirement plan in 2008. Of the African Americans who had access to a plan, only 37.8 percent participated. In comparison, 54.3 percent of nearly 109 million white workers had access to a retirement plan, and 44.1 percent participated.
Employees who work for small companies often don’t have retirement plans, says Mike Alfred, CEO of BrightScope. But despite its very small size, BrightScope is currently setting up a 401(k) plan for its 30 employees. Alfred says the company spent the first two years crafting its website and analyzing 401(k) filings; now it’s time to create a retirement plan that will show that solid plans can be designed at the small-employer level.
“When you’re a startup, it’s hard” to do everything at once, Alfred says. “We are taking our time to do it right and to show small employers that, yes, you can have a great plan.”
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