While retirement readiness has improved over the past two years for many DC plan participants, new data bolsters the case that the chances of achieving retirement readiness are highest when plan sponsors take advantage of automatic plan features.
According to John Hancock Retirement’s most recent State of the Participant report, nearly 53% of its DC retirement plan participants are positioned to replace at least 70% of their current income in their retirement years. In fact, this year’s income replacement data saw an increase of nearly five percentage points from 2020, which is the highest income replacement the firm has seen since its data has been available.
Consider, however, that the percentage of retirement-ready participants in plans using both auto-enrollment and auto-escalation reached 65% in 2022. This is up 10 percentage points from 2020—and widens the retirement readiness gap between plans with no auto features and those that use both auto-enroll and auto-increase to a sizeable 13% (65% to 52%)
The report also found that an increase in the auto-escalation limit has a positive impact on retirement readiness. While a 10% cap has historically been the standard, approximately 60% of plan sponsors are now selecting limits of 15% or higher, with 25% and 15% being the most popular choices, the firm notes.
What’s more, participants are open to saving more each year through auto-escalation. With each passing year, fewer participants opt out of automatic-escalation over five years—with only 5% opting out of auto increases in Year 4 and only 3% in Year 5.
“The opt-out data suggests that communicating in the first year of enrollment is vitally important to help participants understand the importance of saving more each year and the impact it can have on reaching retirement readiness goals as the most recent report shows more than half of participants opted out of auto-escalation in the first year of enrollment,” the report emphasizes.
As for helping participants lock in steady progress, John Hancock suggests that plans consider running periodic auto-sweep campaigns to give employees who have previously opted out of “a nudge” to get back into the plan.
Moreover, if your auto-increase cap is below 10%, the firm recommends increasing it. “Once participants see the effects of the first three or four annual contribution increases, they’re unlikely to opt out of the feature,” the report further emphasizes.
Mixed Distribution Decisions
Despite the positive news about improved retirement readiness, John Hancock also found that a large number of participants did not necessarily make the optimal decision about what to do with their savings when leaving their jobs.
While about 6 in 10 participants leaving their DC plan elected to move their money directly to an IRA or a new employer’s DC plan, roughly 4 in 10 of those leaving their plan cashed out their account—which exposed them to immediate tax liability, possible tax penalties and a step backward from their retirement goals.
“This represents an opportunity for plan providers to provide all departing employees with estimates of the amount they would save on current taxes as well as the potential growth they would experience by making a timely rollover or electing to remain in their current plan,” the report suggests.
To help terminated participants to take distributions if an urgent need arises without depleting their entire plan account, John Hancock further suggests that sponsors consider allowing partial distributions in retirement if they don’t already make them available.
All data in the report is from John Hancock’s open-architecture platform. The 2022 data is based on its 1.6 million participants, 1,716 plans and $108.5 billion in assets under management and administration as of March 31, 2022.
