DCIIA: DC System Can Do Better Without Additional Policy Changes

A new report from the Defined Contribution Institutional Investment Association (DCIIA) contends that leveraging auto features, minimizing money out and helping to eliminate barriers to long-term retirement savings are three key steps that DC plan stakeholders can take to help Americans prepare for a financially secure retirement.

With simulation analysis provided by the Employee Benefit Research Institute, DCIIA’s report, “Design Matters,” explores the current state of 401(k) plans on overall retirement preparedness in a post-Pension Protection Act of 2006 (PPA) environment, with a particular focus on middle-income workers.

The study emphasizes that the current DC system is significantly different from the one that existed prior to the PPA, as the legislation facilitated many enhancements, including auto enrollment, auto escalation, QDIAs and permanently higher contribution caps. Prior to the PPA:

  • 19% of DC plans had auto enrollment; more than 60% of large DC plans have this feature today; and
  • 9% of plans offered automatic escalation; more than 80% of plans with automatic enrollment now have automatic escalation.

Automatic Plan Features Have Been a Success

The paper argues that middle-income workers who spend their entire careers in plans with auto enrollment and auto escalation are projected to experience significantly better outcomes than similar workers in plans without auto features.

In a simulated model comparing middle-income workers who worked exclusively at companies that did and did not offer auto features in their DC plans, the findings show a more than 30% difference in projected earnings saved, by virtue of participating in a plan with auto features.

Greater Use of Tools Already in Place

The report argues that the DC system is already equipped with many of the tools it needs to drive improved retirement outcomes and that “wider and more consistent adoption of these tools” could make a significant difference.

Pointing out that a number of policymakers have proposed changes to the existing safe harbor regulations for automatic enrollment and automatic contribution escalation, the report contends that the current regulations are supportive of “robust” defaults, such as setting auto enrollment levels at more than 3%, and allowing for auto escalation default increases of 1% to 2%, up to a maximum of 15% of salary.

“Indeed, there is currently no regulatory reason not to implement robust defaults, unless the DC plan is among the small group of plans that adheres to the PPA’s non-discrimination testing safe harbor,” DCIIA says.

Limiting Asset Leakage Improves Outcomes

Limiting plan loans, hardship withdrawals and cash-outs could increase projected retirement assets and income by as much as nearly 10% for participants who take advantage of these features, according to the report. In addition, DCIIA notes that, while loans taken against retirement plan assets may be a better choice than other forms of consumer debt, they can create problems when an employee terminates employment with an outstanding loan.

Eliminating Barriers to Retirement Savings

The report highlights how there is growing interest in financial wellness programs. “While retirement education in some form has been offered for decades, employee utilization of it has been low, and it has therefore had a less-than-desired impact on participant plan engagement,” the report explains. Plan sponsors and other industry participants are working to solve this challenge by delivering more targeted, meaningful messages at times when people actually need the information, the report adds.

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