Why now, though, when the evidence for a real crisis in retirement savings has been piling up for years? I think people in our industry may simply feel that they've run out of easy options. And while auto-enrollment is becoming much more acceptable, by itself it's not going to produce the results anyone is looking for.
No more goodies left in the bowl
What can sweeten a retirement plan so that more employees will participate? Not much, according to both experience and quantitative evidence. A new study by the Pension Research Council finds that the usual incentives are alarmingly ineffective: While about 60% of employees surveyed would participate in any 401(k) plan, only 10% more would sign up to take advantage of an added employer match - even a generous one. Providing a wider range of investment options brought mixed results, from a mild increase in participation to an actual decrease due to decision "overload." And offering liquidity in the form of plan loans, a risky proposition at best, had no effect at all.
The authors of the PRC study recommend (you guessed it) auto-enrollment, as well as mandatory contribution rates and some other, more blue-sky propositions. We agree, and apparently everyone else does now, too. The regulatory climate is certainly more favorable. And from a legal perspective, experts now believe that the greatest risk plan sponsors face as fiduciaries is the danger of not doing enough to help employees retire comfortably. (See July's GuidePost for more on the subject, in case you missed it.)
But what happens after you auto-enroll all your employees?
Unless the "default settings" for auto-enrollment include an appropriate level of contributions into something like a managed account, participants will likely get a very scary surprise at retirement time.
If everything defaults into a money market fund, as commonly happens, the participant's investment future can be pretty frightening. Even if the default account is invested in a lifestyle or lifecycle fund, the danger is still there, because these time- and age-based funds don't look at the participant's whole financial picture.
We've always believed that a managed account solution is the only reasonable option for the average plan participant - and for the plan sponsor as well, especially if the provider takes on all fiduciary responsibilty, as we do. Now it seems the whole world is starting to agree. Awareness of managed accounts is even showing up in general business articles such as this AP story carried by the Cincinnati Post. And within the industry, a recent story in Plan Sponsor reports that fully 50% of the leading plan service providers either offer managed accounts or plan to do so within 12 months. Or at least they say they do.
Because we've done it for years for our clients, we know a thing or two about both managed accounts and coaxing non-participants. As the corporate world prepares to get on the bandwagon, it's important to remember that all managed accounts are not created equal.
To be as effective as possible, a solution should take into account the participant's entire financial situation, in some detail. It must rebalance the portfolio regularly and automatically, and change the asset allocation over time as needs change. The cost must be reasonable - a sticking point for many potential adopters, but one that smart technology can alleviate. The technology should be easy to use, and even allow particpants to enroll without touching the system (as we recently did, moving 30% of a large plan "hands free" into managed accounts). And of course, the underlying investment methodology must be sound.
Some really scary facts
Speaking of investment technique, many of us are so involved in asset management that we occasionally need to be reminded of the best way to boost retirement savings: Saving more money in the first place.
A recent Putnam study offers a sobering perspective. The study looked at the effects of contribution rate, asset allocation, and mutual fund performance on an "average" 401(k) plan account over a 15-year period. Guess which had the greatest impact on savings? Contribution level came out on top, asset allocation second, and fund performance dead last. According to the study, a portfolio that only held funds in the top quartile beat a bottom-quartile portfolio by a mere 6% over 15 years, while the difference between conservative and aggressive asset allocation added up to more than 20%.
So in the end, there really is no silver bullet. This is good news for werewolves. For the rest of us, it's a reminder that the basic laws of the retirement universe still apply: save early, save enough, and invest as professionally as possible.
So don't eat all your candy at once, people!