For the first time, in 2012, more people will be saving for retirement in 401(k)-type plans than in traditional pensions, and that means employees need better guidance from plan sponsors, State Street Global Advisors reported Wednesday.
"In 2012, defined contribution will surpass defined benefit as the predominant retirement vehicle globally, which is a real shift," said Kristi Mitchem, senior managing director and head of global defined contribution at State Street Global Advisors, at a media briefing in New York.
But the DC system falls short because some employers don't offer a savings plan while others offer low matches, and some employees choose not to participate in a DC plan even if it is available, Mitchem said.
DC Leakage Leads to Regret
"Leakage," or money coming out of the retirement savings system, is one of the greatest threats to retirement savings, yet it often goes unaddressed, said Brigitte Madrian, a public policy and corporate management professor at Harvard University's Kennedy School of Government, who also spoke at the briefing.
Leakage occurs when employees cash out of their DC plans when leaving a job, or when they make hardship withdrawals or take out loans. The Government Accountability Office reported in 2006 that cash-outs at a job change caused $74 billion of the $84 billion in total leakage.
Though representing only 3% of total retirement savings assets, leakage from job changes has "a nontrivial impact" because employees usually come to regret letting their retirement savings run through their hands, Madrian said.
According to a Fidelity retirement survey in 2011, regret is correlated with the amount of leakage. A majority, 55%, of employees who responded said they regretted taking a cash distribution when changing jobs, while only 29% regretted taking out a loan against a 401(k).
