Retirement plan sponsors and consultants up on the latest ideas about best practices in defined contribution (DC) plans may have support for plan design reform from an unexpected source: plan participants themselves.
The notion that the two groups are not far apart on some innovative retirement plan changes is borne out in a new survey of 1,000 current or past participants in a 401(k) plan carried out by Greenwich Associates on behalf of Northern Trust, which administers some $222 billion in DC assets.
The study, "The Path Forward: The Ideal DC Plan May Be Closer Than You Think," is part of an annual research series that normally takes account of expert opinion — the views of plan sponsors or consultants. The current study, however, looks at plan design from the public's perspective.
"This year, we hit the pause key on soliciting plan sponsor feedback, to find out where participants concur — and differ — with those who are responsible for designing and overseeing their DC retirement programs," said Jim Danaher, managing director of defined contribution solutions at Northern Trust, in a news release.
"The results are encouraging, because they indicate that participants would accept limits on longstanding DC plan features such as daily liquidity or taking loans if the reforms could lead to improved savings rates, investment returns and retirement outcomes," Danaher continued.
Indeed, best practices that might foster greater focus on the long term may not be an area of disagreement between plan sponsors and participants. The study says that plan participant behavior may belie the belief that plan participants want the ability to make daily portfolio changes.
The survey found that while a majority — 56% of participants — say the ability to change their investment mix is important, a far larger percentage, 91%, say they would be willing to sacrifice daily access to their account if doing so would offer greater return potential.
"What participants do supports what they say: many participants do not access their accounts regularly despite having daily access," the report states. It adds that 51% of those surveyed hadn't changed their investment mix for at least 2 months, "including many who haven't made a change in two or three years."
The Northern Trust report advocates that plan sponsors consider "premixed portfolios with less liquid investments that have greater long-term return potential," saying that since investment managers don't necessarily make daily changes in their investment mix, "why enable participants to change investments daily?"
Reached for clarification by ThinkAdvisor, Danaher had alternative investments in mind as examples of less liquid investments with increased return potential, specifying "strategies such as hedge funds or private equity that have typically been used in defined benefit plans."
A second significant plan design change involves the issue of leakage of retirement assets prior to retirement. Northern Trust says 91% of plan sponsors allow participants to take loans, assuming access to these funds is a condition of their participation in DC plans.
Yet the survey finds that 76% of participants have never taken a loan, 57% think only emergency expenses could justify such loans and only 13% consider taking a future loan. If, the report asks, participant borrowing has not dramatically increased even in hard economic times, why make 401(k) loans so easily available?
