Understanding what participants say and do uncovers opportunities to enhance plan design.

Transcription

1 line of Sight The Path Forward 2013: survey results THE IDEAL DC PLAN MAY BE CLOSER THAN YOU THINK Understanding what participants say and do uncovers opportunities to enhance plan design. During the last decade, 401(k) plan design has dramatically evolved as defined contribution (DC) plans became the primary retirement savings vehicle for most corporate U.S. workers. Automatic defaults are becoming more commonplace, and target date funds reflect investment strategies once found in defined benefit plans. While nearly 70% 1 of plan sponsors believe 401(k) plans are capable of providing sufficient retirement income to working Americans, many are concerned that participants aren t fully optimizing their 401(k) plan value. At Northern Trust, we believe more can be done to drive financial success at retirement. Our 2013 Path Forward survey, which builds on our past surveys of plan sponsors and consultants, reveals what participants think about plan sponsors efforts to help them achieve more desirable results at retirement. Actionable and meaningful enhancements to existing plan features can take DC plans to the next level. The ideal DC plan may be closer than you think. September The Path Forward 2012, Importing Winning DB Strategies into DC Plans, Northern Trust, October 2012 northerntrust.com/pathforward Line of Sight: The Ideal DC Plan May Be Closer Than You Think 1 of 8

2 About the Survey In June 2013, Northern Trust partnered with Greenwich Associates to conduct an online poll of 1,000 current or past participants in a 401(k) plan. Results from our fourth annual survey of the DC industry reveal participants perspectives regarding: Investment selection Liquidity Loans 401(k) vs. Rollover IRA question 1: In your opinion, should employee participation in a 401(k) plan be optional? 5 Definitely Definitely not 11 investment selection question 3: How frequently do you review your 401(k) account? Daily 3 Weekly 11 Monthly 26 Quarterly 46 Annually 11 Never 3 question 2: In your opinion, are you on track to achieve your personal retirement savings goals? Yes, definitely on track 22 Somewhat on track 40 Uncertain 14 Probably not on track 13 No, definitely not on track 11 Question 4: Looking at your 401(k) account, what is your current investment mix? Individual stock, bond, stable value or money market funds Target date fund (based on a targeted year of retirement) Target risk fund (conservative, moderate, aggressive) 27 Balanced fund 32 Company/employer stock 11 Mix of variety of funds 1 Don't know 2 ; however, this question allowed multiple answers resulting in 1,100 mentions. 2 of 8 northerntrust.com/pathforward Line of Sight: The Ideal DC Plan May Be Closer Than You Think

3 question 5: How did you choose this investment mix? The investment mix was selected for me through the 401(k) plan s default option The investment mix was selected through the 401(k) plan s managed account option I selected the investment mix on my own, based on my knowledge I selected the investment mix with the help of a personal financial advisor Question 8: If the employer sponsoring your 401(k) plan decided to re-enroll you and directed (defaulted) your investments automatically into a target date fund, how would you feel? Very pleased 5 Pleased 18 Indifferent 31 Displeased 29 Very displeased 17 Question 6: When did you last make a change to your investment mix? Less than 1 month ago 6 1 month to less than 6 months ago 19 6 months to less than 12 months ago 23 1 year to less than 2 years ago 20 2 years ago or more 23 Never 8 I didn t know I could make changes 1 Base = 490 participants who selected their investment mix on their own or with the help of financial advisor. liquidity Question 9: How important is it for you to be able to access your account on a daily basis to take a loan? 5 Extremely important Not at all important 48 question 7: How frequently do you plan to make future changes to your investment mix? Monthly 3 Quarterly 22 Annually 34 Not more than once every 2 3 years years 6 Never 8 Base = 490 participants who selected their investment mix on their own or with the help of financial advisor. Question 10: How important is it for you to be able to access your account on a daily basis to take a withdrawal? 5 Extremely important Not at all important 45 northerntrust.com/pathforward Line of Sight: The Ideal DC Plan May Be Closer Than You Think 3 of 8

4 Question 11: How important is it for you to be able to access your account on a daily basis to change your investment mix? 5 Extremely important Not at all important 12 Question 14: Would you consider borrowing from your 401(k) balance in the future? Never 24 Not likely 44 Uncertain 19 Likely 9 Definitely 4 Question 12: Would you prefer daily access to your 401(k) assets to take loans/withdrawals and change your investment mix or more limited access if you could invest in a fund with greater return potential? 5 Greater return potential Prefer daily access 5 loans Question 13: Have you borrowed from your 401(k) balance in the past? Yes, currently have a loan outstanding 13 Question 15: For which of the following circumstances would you consider borrowing from your 401(k) account? College/education expenses 7 Purchase of a home 14 Costs of a new child 2 Significant emergency expenses (i.e., family, medical) 57 Repayment of outstanding debt 15 Wedding expenses 3 Family vacations 2 Loss of job 1 Transportation expenses 0 Buying a vehicle 0 Last resort/after using up all other assets Other 1 Don't know 0 0 Yes, no longer have a loan outstanding 11 Under no circumstance would I consider borrowing 28 No 76 ; however, this question allowed multiple answers resulting in 1,042 mentions. 4 of 8 northerntrust.com/pathforward Line of Sight: The Ideal DC Plan May Be Closer Than You Think

5 Question 16: Do you know that, typically, you pay income tax twice on the amount you borrow from your 401(k) plan account, first as you repay the loan with after-tax deductions from your pay, and second when you take any taxable distributions from your account balance? Yes, I am aware of this potential double taxation 74 No, I was not aware of this 26 Question 19: Why did you decide to roll your 401(k) plan account balance into an IRA? I wanted more control over my investments 50 It was simpler than moving to my new employer s 401(k) plan The waiting period required by my new employer to roll into their 401(k) plan was too long My new employer s 401(k) plan did not permit a rollover from a prior employer s plan Unemployed/did not have new job yet 5 Question 17: How does the information about the potential tax effects from 401(k) loans stated in the prior question affect your opinion about taking a loan from your plan account? Still consider borrowing from my 401(k) plan account under most circumstances 5 Financial advisor's advice 1 No 401(k) plan to roll into 1 Other 4 None/No answer 0 Don't know 1 Still consider borrowing from my 401(k) plan account, but only under emergency circumstances Be much less likely to borrow from my 401(k) plan account at all Never consider borrowing from my 401(k) plan account 401(k) vs. rollover IRA Base = 218 participants who rolled into an IRA when changing jobs. Question 20: When deciding whether you want to move your assets from one employer s plan to another employer s plan or even to a rollover IRA what information do you compare when making your decision? Cost 40 Types of funds offered 46 Question 18: If you have ever changed jobs, what did you do with your 401(k) plan account balance from your prior employer? Rolled my 401(k) plan account balance with my prior employer into the 401(k) plan of my new employer Rolled my 401(k) plan account balance with my prior employer into an IRA Took my 401(k) plan account balance in a lump sum as a taxable distribution Investment manager(s) of the funds offered 20 Ease of switching from a prior employer s 401(k) plan into a new employer s 401(k) plan I would not compare any information 10 Other 4 ; however, this question allowed multiple answers resulting in 1,331 mentions. 47 Kept my 401(k) plan account balance with my prior employer 20 Base = 500 participants who have changed jobs; however, this question allowed for multiple answers resulting in 551 mentions. northerntrust.com/pathforward Line of Sight: The Ideal DC Plan May Be Closer Than You Think 5 of 8

6 Question 21: When you retire, which of the following actions are you likely to take with your 401(k) account balance(s)? Keep my 401(k) plan account balance in my most recent employer s plan Roll over my current 401(k) plan account balance into an IRA Take a lump sum payout as a taxable distribution Take a lump sum and purchase an annuity about our respondents age 18 to to to to >65 3 Question 22: What did you do with your 401(k) account balance(s) upon retirement? Kept my 401(k) plan account balance in my employer s plan Rolled over my current 401(k) plan account balance into an IRA Took a lump sum payout as a taxable distribution Took a lump sum and purchased an annuity 5 Base = 200 retirees gender Male 52 Female 48 current employment status Currently Employed 80 Currently Unemployed 0 Question 23: Why did you decide to roll over your current 401(k) plan account balance into an IRA at retirement? More control over my investments 32 Simpler than staying in my last employer s 401(k) plan New IRA provides better or more investment choices Wanted a clean break from my last employer Did not have another option 3 Advised to do so 10 Other Retired 20 annual income Less than $25,000 6 $25,001 to $50, $50,001 to $100, $100,001 to $250, More than $250,000 2 Base =103 retirees who rolled into an IRA at retirement. 6 of 8 northerntrust.com/pathforward Line of Sight: The Ideal DC Plan May Be Closer Than You Think

7 employer size (# of employees) employer industry Consumer and industrial products/services 14 <100 employees 0 Energy and resources to 250 employees 16 Financial services/insurance to 500 employees 14 Health care and life sciences to 1,000 employees 15 1,001 to 10,000 employees 35 >10,000 employees 20 Professional services Public sector/not for profit Retail Technology, media and telecommunications Transportation 3 Educational services 4 take the path forward Hospitality 0 Sales & marketing 1 Security services/military 0 You can learn more about our 2013 findings, summarized here, by subscribing to our 2013 Path Forward Action Plans. You ll receive insights and recommendations before we release them to the general public. Subscribe today at northerntrust.com/pathforward. Other 12 Base = 800 respondents The Path Forward: DC Research Series The Path Forward, our annual DC research series, explores topics at the forefront of DC plan design and offers actionable solutions plan sponsors can take today and in the future to help their participants achieve better retirement outcomes. 2012: Importing Winning DB Strategies into DC Plans identifies areas where DC plan sponsors can improve their plans by importing DB plan practices and presents winning strategies industry leaders are embracing. 2011: Engaging the Younger Employee in DC Plan Participation highlights tactics to address the challenges of engaging employees younger than 35 in DC plan participation. 2010: Designing the Ideal DC Plan reveals how DC plan sponsors and investment consultants would design the ideal plan and identifies action steps that could be implemented. Explore our past research and DC capabilities at northerntrust.com/dcsolutions. line of Sight line of SighT line of the Path Forward SighT The Path Forward The Path Forward Importing Winning DB Strategies into DC Plans Engaging the Younger Employee in DC Plan Participation Designing the Ideal Defined Contribution Plan northerntrust.com/pathforward Line of Sight: The Ideal DC Plan May Be Closer Than You Think 7 of 8

8 We hope you enjoy the latest presentation from Northern Trust s Line of Sight. By providing research, findings, analysis and insight on the effects and implications of our changing financial landscape, Line of Sight offers the clarity you need to make better informed decisions. Northern Trust Corporation, Head Office: 50 South La Salle Street, Chicago, Illinois U.S.A., incorporated with limited liability in the U.S. Asset management at Northern Trust comprises Northern Trust Investments, Inc., Northern Trust Global Investments Ltd., Northern Trust Global Investments Japan, K.K., The Northern Trust Company of Connecticut and its subsidiaries, including NT Global Advisors, Inc., and investment personnel of The Northern Trust Company. IRS CIRCULAR 230 NOTICE: To the extent that this message or any attachment concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law. For more information about this notice, see northern trust 2013 northerntrust.com/pathforward Line of Sight: The Ideal DC Plan May Be Closer Than You Think 8 of 8 Q (10/13)