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PERSPECTIVES: Prepare your employees for retirement

Robyn Credico
Robyn Credico is the defined contribution plan practice leader, North America, of Towers Watson & Co. in Arlington, Va.

The financial implications of workers who stay at a company because they cannot afford retirement are real. Employers should analyze their defined contribution plans, says Robyn Credico, defined contribution plan practice leader, North America, for Towers Watson & Co.

It's no secret that most U.S. workers hired today will be relying on their defined contribution plans, 401(k) or 403(b), as a primary retirement savings vehicle. Although some organizations still offer defined benefit pension plans, about 70% of the Fortune 100 corporations only offer a defined contribution plan to new employees. Employers and defined contribution plan providers have both made strides in offering workers help, but the decision of how to save and how to invest now rests squarely on the shoulders of employees.

This transition to employee self-reliance was caused by many factors, including increased cost and cost volatility of defined benefit plans and legislative changes unfavorable to defined benefit plans. If we were to peek inside the heads of human resource and finance executives, we'd find another factor adding fuel to defined contribution plan prevalence: rising health care costs.

Today, employees are more accountable for their health and for paying a greater share of health care costs. As a result, workers are headed into retirement with a largely self-structured retirement savings, a larger share of health care costs and the likely absence of a helping hand from a traditional pension plan. This leaves employees and employers in a tough predicament. The financial implications of workers who stay at a company because they cannot afford retirement are real and affect organizations at many levels.

There are pockets of good news. Defined contribution providers have stepped up to help employees with new types of savings education and more diverse investment options. In some cases, the solutions are helpful. However, additional options create a layer of complexity that can lead to employee paralysis.


A decade ago, the average number of investment options in employer 401(k) plans hovered around four. They peaked at about 20 options a few years ago. Today, the average number of investment options is declining again as plan sponsors simplify platforms. This is true even though sponsors have more available types of investments, including active management, passive management, target-date mutual funds and for some, company stock.

Plan design can help spur a savings start but automatic enrollment hasn't been the lifeboat for retirement security many expected. Automatic employee 401(k) enrollment is only effective if it starts at a savings percentage that promotes savings accumulation (6% or higher) and includes automatic increases over time.

If the voice of plan sponsors could be combined, they probably would say that defined contribution plans are not as simple to manage as they thought. Employers largely think their defined contribution plans have robust education tools but these tools are underutilized and misunderstood. They also are increasingly concerned about the financial effect of unpredictable retirement patterns on their business.

How can organizations master these challenges? Employers can start by analyzing their plans and taking advantage of the advanced reporting options many defined contribution plan providers now offer. They need to look beyond averages, since averages don't offer a true picture of how prepared employees are for retirement. You can have a strong average annual savings rate of 8% of their salaries, but if you look under the hood, some employees nearing retirement are saving 20% and others are saving only 3%, 4%, or less. The same is true for investing behaviors. Groups of young employees invested in 100% fixed-income stable value funds can hide under a total plan asset-allocation picture that seems diversified.


Defined contribution plan providers can help with employee communications to address retirement needs gaps and many now include other costs in their analysis, including health care costs. But the effort to change behavior is often fragmented. Employers need to design saving and investment education programs that jointly address the actions their employees need to take to accumulate sufficient retirement savings. They need to use some of the newer analytical tools that estimate when individuals in the plan will be ready to retire and analyze these individual results by employee groups. This data is their key to generating an increase in retirement readiness because you start with a diagnosis of the issue you want to improve—how ready are my employees to retire?

Plan design can be a powerful tool in the quest to drive up readiness and the identity of the most successful organizations in that regard might surprise you. Often, they are not the employers with the largest budgets. Instead, they are organizations that have thoroughly considered their plan design strategy and at times balked at the traditional idea that defined contribution plans have to be a one-size-fits-all approach. For example, a tiered-match formula can help organizations with high turnover that want to allocate their match budget to reward long-term employees. For some organizations, waiting periods for the employer match or for plan entry also can be justified. Employee demographics are the most important factor in determining if certain design and investment choices would help improve the retirement readiness of your employees.

Sometimes merely turning a blind eye toward trends can be a winning strategy. For example, when index mutual funds were first introduced, they were wildly popular. These funds can be good options for some defined contribution plans due to their comparatively lower management fees. For other plans, the limited or lack of revenue-sharing in the investments may drive up overall participant cost and makes the plan less advantageous for employees. When a trend doesn't help meet the plan objectives for a particular organization, no matter how popular it is, it's not a trend the organization should adopt.


Experience is usually a good teacher and sometimes plan sponsors can best help their workforce by seeing what works, and what doesn't, and not be afraid to change course. For instance, plans that have been unsuccessful over several years in engaging employees in using advanced financial education tools should consider eliminating the tools to reduce participant costs and implement an education platform that is more appropriate. These actions may seem counterintuitive, but employers should consider any prudent option that will benefit participants and fit their budget.

Before reaching any decision, it is important for plan sponsors to decide what their philosophy is for the plan and use this philosophy to establish the plan objectives. Is the objective to provide retirement adequacy for all employees? Or is it to reward long-term employees as much as possible while offering a fair and competitive benefit to others? Or is it to offer a basic platform for employees to contribute on their own?

Articulating a plan's philosophy and objectives is no easy task. It varies by industry and each individual organization. It requires detailed analysis and custom planning, which may seem new to some employers. The objectives provide a blueprint to help direct the focus of how an organization is spending its budget and shape efficient plan design. There is a tremendous benefit for organizations to get their employees to retirement age with adequate savings. While the process may include some new elements, the results are well worth the effort.

Robyn Credico is the defined contribution plan practice leader, North America, of Towers Watson & Co. in Arlington, Va. She can be reached at 703-258-8142 or at

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