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Amid Shifting Landscape, Notion of 'Normal Retirement' Is Changing

With longer life expectancies and workforce participation rates pushing past age 65, Americans’ notion of “normal retirement” is changing, according to a biennial survey.

The 2019 edition of Deloitte’s Defined Contribution Benchmarking Survey confirms this trend, showing that many employees continue to work even though they are eligible to retire. In fact, the workforce participation rate among those age 65 or older has surpassed 20% for the first time in more than 50 years, the study notes. 

“Old modeling and old thinking in which the projection and modeling assumptions of a classic retirement at age 65 need to be revisited,” the firm emphasizes. 

“Employee preference” was found to be the most commonly cited reason for continuing to work while eligible to retire, but plan sponsors also noted that employees are not retiring due to the need to keep health care coverage, as well as unmet financial needs that prevent retirement. 

In response, Deloitte says that plan sponsors are shifting focus to a broader picture of financial wellness to better understand the short-term and intermediate barriers participants face in saving for retirement. As such, they are changing plan features to improve effectiveness, enhancing digital capabilities and moving toward a more focused approach on participant financial well-being. 

Auto-enrollment

Plan sponsors are continuing to react to the shifts in retirement participation by defaulting participants at higher default auto-enrollment rates. According to the findings, 48% of plan sponsors have increased to default rates of 5% or above, up from 38% in 2017. 

Counterbalancing this increase, however, Deloitte also saw a rise in the auto-enrollment opt-out rate, with plan sponsors indicating 10% or more of participants opt out 9% of the time, up from just 4% in 2017. 

Investments

Deloitte also observed a significant shift in the overall average weighted expense ratio paid to be 0.5% or less for 75% of plans, which was 40% in 2017. The study notes that this is also seen in the reduction of plans paying all fees through investment revenue from 39% to 33%.

Plan sponsors are also shifting their investment monitoring process. While using external entities for investment monitoring remained relatively the same, using internal staff declined 10 percentage points from 2017, from 49% to 39%. What’s more, the study notes that nearly 60% of plan sponsors utilize an ERISA 3(21) advisor to make investment recommendations to the plan sponsor.

Evolving Plan Features

Roth Features: A prominent trend from 2019 shows a significant increase of Roth features. The survey found that 80% of respondents currently offer a Roth feature, up from 70% in 2017 and 60% in 2015. Certain industries – including public sector and energy and resources – were found to lag others in offering Roth plans. Adoption of Roth plans also jumped in 2019, with 45% of sponsors now reporting a utilization rate of more than 10%, up from just 23% in 2017, the study notes. Those with less than 5% adoption account for just 29% of respondents, down from 50% in 2017.

Student Debt: Meanwhile, despite being a top concern of employees entering the workforce and total student debt eclipsing $1.5 trillion, only 1% of plan sponsors offer student debt repayment and refinance programs integrated with their DC plans. That said, 38% of plan sponsors report interest in considering this integration. 
Even when they are offered, however, Deloitte found that use of these programs is low, with plan sponsors reporting average participation rates in student debt repayment and refinance programs of 6% and 2%, respectively.

HSAs: Plan sponsors have an opportunity to encourage retirement and health care savings through shifting employee mindset on HSAs. Deloitte notes that 70% of plan sponsors offer HSAs, but the plans are still largely viewed as health spending accounts, with 0% of plan sponsors seeing HSAs exclusively or primarily as retirement savings vehicles. 
The study observes that with an average account balance of $3,006, HSAs are “unlikely to make a considerable impact on retirement readiness unless more emphasis is put on increasing balances and saving for retirement.”

Mobile Usage: A growing trend is the offering of mobile phones as a means for participants to enroll in, view and make transactions in their DC plans. In Deloitte’s 2019 findings, 75% of plan sponsors now offer mobile phone transactional features, up from 71% in 2017. Moreover, the study notes that nearly 80% of large plan service providers offer mobile access. 
Deloitte also notes that there’s been an increase in plan sponsors offering online statements. In 2019 the figures show that 77% of all plan sponsors provide online statements – up from 66% in 2017 and 54% in 2015.

The findings are based on the responses of about 240 plan sponsors, reflecting a varied population of industries, with financial services/insurance, manufacturing, public sector, and health care and life sciences as the most prevalent.