New design for a new decade

Brought to you by Fidelity Investments

Employers can play a pivotal role in helping their employees achieve a sense of retirement readiness. Historically, however, four behavioral obstacles have been most responsible for keeping defined contribution plan participants from reaching their retirement savings goals. These include low participation, lack of ongoing engagement, inadequate savings rates, and inappropriate asset allocation.

“The benchmark for plan engagement is healthy plan behavior – employees who are enrolled, balancing priorities effectively, and saving enough, and investing age-appropriately.”

Strategies close at hand

An analysis of the more than 17,000 defined contribution plans and 11 million participants serviced by Fidelity (as of December 31, 2009), indicates that employers can influence specific employee outcomes through their defined contribution plan design. Better yet, design enhancements don’t have to be costly or labor intensive to make a measurable difference.

Excerpts from New Design for a New Decade

This paper looks at four strategic plan-design tactics that, based on Fidelity analysis, are helping plan sponsors better meet their employee goals and outcomes. The following excerpts from a newly issued Fidelity Perspectives paper, New Design for a New Decade, list these strategies, suggest related plan actions, and discuss the research findings behind the suggestions.

Strategy 1: Boost enrollment and participation.

Suggested plan actions:

Extend automatic enrollment to all eligible nonparticipants, not just the newly eligible.
Of the majority of employees who have been targeted for automatic enrollment in plans recordkept by Fidelity, a mere 10% have opted out.1 Deliberately extending this action to veteran employees can radically improve participation across an entire workforce.

Preserve or restore employer contributions

For many employees, the decision to enroll in or continue contributing to a plan is influenced directly by the availability of company contributions from their employer. In fact, 37% of Generation X and Generation Y employees (age 34¬–42 and 22–33, respectively) who don’t participate in their plan, name the lack of an employer contribution as a deciding factor(2).

Provide simplified, multitouch enrollment support

In six of seven major industries studied by Fidelity, a synchronized enrollment sequence consisting of personalized mailings, direct links to guidance, and an online enrollment tool has greatly outperformed more traditional enrollment efforts(2).

Strategy 2: Engage new participants quickly and offer guidance

Suggested plan actions:

Implement a formal onboarding program with proactive outreach. Formal onboarding programs—including proactive phone calls, e-mails, and an online landing zone—are prompting many new participants to fine-tune their strategy in the first six months. This reflects the sentiments of the plan participants Fidelity polled, 54% of whom would welcome proactive e-mails from their provider with guidance and information appropriate for their situation(3).

Offer continual guidance to help keep employees on track through every life stage.
Most employees embrace ongoing guidance, especially if targeted specifically to their needs. Nearly six out every 10 participants agreed that guidance offered by their employer is a significant benefit(3).

Strategy 3: Increase the amount employees save

Suggested plan actions:

Enroll all new participants in an automatic annual increase program—consider offering the option to existing participants. The traction of automatic increase programs has been impressive. Although only 6.7% of plan participants utilized an automatic increase program in 2009, 21% of all contribution increases were attributable to this plan feature(1).

Set a higher auto-enrollment deferral rate. Fidelity data indicates that employees tend to lock in to their initial auto-enrollment settings, including their default deferral amount. Eight out of 10 employees who start at a default deferral rate do not opt out, and keep or increase their deferral rate(1).

Raise the plan’s matching-contribution limit. Not only do employer matching contributions spur participation, they inform contribution decisions as well. The most common employer match rate, 6%, is also the most common employee deferral rate—evidence that participants are reluctant to leave match money on the table(1).

Deliver simple and actionable communications to help maximize contributions. A needs-based, multi-channel engagement program can reach participants not taking full advantage of the company match. Employees are 2.5 times more likely to increase their deferral amount after receiving a targeted multitouch communication(4).

 

Strategy 4: Promote age-based asset allocation

Suggested plan actions:

Gauge the balance of risk and return among participants by conducting investment reviews of participant asset allocation at the plan level. A look at the nuanced risks affecting employee-level performance, including absence of diversification and inefficient management, seems to justify the need for periodic plan-level reviews by an experienced investment consultant. For example, 65% of plan participants took on more investment risk than their age-based lifecycle funds (Fidelity Freedom Funds®) between 1999 and 2009(1). (Past performance is no guarantee of future results.)

Consider making the default option a target date fund and adding a managed account to the investment lineup. Even when presented with carefully structured investment lineups and ample education, many employees take an all-or-nothing investment approach, either too aggressive or too conservative. Yet the percentages show that participants are receptive to guidance, with 65% preferring to either delegate their investment decisions or get a professional’s validation before taking action(5).

Help keep participants on track through timely, ongoing engagement. An ongoing engagement program can encourage participants to revisit their investment portfolio as their situation changes and help ensure that their strategy is in line with their goals. Our data shows that only 11% of participants made an exchange in their DC account during the year ending December 31, 2009—an indicator that participants may not be managing their account as closely as they could(1).

Conclusion

The benchmark for plan engagement is “healthy plan behavior”—employees who are enrolled in their plan, balance priorities effectively, save enough, and invest age appropriately. And we believe employers play a significant role in driving such behavior and outcomes for their employees. Based on Fidelity’s direct observation and analysis, the plan design strategies and suggested actions covered here are helping shape such behavior in plans and among workforces nationwide.

For a complete copy of New Design for a New Decade, contact a Fidelity Representative at 866-418-5173.


Sources:

1. Fidelity Investments recordkept data of more than 17,000 corporate defined contribution plans and 11 million recordkept participants as of December 31, 2009.

2. Fidelity Investments Young Investor Research, August 2009 (based on a National Consumer Survey of 1,853 individuals).

3. Fidelity online survey: 400+ active Fidelity and non-Fidelity defined contribution participants, September 2009.

4. Fidelity Customer Knowledge Center, Onboarding Campaign Analysis, December 2009.

5. Fidelity Investments Defined Contribution Loyalty Study: 800 phone interviews of Fidelity defined contribution participants and 200 online surveys of non-Fidelity DC participants, June 2009.

Guidance provided by Fidelity is educational in nature, is not individualized, and is not intended to serve as the primary or sole basis for your investment or tax-planning decisions.
 
For plan sponsor use only.

Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917

© 2010 FMR LLC. All rights reserved.

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