Employers and America’s retirement savings

Plan sponsors, thank you. You make retirement savings happen so that America’s workers can afford to live dignified and fulfilling lives after they retire. Few recognize and fewer appreciate the treasure and time expended by plan sponsors to design, communicate, administer, monitor and fund their retirement programs. It is primarily because companies have chosen to sponsor retirement plans that we Americans have set aside over US$14 trillion for retirement in addition to the US$1.4 trillion that has accumulated in the Social Security Trust Fund.

Each year, the Profit Sharing/401(k) Council of America (PSCA) conducts a contest to identify best practice communication and education programs provided by plan sponsors of defined contribution retirement plans. It has been exciting to witness the increasing effort and creativity that has been put into improving the quality and effectiveness of defined contribution education and communication programs. This year’s winners will be announced at our National Conference in September, but last year’s large and small company ‘Best of Show’ winners of are illustrative.

Publicis, a large global advertising and marketing firm, applied the same marketing principles in selling plan participation that they use when helping sell products to the public. Their ‘Creative Juices’ campaign was designed to appeal to a young, creative and geographically-diverse employee population. Featuring a suave, urban color scheme and wry, humorous writing, the campaign’s stand-out innovation was the use of full-sized vending machines branded with custom Creative Juices graphics. Actual vending machines were sent to locations with larger employee populations. At smaller locations, a full-size vending machine poster was used. The campaign did not skimp on traditional materials, incorporating printed and electronic materials, face-to-face employee meetings, remote web meetings, streaming video presentations and an eye-catching flash e-mail. However a successful campaign is not about the glitz. It’s about behavior changes. This campaign was a tremendous success, not because it was creative but because the 401(k) participation rate increased from 69 percent to 90 percent and a very high percentage of participants were successfully mapped into the plan’s lifecycle investment fund.

Karsten Manufacturing is a small but well known company that makes Ping golf clubs and equipment. The company developed a full slate of communications approaches, including posters, postcards, newsletters, education guides, a CD and web casts. It prepared 60 company leaders at its two principle sites to respond to retirement-related questions and held employee meetings where the presenters were bilingual in Spanish, Vietnamese and Mandarin. The company successfully transitioned to a new service provider and increased 401(k) plan participation from 73 percent to 84 percent. Its formerly non-participating employees had a 5.4 percent deferral rate.

Its time to stop comparing defined contribution plans and traditional pension plans and be appreciative of both. These plans are like apples and oranges – they are both fine fruits, but they are not the same. A defined contribution plan amasses wealth that a worker may use for retirement or pass on to an heir. A defined benefit plan provides predetermined retirement income, but no residual wealth. Both plans have pros and cons and any effort to distinguish one as superior to the other is pointless and counterproductive. For example, it is incorrect to suggest that pension plans are superior because they pay benefits over an employee’s lifetime and 401(k)s do not. Most employees with pension plans today have the choice to take their benefit in lump sum form, which they frequently do; and all 401(k) participants can choose to create an annuitized benefits if they wish.

Defined contribution and defined benefit plans do share one important characteristic – neither is free. The costs of designing, administering and funding a defined benefit plan or in making contributions to a defined contribution plan, such as matching contributions to a 401(k) or profit sharing contributions to all employees, require a significant company commitment to it workforce. They are part of the ‘cost of compensation’ that an employer pays an employee. Employees could save for retirement on their own, but they don’t.

So I join recent and future retirees in thanking companies like Martin Tractor Company, a small company in Topeka, Kansas, for sponsoring a retirement plan. Martin Tractor Company recently had nine employees retire from its profit sharing/401(k) plan. Their final median pay was US$43,160 and their final average pay was US$44,711. At retirement this group had a median 401(k) balance of US$476,770 and an average balance of US$484,673.

I say thank you plan sponsors for designing and administering plans customized to provide maximum benefit to your employees; for reviewing plan investment options under strict fiduciary requirements to ensure their appropriateness and that the fees are reasonable; for working in concert with your service providers to provide extensive financial education to help participants make wise investment decisions and contributing billions of dollars each year to fund your plans. Thank you employer plan sponsors for providing retirement plans. The programs you make happen are helping America’s workers retire with the financial security we all desire.

Sources: The Federal Reserve, The Investment Company Institute
*Most of the assets in IRAs are the result of rollovers from employer sponsored retirement plans.