Society management

Preparing for retirement and the impact of automatic features

While retirement readiness has improved over the past two years for many DC plan members, new data confirms that the odds of achieving retirement readiness are higher when plan sponsors take advantage of automatic plan features.

According to John Hancock Retirement’s latest State of the Participant Report, nearly 53% of its DC pension plan participants are able to replace at least 70% of their current income during their retirement years. In fact, this year’s income replacement data saw an increase of nearly five percentage points from 2020, which is the highest income replacement the company has seen since its data became available. .

Consider, however, that the percentage of ready-to-retire participants in plans using both auto-enrollment and auto-escalation reached 65% in 2022. That’s a 10 percentage point increase from 2020. and widens the retirement readiness gap between plans without automatic features. and those who use both auto-enrollment and auto-raise up to 13% (65% to 52%)

The report also found that an increase in the self-escalation limit has a positive impact on retirement readiness. While a 10% cap has always been the norm, about 60% of plan sponsors now choose limits of 15% or higher, with 25% and 15% being the most popular choices, the firm notes.

Plus, participants are willing to save more each year through self-climbing. With each passing year, fewer participants opt out of automatic escalation over five years, with only 5% opting out of automatic increases in year 4 and only 3% in year 5.

“The opt-out data suggests that communication during the first year of enrollment is vitally important in helping participants understand the importance of saving more each year and the impact this can have. have on achieving retirement readiness goals, as the most recent report shows that more than half of participants opted out of auto-escalation within the first year of enrollment,” points out the report.

As for helping plan members ensure steady progress, John Hancock suggests the plans consider launching periodic auto-swipe campaigns to give employees who previously opted out a “boost” to get back into the plan.

Additionally, if your auto-increase cap is less than 10%, the firm recommends increasing it. “Once participants see the effects of the first three or four annual dues increases, they are unlikely to opt out of the feature,” the report further stresses.

Mixed distribution decisions

Despite the positive news about improved retirement preparedness, John Hancock also found that many plan members were not necessarily making the optimal decision about what to do with their savings when they left their retirement home. use.

While about 6 in 10 participants leaving their DC plan opted to roll their money directly into an IRA or DC plan with a new employer, about 4 in 10 of those leaving their plan cashed out their account, which exposed them to immediate tax liability, possible tax penalties and a step back from their retirement goals.

“This represents an opportunity for plan providers to provide all departing employees with estimates of how much they would save on current taxes as well as the potential growth they would experience by rolling over in a timely manner or choosing to remain in their current plan,” the report said. suggests.

To help terminated participants receive distributions in times of dire need without depleting their entire plan account, John Hancock further suggests that sponsors consider allowing partial distributions upon retirement if they do not return them. already available.

All data in the report comes from John Hancock’s open-architecture platform. The 2022 data is based on its 1.6 million participants, 1,716 plans and $108.5 billion in assets under management and administration as of March 31, 2022.