The global economic crisis is challenging the retirement planning of many people – not only those retired or near retirement, but younger members of the workforce as well. Its impact is especially harsh given the broader trends that have shifted financial risk to members and stressed retirement resources, imposing hardship on an aging workforce and longer work hours on younger employees. Over the past decade, there has also been a major shift to defined contribution (DC) plans around the world.  In some countries, low savings rates and reduced employer support for retiree health benefits have forced people to put off retirement or re-enter the workforce.
 
In many parts of the world there has been growing suspicion that plan member inertia has been the main cause of low contribution levels and stagnant investments in conservative default funds, limiting the effectiveness of DC plans. As an example, the US passed the Pension Protection Act of 2006 (PPA) in response to concerns about retirement savings levels. However, the impact of the economic crisis has now been heightened by the PPA and its influence on DC plan design. The PPA was extremely successful in promoting automated savings approaches, such as auto enrollment and auto deferral escalation, and in fostering a movement toward more aggressive default investments. Now, with the market downturn, many are questioning the more aggressive investment policies promoted by the PPA.

Tracking reactions and trends

Despite the ongoing debate among policymakers, and the high levels of concern among DC plan members as they watch their account balances shrink, most members have stayed the course. We have tracked actual member reactions through the plans that Mercer administers. Our US outsourcing business reported the following activity for 2008:
 

  
The low level of DC plan activity is a surprise to some, given the dramatic drop in financial markets worldwide, but not to those who have studied behavioral finance. The same member inertia that kept many employees from participating in voluntary programs prior to the spread of automated or mandatory approaches appears to be helping most members maintain their contributions to DC programs and their investments in the equity markets. Some members may avoid even thinking about retirement because it seems totally unattainable or because they are puzzled about what action to take. In fact, most plan sponsors are at a loss as to what to tell members regarding their investments. The conventional wisdom is that you should never sell in a down market, but some are questioning whether there will be any significant recovery in the near future. This counters the argument that now may be an excellent time for employees, especially younger ones, to contribute to their DC plans because of the potential upside.
 
In any case, member inaction should not be interpreted as indicating a lack of concern. Even before the market downturn, many expressed increased anxiety about retirement. In May and June of 2008:

Following the market downturn, a November 2008 survey found that:

We found similar trends in other locations. In Australia, for example, the December 2008 Mercer Superannuation Sentiment Index, a survey of more than 1,000 working Australians, revealed that the economic crisis has caused many employees to question the value of saving for retirement. Under Australia's compulsory superannuation system, most DC plan members experienced an average loss of 22 percent in the 12 months through 28 February 2009. ³  Higher unemployment combined with household debt has caused many employees to redirect their voluntary contributions toward paying down mortgages and credit card debt. Because of market volatility, over 50 percent of Australian workers expect their account balance to shrink in 2009, despite the inflow of new contributions. 
 
Sixteen months of negative returns have also caused many Australian employees to re-consider their investment choice options. Forty percent of those surveyed indicated they plan to review their investment choices over the next six months. Large retail and multi-employer plans in Australia report that many members have switched from growth and equity investment options to more conservative options. On the positive side, we’ve seen an increased number of employees seeking advice from financial planners regarding appropriate investment and retirement strategies. This trend is more pronounced in the 50-65 age group, where 69 percent have already taken or are planning to take this action, compared to 37 percent in the 24-34 age group.
 
When we look at the larger retirement picture, we find that the economic downturn has strengthened some existing trends, including:
 

  
The economic crisis has weakened retirement programs that were previously sound and has severely compromised the many programs that were already on shaky ground. Members are facing a number of financial issues and clearly need help with both retirement planning and overall financial planning.  

Course of action

So what should multinationals do? Refer to “Employer reactions: Challenges and opportunities” for an in-depth discussion on employer reactions to the economic downturn. The following provides an overview of immediate actions that will improve your ability to respond to developing member needs, as well as to identify potential implications for your organization:

      
There are many more actions that could be helpful in the near future as the crisis mentality passes. A good approach would then be to look carefully at the characteristics of successful DC plans around the world and adopt best practices – a subject to which we will return in a future article.

Sources:

1. Mercer Workplace Survey, 2008
2. 2008 Bank of America Retirement Savings Survey
3. Mercer Australia Multi-Sector Moderate Growth Survey
4. The Prudential Class of 2009 Retirement Survey
5. "It’s Not Easy Being Gray: The New Rules of Retirement, Urban Institute," February 2009
6. "It’s Not Easy Being Gray: The New Rules of Retirement, Urban Institute," February 2009