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Contact: Mercer Feedback

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United States
New York , 8 June 2009

Employers are divided on whether the 401(k) plan – which has become more common than the traditional pension plan – is meeting employees’ retirement savings needs, according to a recent Mercer survey.

Mercer surveyed 180 employers, all of whom sponsor a 401(k) plan. Some (41 percent) also sponsor an active pension (defined benefit) plan, of which 63 percent are open to new hires; an additional 26 percent sponsor a frozen defined benefit plan. Their responses reveal a striking difference of opinion on the success of the 401(k) to date and whether the existing system can address the obstacles to success such as poor participation and market volatility.

Responsibility

Respondents differ in their perceptions about whether the responsibility for achieving adequate retirement savings rests with the employer, the employee or is shared. Employers with DB plans open to new entrants tend to see it as a shared responsibility (81 percent) or predominantly the employer’s responsibility (15 percent). Among respondents that have suspended their matching contributions to the 401(k) plan, only 54 percent believe retirement is a shared responsibility, while 46 percent said that employees bear the bulk of the responsibility.

Obstacles to success

The survey also explored the obstacles to participants’ reaching their retirement income objectives and the opportunities to right the ship. Employees’ failure to participate in their employer’s plan was cited by 38 percent of respondents as the most critical obstacle. “Low participation is the challenge most difficult to address during a recession,” said Amy Reynolds, a Mercer principal and defined contribution retirement consultant.

The second largest group (32 percent of plan sponsors) named inadequate savings rates as the most critical obstacle, while only 17 percent cited the volatility of financial markets.

Fixing the system

Employers are split on whether the current system can be fixed, with or without additional regulations (see Figure 1). Sponsors indicated that poor participation and poor investment decisions can be addressed, although there is support for additional regulations in these areas, with 49 percent of sponsors looking for help with investment decisions. On the other hand, sponsors are split on the ability of the 401(k) to ever provide adequate retirement benefits, with 50 percent believing adequacy can be addressed either now or through additional regulations while the other 50 percent disagree or are unsure.

When asked about federal policymakers’ ideas on alternatives to the current system, 87 percent of respondents said they oppose the elimination of the tax deferral on 401(k) contributions, as has been discussed in Washington. The most palatable alternative is combined savings accounts for retiree health care and retirement income (66 percent in favor). Nearly half (49 percent) of respondents said Washington should focus its retirement efforts on shoring up the Social Security program.

“Some 35 years after the enactment of the Employee Retirement Income Security Act and its subsequent amendments and associated regulations, Americans may have no more secure a retirement future than in 1974,” said Ms. Reynolds. “Today’s employers are increasingly relying on employee savings plans, such as the 401(k), as the foundation for their workers’ retirement income – yet recent economic pressures underscore the weakness of this approach.”

About the survey

Among the 180 defined contribution plan sponsors that responded to the survey, nearly half (48 percent) have 5,000 or more participants and about a third (34 percent) have from 1,000 to 5,000 participants. More than one-third (36 percent) have plan assets over $500 million and 28 percent have assets between $100 million and $500 million.

Mercer’s “quick survey” on DC plans is one of many surveys Mercer conducts on a regular basis to collect benchmarking information that will help clients understand market conditions. Through these brief, internet-based surveys, Mercer solicits input from the plan sponsor community regarding current issues with DC plans. In exchange for participating, Mercer shares a summary of the survey results with respondents.

About Mercer

Mercer is a leading global provider of consulting, outsourcing and investment services. Mercer works with clients to solve their most complex benefit and human capital issues, designing and helping manage health, retirement and other benefits. It is a leader in benefit outsourcing. Mercer’s investment services include investment consulting and multi-manager investment management. Mercer’s 18,000 employees are based in more than 40 countries. The company is a wholly owned subsidiary of Marsh & McLennan Companies, Inc., which lists its stock (ticker symbol: MMC) on the New York, Chicago and London stock exchanges.

For more information, visit www.mercer.com.

Figure 1.

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