Retirement Plans

Employers Plan to Bump Up 401(k) Contributions

"There is growing recognition that there must be more of a shared responsibility around retirement outcomes," says Vanguard.
Katie Kuehner-HebertMay 1, 2015
Employers Plan to Bump Up 401(k) Contributions

Defined contribution plans are “here to stay,” but employers are increasing their share of contributions, according to Vanguard’s report, “Global Trends in DB and DC plans,” released last month.

More than half (57%) of the roughly 90 multinational companies responding to Vanguard’s survey expect the level of company contributions to their DC plans  to increase “somewhat,” and 14% expect them to increase “dramatically.”

“The initial shift from DB to DC meant that responsibility switched from employers to employees,” the authors wrote. “But there is growing recognition that there must be more of a shared responsibility around retirement outcomes, beginning with the level of DC plan contributions.”

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A Forbes article on Thursday said that bigger employer contributions will lead to increasing 401(k) account balances and make it easier for employees to reach their target savings rate. However, employees “still need to do their part” and make sure they are also putting aside enough money in their retirement accounts so they won’t outlive their savings.

According to the Vanguard report, standardized, off-the-shelf target-date funds are the “default fund structure of choice” for DC plans, particularly for U.S. employers. Within those default funds, of all of the global respondents which relied on them, roughly 95% said they preferred their default funds to contain either all passive investments (38%) or a combination of active and passive investments (57%).

“A modern DC plan is emerging,” the authors wrote. “Features include some responsibility shifting back from employee to employer, better investment outcomes through improved plan design and investment options, and fee transparency helping to drive costs lower.”

While the majority (64%) of global retirement plans are managed using a combination of local and corporate governance, multinational companies are increasingly adopting a more centralized approach to managing their retirement plans in multiple countries — causing friction with their local representatives’ “desire for more influence and decision-making authority,” according to the report.

On average four out of ten companies that do not currently manage their global retirement plans centrally expect to move to a more central approach in the next five years. Top company officials prefer centralization to simplify policy and plan structure, and to mitigate risk management concerns, but some obstacles preventing centralization include local market rules, regulations, and customs.

“Improving governance on a global basis takes time and requires healthy dialogue and the engagement of everyone involved,” the authors wrote. “The exact steps an organization takes will vary based on its culture, strategic objectives, and employee base. Companies should consider establishing a formal global governance policy.”

Featured image: Thinkstock

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