Northern Trust ‘Path Forward’ Study: 3 Actions to Drive Improved Retirement Outcomes

10 Years after the Pension Protection Act, Defined Contribution Plans
Can Achieve More

CHICAGO–(BUSINESS WIRE)–A decade after the Pension Protection Act (PPA) of 2006 ushered in an
era of reform for the U.S. retirement system, defined contribution plans
are still falling short in promoting savings and offering investments
that manage risks and provide retirement income, according to a new
study by Northern Trust Asset Management.

Path Forward: Defined Contribution Plans Can Achieve More
released today, tallies the successes of the PPA and proposes solutions
to improve the performance of defined contribution (DC) plans, based on
surveys of 1,000 DC plan participants and more than 100 DC plan
sponsors, as well as interviews with a diverse range of industry experts.

“Despite many advances made since the passage of the Pension Protection
Act, the retirement security of millions of Americans remains in
question and the ideals at the heart of the PPA have only been partially
realized,” said Sabrina Bailey, global head of Retirement Solutions at
Northern Trust Asset Management. “The sixth edition of our Path
research series identifies specific actions plan sponsors
can take to harness the power of the PPA and guide participants toward a
secure and successful retirement.”

Improve implementation of automatic features

The PPA was the catalyst for DC plans to include elements such as
automatic enrollment of employees into the plan, and automatic
escalation of savings over time. Industry leaders interviewed for the Path
said these automatic features have helped combat participant
inertia, a view supported by the plan sponsor and participant surveys.

Asked to identify the single biggest benefit of the PPA, the response
cited the most by plan sponsors was increased plan participation as a
result of auto enrollment. Similarly, participants indicated the ability
to save painlessly through automatic deductions is the 401(k) feature
they value most.

Despite the benefits offered by auto enrollment, Northern Trust’s survey
shows that plan sponsors could challenge participants to save more:

  • While a majority (52 percent) of plan sponsors auto enroll new hires,
    just 32 percent implement auto escalation to increase participant
  • Nearly two-thirds (63 percent) of participants think they could
    contribute 10 percent or more of their income to retirement savings,
    but about the same percentage said their plan’s deferral rate was
    below 10 percent. Additionally, 65 percent said they wish they could
    go back and contribute a higher proportion of their salary to their
    401(k) plan.

“The benefit of using both auto features in tandem is clear,” said Gaobo
Pang, Ph.D., head of investor analytics for Retirement Solutions at
Northern Trust Asset Management. “Among plan sponsors using auto
enrollment and/or auto escalation, 64 percent think that participants
using these features are better prepared for retirement.”

Understand and embrace risk in default options

The PPA enables plan sponsors to determine the default investment for
their participants. Of auto enrolled participants, 72 percent keep their
assets in the default option, demonstrating that the plan sponsor’s
choice can have a powerful impact on participant outcomes.

Risk is a key factor in the selection of the default investment. While
both plan participants (53 percent) and plan sponsors (46 percent) cited
market risk as a key concern, they also mention a variety of other
risks, such as inflation, longevity and concentration risk. In fact, 79
percent of plan participants are concerned about taking the right type
of risk at the right time.

Over three-quarters of plan sponsors (79 percent) cite market volatility
as a key risk for participants over the next five years, and 74 percent
say inflation is another serious risk that will continue in the next
five years.

“Risks evolve over time, so it is crucial that plan sponsors select a
default investment option that can help plan participants appropriately
deal with a variety of risks,” said Susan Czochara, managing director of
Retirement Solutions at Northern Trust Asset Management. “By
constructing a robust default option, such as a target date fund that
adjusts in line with investment goals, sponsors can help participants
manage risk exposures.”

Address retirement income needs

Industry leaders interviewed for the Path Forward said one major
shortcoming of the PPA is a lack of provision for retirement income.
Plan sponsors and participants agree this is a crucial issue:

  • 84 percent of participants surveyed are concerned about outliving
    their resources, and 84 percent of plan sponsors cited longevity risk
    – the risk that participants will outlive their assets – as a serious
    risk facing participants in the future.
  • 86 percent of plan sponsors and 87 percent of plan participants think
    it is important for a 401(k) plan to include investment options
    specifically designed for retirees.

“Although default options work well for most participants during the
accumulation phase, people’s needs, circumstances and priorities tend to
be very different when they retire,” said Czochara. “In designing a menu
of options, plan sponsors need to consider three primary concerns –
efficiency, safety and flexibility – to address a variety of retirement
income needs.”

The Path Forward: Defined Contribution Plans Can Achieve More
is the sixth edition of Northern Trust Asset Management’s research
series on the future of DC plans. Previous installments surveyed plan
sponsors and consultants on the attributes of an ideal defined
contribution plan structure, the challenges of engaging younger
employees and the potential for defined contribution plans to adopt best
practices developed by defined benefit plans and other institutional

“The retirement crisis the PPA sought to address 10 years ago still
exists today, but our research highlights some of the steps that plan
sponsors can take now to help participants save and invest more
effectively,” Bailey said. “Participants are looking to plan sponsors to
guide them with tools including auto features, default investments that
address a range of risks and retirement income options to meet a variety
of needs. Effective plan design and implementation has never been more

Northern Trust manages more than $118 billion in assets for U.S. defined
contribution plans and provides custody and administrative services to
more than $297 billion in DC assets, as of June 30, 2016. Retirement
Solutions takes a consultative approach to addressing the needs of plan
sponsors and participants while offering a suite of solutions –
including an inflation-sensitive asset fund and target date funds –
aimed at improving retirement outcomes. More information can be found at

Northern Trust Asset Management is a leading
global asset management firm serving institutional and individual
investors in 29 countries, with $906 billion in assets under management
as of June 30, 2016. Northern Trust Asset Management’s robust investment
capabilities span all markets and asset classes, from passive and
risk-factor to fundamental active and multi-manager strategies,
delivered in multiple vehicles. For more information, please visit our website
or follow us on Twitter @NTInvest.

Northern Trust Asset Management is composed of Northern Trust
Investments, Inc., Northern Trust Global Investments Limited, 50 South
Capital Advisors, LLC, Northern Trust Global Investments Japan, K.K., NT
Global Advisors, Inc. and investment personnel of The Northern Trust
Company of Hong Kong Limited and The Northern Trust Company.

About Northern Trust

Northern Trust Corporation (Nasdaq: NTRS) is a leading provider of
wealth management, asset servicing, asset management and banking to
corporations, institutions, and affluent families and individuals.
Founded in Chicago in 1889, Northern Trust has offices in the United
States in 19 states and Washington, D.C., and 22 international locations
in Canada, Europe, the Middle East and the Asia-Pacific region. As of
June 30, 2016, Northern Trust had assets under custody of US$6.4
trillion, and assets under management of US$906 billion. For more than
125 years, Northern Trust has earned distinction as an industry leader
for exceptional service, financial expertise, integrity and innovation.
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