Five years from now, the median account balance of a defined contribution plan assets will reach $150,000, up from $100,000 today.
Yet one-third of those "retiring" will continue to work and more employers will offer phased retirement. In fact, a majority of these senior workers will be saving a portion of their earnings for "true old age," when they actually stop working.
These are some of the key findings from a study by retirement plan administrator Diversified Investment Advisors on the future of retirement plans.
Diversified based its findings for the report, "Prescience 2015: Expert Opinions on the Future of Retirement Plans," on a 181-question survey of 68 retirement experts from 54 plan sponsors and plan administrators with $25 million to $1 billion in assets each.
Diversified Vice President Laura White said the survey provides a roadmap for asset managers and sponsors to serve this changing market.
"Although a great deal of information is available about recent trends affecting the retirement plan management business, there is a dearth of reliable analysis as to future directions," White said. "Retirement plan sponsors, providers, consultants and advisers need a clear, forward-looking vision of the retirement plan landscape so they can invest in the development of products, services, systems and processes that will meet the needs of plan sponsors and participants well into the future."
Market turbulence this past week has been jarring, following Standard & Poor's downgrade of the United States' sovereign debt rating to AA+. But experts expect the industry to experience a period of relative calm over the next five years, White said. U.S. equities are expected to appreciate and the economy to grow slowly but steadily by an average of 1.4% a year. Eighty-three percent predict the Dow Jones Industrial Average will reach 14,000 by the end of 2015, surpassing the peak of October 2007.
"This environment will be favorable to the growth of retirement plan assets," White said.
In fact, the "Prescience" experts project 401(k), 403(b) and 457 assets to expand at an annual rate of 10%, from $4.6 trillion at the end of 2010 to $7 trillion by 2015.
The experts also expect more people to participate in their 401(k) or other workplace retirement savings plan, with 70% of families with a head of household aged 55 to 64 having a retirement plan account, up from 61% today.
The experts also believe that 35% of plan sponsors will rely on fee-based retirement plan advisers to assist with fiduciary duties, asset allocation, fee disclosure and investment s advice.
"The emergence and organization of professional retirement plan advisers will have a profound impact on our business over the next five years," said Joe Masterson, Diversified senior vice president. "These professionals are dedicated to the retirement plans business, and therefore are well-suited to understanding plan compliance, designing appropriate fund arrays, positively impacting plan design and helping participants achieve funded retirements."
Survey respondents expect automatic enrollment to be in force among 72% of plans, up from 50% today. This will bring automatically enrolled participants in plans to 66% of all new participants. Automatic escalation is expected to rise from 25% of plans today to 43% of all plans by 2015. This more common usage of automatic enrollment will direct sponsors' attention to safe harbors and qualified default investment alternatives.
Fifty percent are hopeful the government will pass new legislation to expand automatic enrollment safe harbors to boost deferral rates from the current level of 3% in the first year to 10% or greater.
Legislation is also expected to be passed to require sponsors to illustrate what a 401(k) account balance would provide in a monthly income stream. In five years, the experts foresee 42% of all retirement plan assets invested in Qualified Default Investment Alternatives, particularly target-date funds.
Plan sponsors are also expected to scrutinize their investment choices more carefully, with 71% of the respondents agreeing that plan sponsors will pay closer attention to the investment practices of the funds in their plan. Eighty-three percent think plans will begin using Employee Retirement Income Security Act-based criteria to select funds, looking not just at performance or universe rank but also risk, style and consistency.
The use of mobile technology and social media is also projected to become more prevalent.
"Permission management for electronic communications will become more sophisticated, requiring the maintenance of preference information for multiple touch points, media and formats in which participants could receive messages," White said. Those plan administrators that can offer personalized advice on these mobile platforms will stand out among sponsors and participants, she said.
Provider turnover rates are expected to remain at their current levels. Right now, 36% of sponsors conduct annual due diligence reviews, 17% add or replace investment management firms each year, and 10% change their record-keepers.
The Prescience study also revealed that pressures on pricing will squeeze profitability throughout the industry. Sixty-two percent of the experts predicted that by 2015, service provider margins will fall below 11 basis points.
In addition, "advisers, like service providers, will also experience fee compression as more business shifts from an asset-based compensation model to a retainer model," White noted.
The experts said that in the next five years, 53% of multinational firms will look for consultants, advisers and service providers with international capabilities to integrate their various retirement benefits.
Defined contribution plans will continue to replace defined benefit plans, as the trend to freeze or terminate defined benefit plans accelerates by 2015, with respondents foreseeing 14% of today's DB plans to be terminated and 36%of them frozen.
While retirement plan experts do not expect any new regulations or tax code changes to impact defined contribution plans in next five years, they do expect healthcare to get plenty of attention. Eighty-one percent believe human resources staff will dedicate more time and attention to healthcare reform and less to retirement plans.
In sum, White said, "come 2015, the retirement outlook of working Americans will be improved. Out of the Great Recession, the retirement industry is poised for growth. The increased availability of advice at the workplace and the adoption of enhanced qualified automatic contribution arrangements (QACAs) will help drive this progress. The industry stands ready to close the door on defined benefit plans-and to implement the bold defined contribution plan designs that can lead participants to successful retirement outcomes by default."
