Employer anxiety about offering you a 401(k) plan is rising rapidly, and for potentially good — and expensive — reasons. Class-action lawyers are targeting a wider variety of alleged breaches of fiduciary duty in retirement offerings and suing a broader range of entities, including college and university 403(b) plans.
The latest burst of litigation came Wednesday by Schlichter Bogard & Denton, a law firm with a track record of wringing big settlements out of some of the nation's largest corporate 401(k) plans. The firm's new push into the nonprofit education world's version of 401(k)s includes litigation against Cornell University, Northwestern University, and the University of Southern California and similar cases against plans at Yale University, New York University, Duke University, and Vanderbilt University.
Your company may be worried. A new survey of small and midsize plans showed that 38% of them are concerned about the risk of being dragged into court, vs. 24% a year ago. Additionally, this year was the first time it came in as a top reason plan sponsors are turning to retirement advisers, according to the seventh annual Fidelity Investments Plan Sponsor Attitudes Study. The data on smaller plans, defined as ones with 25 to 2,500 participants, were culled from a larger study of 976 sponsors with as many as 10,000 participants.
The rise in employer fear means more people in 401(k)s may find their company adding a new adviser or moving to a different one. The number of companies looking to change advisers hit 23% in the study, a new high. Almost 70% of plans cited the willingness of an adviser to “take on a formal fiduciary role" as important. An adviser change may come in tandem with the winnowing of a confusing thicket of investment options and a switch to lower-priced versions of mutual funds.
Part of the push by employers to start using, or change, advisers is to improve plan performance. Some 88% of plan sponsors surveyed said they have employees who put off retirement because they haven't saved enough. That's obviously not ideal for older workers who want to ease out of the workforce. And as Fidelity Institutional's site phrases it: “Delaying retirement creates potentially higher costs for the sponsor and also may limit advancement opportunities for younger workers.”
There are a lot of fundamental reasons why employees don't save enough. (Student loans, anybody? Wage growth?) One reason is that many people just don't know how much they need to save, let alone how to get there. The study noted that 68% of companies “don't define clear savings or retirement income goals.” For an employee without a defined benefit pension plan, Fidelity says the percentage of preretirement income a worker should try to replace in retirement should be about 45% of an employee's final salary. To get there, most people need to amass 10 times their final salary by their full retirement age (as defined by Social Security) of 67, the study said. So someone making $150,000 needs a final nest egg of at least $1.5 million at age 67.3
One way companies can help savers reach that ambitious goal — aside from increasing the employer match, which is a big motivator for workers but pricey for employers — is to enroll participants automatically at a deferral rate of 6% of salary. The more typical rate is 3%. An American Century Investments survey of 1,504 workers in the year's first quarter found that some 70% of employees weren't averse to that — they thought a 6% rate was what employers should use in automatic enrollment. Automatic escalation of employee contributions of 1% a year until employees are deferring 15% of their salary, up to the allowed dollar limit ($18,000 for 2016), would also help, said Fidelity.
A push to improve retirement savings plans is all good. What's too bad is that much of the impetus behind the move isn't tied to a desire to do the right thing, but rather to a fear of being sued.