The percentage of U.S. employers enrolling employees automatically into the 401(k) plan has risen significantly in just two years, from 34 percent in 2007 to 58 percent in 2009. Of those plans using automatic enrollment, 69 percent now default workers into a target-date fund, up from 50 percent in 2007, according to a study by consultancy Hewitt Associates.
Hewitt's biennial survey of more than 300 mid- to large-sized U.S. companies found:
• Employers defaulting employees into contribution rates at 3 percent or higher grew steadly, from 83 percent in 2007 to 89 percent in 2009.
• Employers offering automatic contribution escalation—where employees can elect to have their contribution rates increased automatically over time without additional action—grew to 44 percent in 2009, up from 35 percent in 2007 and almost four times higher than in 2005 (9 percent).
• Automatic rebalancing is now offered by 47 percent of employers, vs. only 26 percent in 2005.
|
Prevalence of Features in 401(k) Plans |
|
|
2005 |
2007 |
2009 |
|
Automatic enrollment |
19% |
34% |
58% |
|
Automatic rebalancing |
26% |
42% |
47% |
|
Automatic contribution escalation |
9% |
35% |
44% |
|
Premixed portfolios |
63% |
77% |
83% |
|
Investment advisory services |
37% |
40% |
50% |
"Over the past decade, design changes in 401(k) plans have generated many positive improvements in certain employee investment behaviors and participation rates, but there's still work to do," says Pam Hess, Hewitt's director of retirement research. "Companies need to be focused not only on getting workers to save, but getting them to save at levels that put them closer to meeting their retirement goals. This means reviewing appropriate default contribution rates and investment funds and considering coupling automatic enrollment with other automated tools, targeted education and resources that force employees to save and invest more wisely."
Demystifying Investment Selection
In addition to automating features, more companies are offering funds and advice tools that simplify investment decisions and help employees make wise choices. Hewitt's survey revealed that:
• Target-date portfolios are now offered as a plan investment option by 78 percent of surveyed U.S. employers, up from 58 percent in 2007 and 28 percent in 2005.
• Outside investment advisory services—including advice, guidance and/or managed accounts—are offered by half of all respondents (50 percent), up from 40 percent in 2007 and 37 percent in 2005.
• One-on-one financial counseling is offered by nearly three in 10 plans (29 percent) and 28 percent offer online guidance, vs. 22 percent and 18 percent, respectively, two years earlier.
• Managed accounts are offered by more than a quarter (26 percent) of surveyed plans, up from 11 percent in 2007.
"For most workers, investment decisions can seem daunting. Confusion and lack of investment knowledge may play significant roles in employees choosing a portfolio that's either extremely conservative or extremely risky," says Hess. "To maximize retirement savings, workers need to choose a diversified mix of funds that take into account risk levels and age until retirement. In many cases, employees just want to be told what to do."
Keeping Plan Expenses Low
Lowering plan expenses is becoming a higher priority for an increasing number of employers, particularly as the topic gains significant attention among regulators, litigators and the media. According to Hewitt's survey:
• Calculating plan costs. 84 percent of employers have attempted to calculate the total cost of maintaining their 401(k) plan—up from 60 percent in 2007 and only 29 percent in 2001.
• Reducing expenses. Almost three-quarters of employers (74 percent) have made efforts to reduce expenses, up from 57 percent in 2007. These efforts include negotiating with their current service provider to reduce fees (66 percent), swapping out funds for lower cost alternatives (51 percent) and working with fund managers for alternative pricing—through collective trusts and separate accounts (18 percent).
• Considering fund fees. Nearly six out of 10 employers (59 percent) ranked investment fees/expense ratio as one of the most important factors in selecting investment options for their 401(k) plans.
Hewitt's survey found that fee disclosure is also becoming an increasing priority. Today, most plan sponsors proactively disclose administrative fees to participants. Just 18 percent of plans disclose administrative fees only on a participant's request, vs. 28 percent two years earlier.
"It's encouraging to see more companies examining their 401(k) plan expenses. From an employee standpoint, saving even a small amount in fees can substantially—and positively—impact their long-term retirement income," says Hess. "Leveraging plan assets through the use of lower-cost institutional funds—such as collective trusts and separate accounts—can reap large rewards for workers."
Other Key Findings
• Employer contributions. Almost all companies (93 percent) offer some type of employer contribution to the 401(k) plan. The majority (65 percent) offer a fixed match, most commonly $1 per $1 of employee contributions up to 6 percent of pay.
• Company stock. 17 percent of employers invest the employer-matching contribution exclusively in company stock, down from 23 percent in 2007 and 45 percent in 2001.
• Matching suspension. 10 percent of companies suspended their employer-matching contributions temporarily over the past two years. An additional 10 percent stopped making non-matching profit sharing contributions (7 percent) and employer non-matching contributions (3 percent), which are typically contributions made by companies based on financial measures such as profit and operational performance.
• Eliminating time-on-job requirements to participate. Employers are providing workers with earlier access to 401(k) plans. In 2009, 74 percent of plans did not have a service requirement for participation in a 401(k) plan, up from 61 percent in 2007.
• Eliminating time-on-job requirements for matching. In plans with a matching contribution, workers received an employer match earlier than before: 56 percent of plans do not have any service requirements for participants to receive employer-matching contributions, up from 44 percent in 2007.
• Brokerage “windows.” Continuing an upward trend, the percentage of plans offering a self-directed brokerage account increased from 18 percent in 2007 to 26 percent in 2009.
Stephen Miller is an online editor/manager for SHRM.
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More Companies Plan to Unfreeze Salaries, Restore 401(k) Matches, SHRM Online Benefits Discipline, November 2009
Data Shows Increase in 401(k) Plan Participation, SHRM Online Benefits Discipline, November 2009
GAO: Automatic Enrollment Ups 401(k) Participation; Challenges Remain, SHRM Online Benefits Discipline, October 2009
401(k) Stats: Benchmarks for Plan Sponsors, SHRM Online Benefits Discipline, October 2009
Answers to 401(k) Questions that Matter Most, SHRM Online Benefits Discipline, October 2009
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