Compliance December 23, 2009

Law Firm Trolls for Participant-Plaintiffs

While it’s hardly a unique occurrence these days, a law firm is reaching out to 401(k) participants in a potential “stock-drop” suit.

Reported by

Stull, Stull & Brody, which says it has “substantial experience representing employees who suffered losses from purchases of their employer’s stock in their 401(k) plans,” noted that a “class action has been commenced in the United States District Court for the District of Connecticut on behalf of those who purchased the common stock of Terex Corporation between February 20, 2008 and September 4, 2008.”   

An announcement calls for potential participant-litigants, noting that “if you bought Terex stock through your Terex retirement account and have information or would like to learn more about these claims, please contact us.”

According to the firm, the complaint charges that Terex and some of its executives and officers “violated federal securities laws by failing to disclose material adverse facts about the Company’s true financial condition, business and prospects.” The complaint alleges that defendants “failed to disclose: (i) that the Company failed to properly and timely account for impaired assets in its ‘Construction’ and ‘Roadbuilding, Utility Products and Other’ segments; (ii) that Terex was experiencing declining demand for its products in its Construction, Materials Processing and Aerial Work Platforms segments; and (iii) as a result of the foregoing, defendants lacked a reasonable basis for their positive statements about the Company and its prospects.” 

It goes on to note that on September 4, 2008, Terex announced that it was updating its “2008 full year guidance and providing quarterly guidance due to changing market conditions,” and that in response to these statements (which the law firm said “revealed various adverse factors negatively impacting Terex’s business”), the price of Terex stock fell $9.30 per share, or 20%, to close at $38.02 per share. 

Data & Research December 23, 2009

Auto Enrollment Could Lead to Reduced Match

Despite the continued popularity of automatic enrollment among 401(k) plans, research suggests automatic enrollment might work against the long-term goal of increasing workers’ retirement savings by helping bring down the employer match rate.

Reported by

Urban Institute researchers Mauricio Soto and Barbara A. Butrica, who conducted the study for the Center for Retirement Research at Boston College, found that the employers with auto enrollment had match rates about 7% below their non-auto-enrolling counterparts.

Further, the study found that a match-rate cut by 7% would offset at least 42% of cost increases related to auto enrollment in plans with a participation rate of at least 60% before instituting the auto enroll feature. A plan with a 60% participation rate before automatic enrollment would need to reduce the match rate from 50% to 42.9% to offset a 10 % increase in participation, the researchers say.

A key concern, according to the researchers, is whether some sponsors might actually view employer matches in an auto-enroll environment as an unacceptably high corporate expense. They point out that the impact of a match on participation has been shown to be relatively modest beyond the effects of the auto enrollment program.

“The findings of this paper indicate that while automatic enrollment is likely to achieve the goal of increasing pension coverage, it might also work against the principal goal of increasing retirement savings,” according to the research. “The prospect of lower match rates may not only reduce employer contributions to workers’ retirement accounts, but some research suggests that lower match rates might also lower workers’ own retirement contributions.”

After studying 2007 Form 5500 statistics and other data from mostly large plans, the researchers found that 93% of those without auto enrollment offer a match while 82% of those auto enrolling participants had a match. The mean match rate was 47% for plans without auto enrollment and 34% for plans with the feature.

Between 1993 and 2007, agriculture, mining, and construction industries offered the highest match rates (58%) followed by retail trade (57%), and financial, insurance, and real estate industries (54%). Manufacturing and wholesale trade industries averaged match rates between 48% and 49%. Transportation and public utilities, and other services offered the lowest level of match rates (37% and 41%, respectively).

The researchers demonstrated their conclusion by studying the plan dynamics in a hypothetical firm of 1,000 employees in which every worker earns $50,000 and which offers a match of 50% up to the first 6% of contributions (participants contribute 6%). Before the company adopts auto enrollment, the participation rate is 49%. The researchers said the hypothetical employer’s cost of offering the match is $735,000 per year (1,000 employees x 49% participation rate x 50% match rate x 6% contributions x $50,000) and the total labor cost is $50,735,000 ($50,000 x 1,000 + cost of the match).

After the firm adopts automatic enrollment, participation increases from 49% to 86%. The increase in participation increases the match cost by 76% to $1,290,000 and total compensation by 1.1% to $51,290,000, the study found.

Overall, the study looked at 826 plans from 532 employers that hold about half of the total 401(k) assets and account for about 30% of total participants.

The study report is available here.

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