Data & Research November 15, 2010

401(k) Scorecard Shows Good News and Bad

The Bank of America Merrill Lynch "401(k) Contribution Activities Scorecard" for Q3 2010 found modest improvements in participants’ saving behavior, but also record levels of loans and hardship withdrawals.
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The report is based on the activities of approximately 1.4 million actively contributing participants and found that among those who have taken some type of savings action year-to-date in 2010, 67% took a positive action (started or increased saving) versus 33% who took a negative action (stopped or decreased saving) – compared to 60% who took a positive action and 40% who took a negative action during the same six-month period in 2009.

Kevin Crain, head of institutional client relationships for BofA Merrill Lynch, told PLANADVISER that the ratio between positive and negative action has been steadily improving each quarter since Q2 2009.  When Crain started paying close attention to this ratio in Q4 2008, he says the ratio was horrible-less than 50% taking positive action, with slightly more than 50% taking negative action.  The ratio was about 50/50 in Q1 2009, and in Q2 2009, the ratio slowly started to favor positive action.  Now, he said, we’re getting close to a 70/30 ratio, which would be great news.   

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In fact, Crain pointed out that the ratio of participants enrolling in 401(k)s or increasing their contributions versus those not contributing at all or withdrawing from the plan, is mostly likely even better than it was before the recession.  The reason for this, he says, is dramatic increases in the number of plans using auto-enrollment and auto-increasing features, as well as making advice that is more readily available. These trends are seen in the BofA Merrill Lynch plans:

  • Year-over-year (since September 30, 2009), BofA Merrill Lynch has seen a 23% increase in plan sponsor adoption of its product, Advice Access, with nearly 400 plan sponsor clients now live with it, out of approximately 1,500.  (Crain says 25 out of 30 of BofA Merrill Lynch’s largest plans have incorporated the tool.)
  • Plan participants using Advice Access rose 83%, with another 54% implementing specific advice into their plan.   
  • The study reports a 17% increase in the use of auto-increase, with 128 plans live with this feature, and an 8% increase in the use of auto enrollment, with 247 plans live with this feature.

Distibutions 

The scorecard also revealed record highs for the first three quarters of a year (since 2007, the earliest year data was reviewed for this report) in terms of the volumes and dollar amounts being distributed from 401(k) plan participant accounts through loans as well as hardship and in-service withdrawals:

  • New loan issuance transactions and total amount borrowed were up 3.0% and 13.2% respectively over the same nine month period in 2009
  • Hardship withdrawal transactions and total amount distributed were up 4.6% and 2.6% respectively over the same nine month period in 2009
  • In-service withdrawal transactions and total amount distributed were up 8.3% and 3.7% respectively over the same nine month period in 2009

Crain says it’s important to note, however, that even though the numbers of participants taking negative action against their accounts increased this year, the increase is not as steep as it has been in the past.   

To prevent the number of participants taking loans off their 401(k) or taking hardship withdrawals from continuing to rise, Crain says there are several steps sponsors and advisers can take. BofA Merrill Lynch is helping plan sponsors have more targeted messages to the participants–giving them personalized messages telling them to think very carefully about the implications a 401(k) loan or withdrawal can have (but they cannot go so far as to say, "You can't make this withdrawal.")  

As for advisers, Crain sees a trend in which advisers are expanding their seminar offerings–in the past, seminars were focused solely on enrollment and contributing as much as you can to the plan. Now, Crain says, more seminars are geared towards the importance of not dipping into the 401(k) account when financial situations start to look grim.   

Data & Research November 15, 2010

What Plan Sponsors Want From Advisers

Relying on a financial adviser outside the plan was the preference for 37.5% of the roughly 6,000 plan sponsor respondents to PLANSPONSOR’s annual Defined Contribution Services Survey. 

 

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However, that option was significantly more appealing to micro and smaller employers.  Mega employers were more inclined to do so via some kind of third-party advice provider (42.1%), while large and mid-size plans were somewhat more inclined to do so via their DC plan provider.  That said, there was a distinct and noticeable trend across market segments toward offering help. 

Beyond the particulars of participant-level advice, nearly two-thirds of plan sponsor respondents—and nearly half of even the largest programs—now rely on the services of a financial adviser.  Larger programs, notably those in the large and mega segments, were significantly more likely to claim that their adviser’s fee arrangement was based on a flat fee/retainer (61% and 60%, respectively), while micro and small plans were more inclined to cite adviser fees based on plan assets (54.2%, and 59.6%, respectively).  Mid-size plans were split nearly evenly between those two options in the arrangements they had in place.   

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Significantly, there was movement in every market segment away from fees based on plan assets and toward some form of flat-fee arrangement. 

When it comes to evaluating their advisers, plan sponsors put the highest priority on service to the plan committee/sponsor over plan participants, a finding consistent with prior years.  In fact, industry knowledge (doubtless to be deployed in the service of the committee/sponsor) outpaced participant service.  Transparency of fees was ranked below service to plan participants, but it moved up sharply in priority from a year earlier—and it was well ahead of reasonableness of fees.

Menu Driven

The number of investment options offered rose slightly in this year’s survey; 21.4 from 19.5 a year ago (the median number rose from 17 to 18), and they generally were higher across all market segments.  Moreover, the average number held by participants also edged up—6.3 in this year’s survey from 5.3 a year ago—while the median rose to 5.0 from 4.5 in the 2009 survey.  This, too, was up across the board, though the increase was more pronounced among smaller plans.

This year’s plan sponsor respondents were, in aggregate, predisposed toward an annual review of plan investments, but there was a great deal of disparity based on plan size.  For example, nearly half (47.4%) of micro plans conducted that review once a year, but those in the small market were as likely to do so on a quarterly basis as once a year.  Mid-size plans were four times as likely (60%) to conduct a quarterly review as an annual one, and large plans three times as likely to do so (60% versus 20.4%).  Those trends were largely in keeping with the findings of the 2009 survey. 

Most of this year’s respondents indicated they had an investment committee for their DC plan, though larger programs were significantly more likely to fall in that category.  For example, more than 90% of the respondents at mid-size, large, and mega plans did, and more than 80% of those in the small category did, while roughly 60% of micro plans did not.  Committees composed of non-employees only were a distinct minority, while those consisting of internal employees only dominated the results.   

Not surprisingly, there was a strong correlation between the existence of a written investment policy statement (IPS) and those investment committees, with roughly 90% of plans mid-size and above claiming to have one, while only about a third of micro programs did.   

However, despite their prevalence on the investment menu, only about a quarter of responding plans said that that IPS specifically covered target-date funds and their underlying funds.  On the other hand, a full third of this year’s respondents did not know if their IPS covered those offerings.

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