Data & Research July 29, 2011

Automation and Advice Becoming Standard in DC Plans

Automation has become standard in many defined contribution (DC) plans, according to a recent report from Aon Hewitt.
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The Trends & Experience in Defined Contribution (DC) plans survey found the percentage of employers that automatically enroll participants has plateaued at 56% of plans, similar to 2009 levels. Among those not offering, 5.5% plan to add during 2011.  

Companies that offer both DC and defined benefit (DB) plans continue to be more likely to automatically enroll employees (62%), compared to those that are DC only (47%).  

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Although there has been much discussion around the needs for automatic enrollment to also reach existing nonparticipants, still the vast bulk (82%) only default new hires, the survey report said. This is nearly unchanged from 2009.  

Default investments under automatic enrollment have shifted to qualified default investment alternatives (QDIA) options, with target-date portfolios dominating. Currently, 78% of plans default participants’ funds into a target-date fund, up from 69% in 2009 and 50% in 2007. Balanced or target-risk funds are used with 13% of plans, managed accounts by 3%, and stable value or money market by 6% of employers.  

The report notes that default contribution rates have also been discussed significantly in the marketplace, focusing on whether these rates are adequate given participant inertia. Two-thirds of plans (66%) continue to use a 1% to 3% default rate. These stats have only marginally improved in the past two years, with 15% of plans defaulting at a rate of 6% or higher (up from 12% of plans). 

Automatic contribution escalation is also more popular, with 51% of plans offering the feature (up from 44% in 2009), and another 6% plan to add in 2011. Escalation is also more popular as part of automatic enrollment, with 45% of plans using automatic escalation within automatic enrollment (up from 40% in 2009). Escalation is more prevalent among plans that initially default at lower rates (76% default at 2% or 3% of pay initially).  

Automatic rebalancing is offered by 53% of plans, up from 47% in 2009. Another 3% of employers report they plan to adopt it during the coming year.

Advice More Prevalent  

The Aon Hewitt survey found investment education and advisory services are increasingly prevalent and top of mind. Nearly all respondents (98%) use written materials for communicating investment concepts, while only 22% report that they are very effective. The most effective media reported is on-site seminars/workshops/meetings (ranked very effective by 54% of plans), followed by call center counseling (38%) and personalized communication (38%). 

More companies are helping their employees make wise investment decisions by offering independent financial advice and education. Three-quarters (74%) of plan sponsors now offer outside investment advisory services to employees, up 50% since 2009 (offered by only 50% of plans). The types of services offered range from online advice (37%) and guidance tools (47%), one-on-one counseling (44%), and managed accounts (29%), with increases seen across all. Another 7% of employers note they will provide these types of services in the next year.  

Close to half (47%) of employers now offer participants access to online guidance, up from 28% in 2009. Additionally, 44% of plans provide one-on-one financial counseling. Both online advice and managed accounts also increased in prevalence, now offered by 37% and 29% of plans, respectively, and 8% of sponsors are likely to add each solution in the coming year.  

Among employers that do not offer outside investment advisory services to their employees, two-thirds report the main barrier being legal/fiduciary in nature. Cost concerns are reported as the primary barrier among 18% of plans.  

The Trends & Experience in Defined Contribution (DC) plans survey has been conducted every two years since 1991. The 2011 survey was responded to by a record number of employers—546 across a variety of plan types, sizes and industries.  

Data & Research July 29, 2011

DC Offerings Increasingly Dominate Retirement Plan Landscape

A survey from Aon Hewitt finds that defined contribution (DC) plans are now the primary retirement savings vehicle for the majority of workers, up substantially from 2009.
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This trend has been escalating during the previous two years, according to the report.  

Employers continue to evaluate the success of their plans primarily through adequate performance of investments and the adequate facilitation of retirement income for participants, as well as the cost-effectiveness of the plan. This is consistent with 2009 results; however, the performance of investments was ranked higher than historical levels.  

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Plan sponsors are still gradually moving away from traditional defined benefit (DB) plans. About half of respondents cover (some or all) salaried employees under a traditional DB pension plan, as well as the DC plan. Twenty-two percent report that salaried employees are also covered with a hybrid DB pension plan. Altogether, 57% of plans offer both a DC plan and DB pension plan (down from 64% in 2009). Additionally, of those with DB plans, 44% of these plans remain open to new hires, down slightly from 46% in 2009.  

In terms of changes to retirement programs, while some employers had cut-backs in their DB plans and/or retiree medical programs during the past two years, many of these same employers have simultaneously enhanced the DC plan. The main form(s) of enrichment reported was introducing a DC matching contribution (13%) and/or non-matching contribution (10%). 

Ninety-five percent of employers consider their plans subject to the Employee Retirement Income Security Act (ERISA). Among these, 81% report that their plans comply with ERISA section 404(c).  

In addition to offering a DC plan to salaried employees, nearly three-quarters of employers offer the same plan to nonunion hourly employees. Eighty-five percent of employers offer the DC plan to their part-time employees; this is consistent with 2009 results though slightly higher than 2007.

Plan Features  

Eligibility requirements to participate in a 401(k) plan and to receive a company match remained largely consistent in the past two years. About seven in ten plans (71%) provide immediate eligibility, similar to 2009 levels. Further, for employer-matching contributions, more than half (52%) provide corresponding immediate eligibility as well.  

The maximum employee contribution rate continues to climb, with on average a maximum rate of 61% (versus 54% in 2009). The threshold of 50% to 59% is the most prevalent among one-third (32%) of plans. Catch-up contributions are provided among the vast majority of plans, offered by nine out of ten plans. 

Nearly all (93%) of responding employers contribute employer money to their plans, down just slightly from 95% in 2009. Eighty-five percent provide matching contributions (fixed, graded, service, or other). A fixed match remains most prevalent among 63% of plans, while 18% use a graded match. Further, 29% of employers provide non-matching contributions.  

In 2011, the most common type of fixed match is still $0.50 per $1.00 up to a 6% of pay, with 14% of employers reporting this formula. In total, 19% of plans match $0.50 per $1.00 up to a specified percentage of pay. The second most common type of fixed match is $1.00 per $1.00 up to 6% of pay, reported by 10% of plans. A quarter of plans with a fixed match formula reported a $1.00-per-$1.00 match up to a specified percentage of pay.  

Employer contributions continue to immediately vest across 43% of plans; this is static from 2009. The most prevalent vesting schedule remains 3-year cliff vesting (18% of plans), followed by 5-year cliff vesting (16% of plans).  

The Trends & Experience in Defined Contribution (DC) plans survey has been conducted every two years since 1991. The 2011 survey was responded to by a record number of employers—546 across a variety of plan types, sizes and industries.

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