Participation Rate Not The Only Plan Success Metric

A Hewitt Associates news release said its poll of more than 300 of mid-to-large companies with 401(k) plans found that sponsors were not only increasingly embracing auto enrollment, but defaulting participants into diversified portfolios – often at a 3% level. Only 25% of companies viewed a high participation rate as the primary measure of success for their 401(k) plans, down from 43% in 2005.

Hewitt said its latest survey found that 34% of companies automatically enrolled employees in their 401(k) plans in 2007, up from 19% in 2005. Of those, more than 77% defaulted employees into a diversified portfolio, such as target- risk, target-maturity or balanced funds – a drastic hike from the 39% in 2005.

Default Choices

More than 50% of plans involved in the survey utilize target-maturity portfolios as a default while 83% set their default contribution rates as 3% or higher, compared to just 66% who did so two years ago. Not only that, Hewitt reported, 28% of companies used contribution escalation in conjunction with automatic enrollment, with more than 40% of companies escalating employees to target rates between 8% and 15%.

Plan Fees

Hewitt’s study also shows that an increasing number of companies are taking a closer look at 401(k) plan fees, a trend due, in part, to an upsurge in government and media scrutiny. In fact, 61% of employers noted they are very or somewhat concerned about plan expenses.

A similar number of employers (60%) have attempted to calculate the total cost of maintaining their 401(k) plan – an increase from 34% in 2003 – and more than half (57%) have made efforts to reduce fund or plan expenses in the past two years. Forty percent of employers noted they were planning to evaluate the cost of their funds.

“It’s obvious that today’s employers understand that the majority of their employees take a back seat in managing their retirement. This is why we continue to see a steady number of companies putting their 401(k) plans on autopilot and adopting features like automatic enrollment,” said Pamela Hess, director of retirement research at Hewitt Associates, in the news release. “What’s encouraging is that companies realize that simply automatically enrolling employees into the 401(k) plan will not get workers where they need to be in terms of retirement savings. Employers are helping their employees obtain sufficient retirement income by picking more appropriate default contribution rates and investment funds, and coupling automatic enrollment with other automated tools that force employees to save and invest more wisely.”

Investment Options and Services

The average number of core investment options increased from 14 to 17 in the past two years. Excluding target-risk and target-maturity funds the average went from 10 to 12 options. The most popular asset classes remain stable value (84%), bond (88%), large-cap U.S. equity (98%) and international equity (97%).

More than three-quarters (77%) of employers now offer target-risk and/or target-maturity portfolios, up from 63% in 2005. Among those plans, 58% offer target maturity funds portfolios, 31% offer target-risk, and 10% offer both.

The number of firms that offer outside investment advisory services has grown to 40%, up from 28% in 2003. The types of services vary with 20% offering online advice and 11% offering managed accounts.

Nearly 60% of employers offer non-mutual fund alternatives as part of their 401(k) plan. Among plans with over $1 billion in assets, 46% offer only institutional vehicles, while only 12% offer none or only one institutional option.

About one-quarter (23%) of companies offer employer stock match exclusively in company stock, down from 36% in 2005. Among those that match exclusively in company stock, 67% allow employees to diversify/transfer out any time, up from 24%in 2005.

Copies of the complete report, “Trends and Experience in 401(k) Plans,” are available at (847) 771-2500 or infodesk@hewitt.com.