Savings Shortfalls a Target of New Plan Designs

Most employers (80%) consider the company-sponsored defined contribution retirement plan to be the primary vehicle for their employees’ retirement income, but almost half (43%) are concerned that their employees are not saving enough for retirement, according to Wells Fargo’s 2006 Best Practices in Retirement Plans Survey.

Other employer concerns include educating workers about their retirement plans (27%), the increasing cost of providing retirement plans (17%) and uncertain or changing legislation and regulations (11%).

Employers are utilizing plan design features to address these concerns about employees’ retirement savings. The most common plan feature, offered by 69% of those surveyed, is some form of investment advice or education resource to employees. Considering that this includes both education and advice, it is surprising that only about two-thirds of people report offering such a feature to their employees.

Lifestyle Choices

The next most common feature is the use of target date or target risk funds, offered by 48% of sponsors. The funds geared to a particular retirement date are the most popular, with 60% of these employers offering target date funds. One in five employers (21%) offer target risk funds and 19% offer both types of target funds. Nine percent of employers plan to add these funds within the next 12 months while a scant 5% of employers plan to add managed accounts within the next 12 months.

Automatic enrollment is offered by one-quarter of employers (26%), and 10% plan to add that feature in the next year. The most common default rate and default investment option was 3% and a stable value or money market fund, respectively. Plans with automatic enrollment had participation rates 10% higher than those without the feature (74% vs. 64%). Six percent of respondents plan to offer automatic portfolio rebalancing to employees and 5% plan to add an automatic contribution increase program within the next 12 months.

Not surprisingly, reflecting other surveys on the subject, only 3% of survey respondents currently offer a Roth 401(k) plan feature, but growth is on the horizon: 16% plan to add the feature within the next year.

The survey of more than 450 employers by Wells Fargo’s employee benefits consulting group, BPS&M, found, that only one-third of respondents provide a defined benefit or traditional pension plan to their employees, and that changes are imminent at many: 20% of those companies intend to close it to new employees, 14% intend to replace their pension plan with a 401(k) or similar plan, 13% intend to freeze current benefits in their pension plan and 5% intend to terminate their pension plan within the next 12 months.