An increasing number of defined contribution plans of large employers have been adding auto-enrollment, auto-escalation of contributions and Roth options as enhancements to their plans, according to Alight Solutions' 2017 Trends and Experience benchmarking report on DC plans.
(Related: GAO: Overhaul Entire US Retirement System)
Sixty-six percent of employers have instituted auto-enrollment, up 58% from 2015, and three-quarters of those employers also offer automatic escalation of employee contributions. In most cases, however the auto-enrollment is available only for new employees, not existing ones who don’t participate in their DC plan, according to the report from the benefits outsourcing company that was spun off from Aon earlier this year in a sale to Blackstone Group.
The report is based on a survey of 333 employers offering 401(k), profit sharing, 403(b), 401(a) and 457(b) plans covering nearly 10 million employees and $775 billion in assets. The median plan size was $1.4 billion covering a median 11,000 employees.
The most popular automatic contribution rate was 3%, accounting for 37% of employers surveyed, followed by 6%, which 30% of employers used.
Almost three-quarters of plans also include a Roth option, up from 58% in 2015 and 11% a decade ago, and 43% of plans offer in-plan Roth conversions, allowing employees to convert tax-deferred contributions in a 401(k) plan, for example, to a Roth, whose contributions are after-tax. Ninety-six percent of plans offer a match for contributions to Roth and pretax investments, up slightly from 93% in 2015. The most common match is dollar-for-dollar of employee contributions, up to 6%.
“Companies are being more innovative,” says Rob Austin, Alight’s director of research for health and wealth solutions. “They’re taking the data and insights we’ve seen and using them to enhance their plans even more.”
Defined contribution plans are also innovating by adding restrictions that can ultimately help employees save for retirement. For example, 57% of employers with publicly traded stock include that stock as an investment option in their defined contribution plans, down from 63% in 2015, and 31% of companies offering that option limit the amount of those contributions, up from 24% in 2015.
Owning company stock in a retirement plan essentially commingles an employee’s financial capital with their human capital, increasing the risk in their financial plans, according to Christine Benz of Morningstar, who wrote a column on the topic late last year.
The most dramatic example of that risk was Enron’s 401(k) plan, which was heavily invested in company stock that became worthless when the firm went under in 2000 and eventually led to passage of the federal Pension Protection Act in 2006. Some defined contribution plan sponsors have been sued for violating the PPA and their fiduciary responsibility for including company stock as an investment option when the company’s stock price declined sharply.
Another restriction that plan sponsors have instituted is a waiting period between employee loans from defined contribution loans. Even though the employee usually reimburses him or herself when repaying the loan, the withdrawal of funds, even temporarily, reduces potential gains.
Other retirement plan changes highlighted in the Alight Solutions report include the predominance of target date and target risk plans, offered by 97% of plans, compared with just 77% a decade ago, and the use of outside investment firms to serve as a co-fiduciary to a plan, along with the plan sponsor. Ninety-one percent of plans surveyed use an investment consultant as a co-fiduciary, known as a 3(21) fiduciary, which shares fiduciary responsibility with the plan sponsor.
The survey also found that two-thirds of employers are concerned about plan costs, up from 57% just two years earlier and that nearly half use flat-dollar fees per participant to pay administrative costs, almost double the percentage two years ago. Sixty-one percent of plan sponsors surveyed replaced funds with lower-cost alternatives, up from 56% in 2013.
The Alight Solutions report, however, doesn’t include the average or median costs of plans or the change in costs over time but shows the way costs are shared between plan sponsors and plan participants. Employees who participate in defined contribution plans are responsible for about 70% of the administrative costs but only about half the custodial and investing consulting fees, which they share with plan sponsors.
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