Even with the economic downturn, a new study shows employers are finding ways to aid employees in saving for their retirement.
A study from Diversified Investment Advisors indicates that at corporations with 1,000 or more employees, 46 percent of plan sponsors are planning to reduce or eliminate employer contributions to their 401(k) plans or have already done so.
“The events of the last year have forced many corporate employers to scale back on their 401(k) contributions or cut them entirely, but this does not tell the whole story,” explained Laura White, vice president for Diversified Investment Advisors, a national investment advisory firm specializing in retirement plans. “We found that those employers that offer a defined benefit plan, as well as those with fewer than 10,000 employees, were most likely to eliminate the employer contribution to their 401(k) plan. In fact, most of the plan sponsors surveyed maintain multiple plans, so employers are still contributing to their employees’ retirement in other ways.”
For example, she said, 46 percent of 401(k) plan sponsors surveyed also offer a 401(a) plan, 87 percent have a traditional pension plan, and 51 percent offer a cash balance plan.
In addition, employers are actually increasing their payroll despite reducing headcount as well as increasing their benefits budgets. According to Diversified’s survey, plan sponsors are increasing their benefits budgets to 27.9 percent of payroll from 26.6 percent. “Plan sponsors are balancing their need for fiscal responsibility with the needs of their employees,” White noted.
Of those employers that still contribute to their 401(k) plan, Diversified’s study found that more than 90 percent funded their plan in part with employer contributions, with the majority relying on matching contributions (78 percent) as opposed to a stated percentage of salary (41 percent) or a fixed amount (16 percent). The most common matching formula continues to be $0.50 on the dollar up to 5 percent to 6 percent of compensation.
“However, among those that plan to reduce benefits costs in 2009, 37 percent of plan sponsors said they were more likely to negotiate fees with the provider; 33 percent will negotiate fees with their advisor; 32 percent will change the way expenses are paid, presumably by transferring a greater share of the burden to employees, and only 17 percent said they had planned to reduce their employer contributions to their defined contribution plan,” said White. “Our study also showed that four in ten plan sponsors with $10 to $25 million in defined contribution plan assets expect to conduct a due diligence search in 2009 in an effort to ensure they are receiving a good value.”
The Report on Retirement Plans – 2009 highlights a continuing trend to shift the burden of retirement saving and investing to the employee and away from plan sponsors. For example, according to the report, 401(k) plans have shifted from being a supplemental source of retirement income to being the primary retirement planning vehicle. Forty-four percent of 401(k) plans have participation rates above 80 percent, compared to 28 percent of plans just three years ago.
“Automatic plan features, particularly enrollment, as well as a change in attitude toward retirement savings in general, have contributed to these increased participation rates,” White noted. “In fact, nearly two-thirds of employers surveyed have implemented automatic enrollment.”
According to Diversified’s survey, employee participation rates are 8 percent higher among employers that have implemented automatic enrollment than among those that have not. But even automatic enrollment does not lead to perfect plan participation, with one-quarter of employees not participating in the plan either because they had opted out or because the plan uses automatic enrollment only for new employees. Forty percent of plan sponsors that have implemented automatic enrollment re-enroll employees who have previously opted out of their 401(k) plan to ensure that all employees are systematically exposed to the opportunity.
Other key findings of Report on Retirement Plans – 2009 include:
- Plans with automatic enrollment tend to have a higher incidence of other account management features such as automatic deferral increases (60 percent); automatic rebalancing (52 percent); managed accounts (60 percent) and investment advice (65 percent).
- Target date funds have grown in popularity with 55 percent of 401(k) plans offering these funds versus 37 percent of plans in 2007. An additional 29 percent of plan sponsors said they plan to introduce them within the next 24 months.
- Target-date funds may increase participation rates–66 percent of plans with target-date funds experience participation rates of 70 percent or more as compared to 43 percent of plans without them.
- 401(k) plans are offering fewer funds than in the past. The number of 401(k) plans that offer five or fewer funds has risen to 33 percent in 2009 from 18 percent in 2007, while the incidence of plans that offer 10 to 14 funds has dropped to 15 percent today from 22 percent in 2007. Despite this, 41 percent of 401(k) plan sponsors with 1,000 or more employees now offer collective trusts, up from 25 percent in 2007; 54 percent offer exchange traded funds; 42 percent offer inflation-protected securities and 41 percent offer real estate investment trusts.
- There is an increasing focus on outsourcing functions related to fiduciary responsibility; only 15 percent of corporate employers with 1,000 or more employees rely on internal staff to research and monitor investment options.
- Forty percent of plan sponsors disclose total fees today; 59 percent disclose investment management fees; 58 percent disclose general administrative fees and 47 percent disclose individual service fees. The majority (75 percent) disclose fees in participant statements.
- Forty-four percent of plan sponsors say they plan to conduct an education campaign for the specific purpose of helping employees closer to retirement make retirement income decisions in 2009.