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CCH® HR MANAGEMENT — 12/12/07

More employers are automating 401(k) plans, Hewitt says

Despite employers' increased adoption of automated 401(k) plan features like automatic enrollment, employees continue to struggle with proactively saving and investing for retirement, according to a new survey by Hewitt Associates. Accordingly, employers are starting to realize that 401(k) plan participation alone is not enough. In response, employers are taking more proactive steps to prepare their employees for retirement through a more sophisticated design of the automated features of their 401(k) plans.

Hewitt's biennial survey of more than 300 mid to large companies offering 401(k) plans revealed that only 25 percent of companies viewed a high participation rate as the primary measure of success for their 401(k) plans, down from 43 percent in 2005. Instead, many are focusing on their 401(k) plan's ability to facilitate a sufficient retirement income for their employees.

As a result of this shift in priorities, a growing number of companies are structuring their 401(k) plans in a way to not only ensure that employees participate, but also help improve the quality of participation once they are enrolled. According to Hewitt's survey, approximately one-third (34 percent) of companies automatically enrolled employees in their 401(k) plans in 2007, up from just 19 percent in 2005.

Default plan growing more popular. Of those, more than 77 percent defaulted employees into a diversified portfolio, such as target- risk, target-maturity or balanced funds. This is up from 39 percent in 2005. While this category grew, the biggest winner was target-maturity portfolios with more than 50 percent of plans utilizing them as a default. Further, 83 percent of companies set their default contribution rates as three percent or higher, compared to just 66 percent two years ago. In addition, almost 30 percent of companies (28 percent) used contribution escalation in conjunction with automatic enrollment, with more than 40 percent of companies escalating employees to target rates between 8 and 15 percent.

Making 401(k) investing easier. In addition to automating their 401(k) plans, an increasing number of companies are continuing to offer workers tools and features that automate and simplify the 401(k) investment selection process. Forty-two percent offered automatic rebalancing in their 401(k) plans, up from only 26 percent in 2005 and just 11 percent in 2003. More than three-quarters (77 percent) of employers now offer target-risk and/or target-maturity portfolios, up from 63 percent in 2005. Among those plans, 58 percent offer target- maturity funds portfolios, 31 percent offer target-risk, and 10 percent offer both.

Moreover, four out of ten companies (40 percent) offer outside investment advisory services, up from 28 percent in 2003. The types of services vary with 20 percent offering online advice and 11 percent offering managed accounts.

Lowering plan expenses. 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 of companies' 401(k) plans. In fact, 61 percent of employers noted they are very or somewhat concerned about plan expenses. A similar number of employers (60 percent) have attempted to calculate the total cost of maintaining their 401(k) plan-an increase from 34 percent in 2003-and more than half (57 percent) 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.

For additional information on this and other HR topics, consult CCH Human Resources Management or Personnel Practices/Communications.

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