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CCH® PENSION — 3/21/08

Retirement Plan Sponsors To Focus On Risk Management, Automation, Employee Accountability In 2008

From Spencer's Benefits Reports: Continued changes to the retirement plan landscape—including recent legislation, tighter reporting and funding rules, and the gradual shift of risk from employers to employees—are prompting companies to more actively manage their retirement plans, according to a survey recently conducted by Hewitt Associates. In light of these changes, companies are increasing their focus on reducing retirement plan risk and ensuring that employees take appropriate advantage of their retirement plans.

Hewitt’s study of 190 midsize and large U.S. companies revealed that the new funding rules for pension plans enacted by the Pension Protection Act of 2006 (PPA) and increased scrutiny of retirement plan operations in general are prompting more companies to take additional steps to administer their plans within a risk framework in 2008. Among those companies offering pension plans, nearly two-thirds (63%) reported that they are very likely to perform funding and accounting projections, 30% plan to perform an asset liability study, and 29% are very likely to assess the risks that their pension plans are running based on current strategies. More than half (55%) of companies offering a defined contribution plan intend to review their fund operations, including expenses and revenue sharing. Fiduciary responsibility also is a focus, with 35% of companies indicating that they are very likely to review their 401(k) plan governance structure or hire a third party monitor to review their investment options.

At the same time, more than half (56%) of companies still rank employees’ taking accountability for retirement as a high priority this year, and 50% reported that they plan to focus on helping employees better understand their retirement benefits. Much of employers’ efforts will be carried out through communications.

Two-thirds (66%) of companies are very likely to undertake a communication initiative on 401(k) plan participation, and 64% are likely to communicate to their employees about diversification and fund usage. In addition, 58% plan to focus their communication efforts on 401(k) contribution levels.

“Recent legislation, regulations from the IRS and Department of Labor, increasing postretirement needs, and current litigation are putting employers under more pressure than ever to effectively manage two sides of the retirement equation—minimizing risks and unnecessary costs, while optimizing the benefit that employees will get from their retirement programs,” noted Alison Borland, defined contribution consulting practice leader at Hewitt. “Minimizing risk requires the implementation of processes and standards that enable employers to more effectively monitor and manage those risks within their retirement plans. Optimizing employee benefits requires careful consideration of plan design and proactive communication with employees that will support employees’ efforts to make good decisions around saving and investing for retirement. As such, they are taking more aggressive steps to equip workers with tools and information that can help improve saving and investing habits.”

Few Changes Contemplated

Hewitt further noted that despite impending increases in the potential costs and the cost volatility of pension plans, the pace at which employers are modifying their defined benefit plan design will slow dramatically this year. According to the survey, nearly three-fourths (72%) of companies that offer a defined benefit plan reported that they will make no changes to those plans in 2008, compared with 41% in 2007. Only 3% of firms reported that they are very likely to close their plans, and 2% indicated that they are likely to freeze their plan, down from 6% and 4%, respectively.

Instead, companies are focusing on ways to manage financial and other risks of their plans more effectively, given the requirements of the PPA. In addition to performing funding and accounting projections, and reviewing funding strategies, 29% of firms reported that they are very likely to assess the risks that their pension plans are running based on current strategies.

As a way to ensure that employees take appropriate advantage of the retirement plans offered to them, automated tools are becoming standard features in 401(k) plans. In 2008, 44% of companies offer automatic enrollment to their employees, compared with 36% in 2007. Among those plans that currently do not offer automatic enrollment, 30% indicated that they are very likely to offer it in 2008, while 27% are somewhat likely. More than one-fifth (22%) of companies currently enroll both existing and new participants in their 401(k) plans, up from 15% in 2007; and another 27% are very likely to do so in 2008. Companies that have frozen or closed their defined benefit plans are more likely to offer automatic enrollment to their employees than companies that offer only 401(k) plans or that offer an active pension plan.

Among those companies that offer automatic enrollment, 72% plan to convert their default investment fund to a premixed portfolio fund. According to another recent Hewitt study, 69% of companies currently default employees into diversified investment options such as target-date portfolios, and another 18% reported that they planned to do so in 2008. Furthermore, 83% of employers set their default contribution rates at 3% or higher.

In addition, 44% of companies have a form of contribution escalation in their 401(k) plans, up from 31% in 2007. More than one-fifth (22%) of companies offer contribution escalation as part of automatic enrollment, while 8% of those companies that do not offer the feature plan to add it as a default under automatic enrollment.

Other Findings

Other findings of Hewitt’s survey include the following:

• Approximately one-fifth (19%) of employers currently offer a Roth 401(k) to their employees, up from 12% in 2007. Among those companies that currently do not offer a Roth 401(k), 11% indicated that they are very likely to add one in 2008.
• Twenty-two percent of companies currently offer managed accounts, up from only 15% in 2007. Among those companies that currently do not offer them, 6% indicated that they are very likely to offer them in the coming year.
• More than half (51%) of companies offer automatic rebalancing, up from 39% in 2007. Another 12% indicated that they are very likely to offer it in 2008.
• Consistent with previous years, the majority of companies reported that they plan to make no changes to their company match (71%). Twelve percent reported that they plan to add/increase the company match, and only 2% plan to reduce or eliminate the company match.
• More than two-fifths (43%) of employers currently offer online third-party investment advisory services, and another 47% plan to offer them in 2008. Thirty-four percent provide in-person third-party investment advisory services, and another 30% plan to offer the feature in 2008.
• In an effort to reduce plan fees, 29% of employers plan to alter their fund options. Twenty-nine percent of employers also plan to replace higher-cost mutual funds with lower-cost institutional funds.

For further information, visit http://www.hewitt.com.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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