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CCH® PENSION AND BENEFITS 8/11/06

Despite increased 401(k) participation, Deloitte finds room for improvement

Despite increases in 401(k) plan participation, many employees are financially unprepared for retirement, according to the 2005-2006 Annual 401(k) Benchmarking Survey, conducted by Deloitte Consulting LLP (Deloitte Consulting), the International Foundation of Employee Benefit Plans and the International Society of Certified Employee Benefit Specialists (ISCEBS). The survey also uncovered notable spikes in time-based lifestyle funds, auto-enrollment and step-up programs as respondents revealed numerous changes in plan design to help improve ease of use, flexibility and versatility for employees.

The Annual 401(k) Benchmarking Survey was conducted electronically. In all, 830 plan sponsors responded to the survey. The respondents were distributed across all regions of the country and all industries.

Participation increases

The nationwide survey revealed that plans with more than 70 percent participation by eligible employees rose to 67 percent versus 63 percent from last year's survey. Similarly, the percentage of plans with participation rates exceeding 90 percent increased to 24 percent from 19 percent. Despite these increases, respondents believe the majority of employees are not taking advantage of their 401(k) plans to effectively fund their retirement. A surprising one-fifth of respondents believe that "very few" of their employees either are, or will be financially prepared for retirement, with 65 percent agreeing that only "some" employees will be prepared. Only 13 percent of survey respondents agreed with the statement that "most employees are/will be financially prepared for retirement."

"While the increases in participation are promising, the lack of employee preparedness for retirement is alarming and suggests that there's still plenty of room for improvement in 401(k) plan design and communication, to the extent that employers have made employee retirement security a priority goal," said Leslie V. Smith, a director in Deloitte Consulting's Human Capital practice and the survey's director. "Employers should continue to explore a variety of options that will encourage employees to become better consumers of their 401(k) plans and, therefore, make retirement security a priority goal."

One of the most rapidly growing new 401(k) investment options for respondents is the "time-based lifestyle fund," which targets plan participants according to their expected retirement date and gradually shifts the fund's asset allocation from stocks to bonds as the target retirement date approaches. Approximately 44 percent of respondents reported offering this type of investment option now, up sharply from 28 percent the prior year. "Time-based lifestyle funds are gaining in popularity because they largely take care of themselves," explained Smith. "This does not mean, however, that employers can walk away from educating their employees on wise investment choices. It indicates that many employers are increasing the options they provide and are moving away from steering participants to any particular investment choices." Overall, respondents provided 17 investment choices to the average participant versus 15 in the last survey.

Easier enrollment

Nearly half (49 percent) of surveyed plan sponsors now allow employees to participate in 401(k) plans immediately upon being hired, versus 45 percent in the prior survey. Along similar lines, a higher percentage of respondents (8 percent versus 6 percent) reported that they had, in the past year, made participation eligibility "less restrictive."

Twenty-three percent of respondents reported automatically enrolling new employees, versus 14 percent a year earlier, more than a 75 percent increase. Similarly, 29 percent reported they are considering auto-enrollment, whereas only 14 percent were considering that policy change in the prior survey.

Efforts to boost employee deferrals via "step-up" programs are also gaining popularity; 16 percent of survey respondents reported now offering step-up programs (as a stand-alone feature), versus only 5 percent in the last survey, a 300 percent increase. "This dramatic increase in 'plan automation' features shows that employers are beginning to overcome the administrative and philosophical hesitancies that have previously been cited as obstacles, and are striving to focus their employees' attention on making the most out of their 401(k) plan," noted Smith. "Higher plan participation can translate to higher plan costs (due to company matching contributions), but clearly many employers believe that helping their employees prepare for retirement is well worth the increased costs."

Plan effectiveness

"Fundamentally, 401(k) plans, like any employee benefit, are intended to help employers recruit and retain employees," Smith observed. "With today's diverse, four-generation workforce, that's no small task. The good news is that by those measurements, 401(k) plans are performing quite well, and getting slightly better." For example, 80 percent of those surveyed believe their 401(k)s are effective as recruiting tools (up from 78 percent in the prior survey). And, 71 percent consider their plans to be helpful in retaining employees, inching up slightly from the last survey which indicated a 70 percent "yes" response. In addition, 28 percent of survey respondents consider their 401(k) plan provisions "more" competitive than those of their peers, versus 13 percent who consider them "less competitive." That leaves the largest block of survey respondents (59 percent) considering their plans merely "as competitive" as those of their peers.

Trends in employer contributions

Survey data reflects continuing fallout of the 2003 collapse of Enron Corporation, whose employees invested a substantial part of their 401(k) assets in employer stock and suffered financially as a consequence. In particular, the proportion of respondents matching employee deferrals in company stock dropped to 12 percent, from 15 percent the prior year. "That the proportions are relatively low simply reflects the fact that many of the companies surveyed are privately held," stated Smith. "What's notable is the proportional size of the drop, 20 percent. That's significant, and indicates a continuous trend away from using company stock as a mandatory investment in a 401(k) retirement plan, while supporting the trend of increased flexibility and choice."

Survey responses also point to publicly held employers backing away from policies encouraging rank-and-file employees to hold employer stock in their 401(k) plans. For example, in the recent survey, 68 percent of respondents that match employee contributions with employer stock now allow employees to immediately reallocate those matches to other funds. In the prior survey, only 55 percent gave participants that flexibility. Respondents are also granting themselves more discretion with respect to profit-sharing contributions to employee 401(k) accounts. In particular, only 19 percent of respondents reported being committed to a fixed profit-sharing contribution, down from 35 percent in the prior survey.

For more information on this and related topics, consult the CCH Pension Plan Guide.

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