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5500 Preparer's Manual for 2012 Plan Years
The premier resource in the field of Form 5500 preparation, 5500 Preparer's Manual will help you handle the required annual Form 5500 filings for both pension benefits and welfare benefit plans.
Automatically enrolling employees in 401(k) plans is an effective way to increase participation rates, but a study recently conducted by Hewitt Associates found that most employees still will not meet their long-term retirement savings goals unless companies do more to structure the plans in a way that helps improve the quality of employee participation. Hewitt’s study examined the saving and investing habits of employees who were automatically enrolled in their companies’ 401(k) plans and compared those to employees who joined the plan voluntarily.
Of the 2.6 million U.S. employees analyzed in the study, more than 90% of workers participated in a 401(k) plan if their company automatically enrolled them, compared with only 68% of employees at companies that did not offer automatic enrollment. However, while participation rates dramatically increased at companies with automatic enrollment, most automatically enrolled employees remained at the default contribution rate and thus added less to their 401(k) plan accounts than employees who contributed through traditional enrollment. The automatically enrolled employees also had less-diversified portfolios and were less likely to actively rebalance or make transfers within their plans.
“While automatic enrollment is proving to be an effective tool for getting employees into the 401(k) plan, it isn’t a cure-all for helping people meet their retirement needs,” noted Pamela Hess, director of retirement research at Hewitt. “Most employees are defaulted at a low rate and into a conservative fund, and they do not take an active role in managing their 401(k) accounts—whether it’s because of inertia, lack of interest, or simply because they don’t realize they need to be actively involved.”
According to Ms. Hess, “As recent retirement legislation like the Pension Protection Act encourages more companies to consider adding automatic enrollment to their 401(k) plans, it’s critical that they not only focus on getting people into the plan, but also consider the quality of participation. Companies should take time to review appropriate default contribution rates and investment funds, and consider coupling automatic enrollment with other automated tools, targeted education, and resources that force employees to save and invest more wisely.”
Hewitt’s study found that because the majority of companies (70%) with automatic enrollment had a default contribution rate at or less than 3%, employees under automatic enrollment contributed less (6.8%) than those who were traditionally enrolled (8%). These employees also were less likely to contribute higher than the company match, only contributing up to 1.2 times the match threshold on average, compared with 1.6 times for employees voluntarily participating in the 401(k) plan.
Furthermore, nearly half (42%) of the companies that automatically enrolled employees in a 401(k) plan defaulted them into a stable value or money market fund. As a result, employees who were hired under automatic enrollment had significantly less equity exposure than employees who were traditionally enrolled. Employees hired under automatic enrollment with a default into a stable value fund contributed only 31% of their assets to equities, while those defaulted into a target maturity or balanced fund invested the same amount in equities as those who were traditionally enrolled (67%).
“Confusion and lack of investment knowledge may play significant roles in employees sticking with the default investment funds for long periods of time, and the result can be an extremely conservative investment allocation,” Ms. Hess concluded. “Although there is still a large percentage of companies that default employees into a stable value or money market account, the Pension Protection Act and recent Department of Labor guidance encourage companies to use equity-based default options under automatic enrollment. In particular, we recommend that companies default employees into target maturity funds, which are the easiest, most cost-effective way to enable employees to be well-diversified without having to make investment decisions or take an active role in managing their accounts.”
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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