Annual 401(k) Benchmarking Survey highlights plan sponsor focus on employee retirement readiness

While 401(k) account balances are at an all-time high, plan sponsors are relaxing restrictions on eligibility and contributions, and employers are reinstating and increasing matching contributions, concern about employees’ perceived lack of preparedness for retirement is a primary focus of plan sponsors. The 12th Annual 401(k) Benchmarking Survey, conducted by Deloitte, the International Foundation of Employee Benefit Plans, and the International Society of Certified Employee Benefit Specialists, highlights the measures plan sponsors are taking to educate and better prepare participants for retirement.
Plan demographics

The survey reflects data from nearly 400 private and publicly held plan sponsors, representing a broad range of industries. Plan size ranged from those with less than $5 million in total assets (10%) to plans with assets in excess of $5 billion (3%), with the majority of plans being in the $50-$100 million (12%), $100 million-$500 million (29%), and $500 million-$1 billion (14%) range.

The surveyed employers included those with less than 100 employees to those with over 10,000 employees. The average age range of participants for most plan sponsors (69%) was 41-50, with most employers reporting an average length of service of 6-10 years (44%) or 11-15 years (27%).

The average account balance reported by plan sponsors was $85,000, with 44% indicating an average balance in excess of $75,000. While this average account balance represents an all time high, it has generated concern among employers as being inadequate to sustain workers in retirement.
Participant education and awareness

The greatest focus for the majority of surveyed employers (88%) was on increasing participant education and awareness as a means of improving retirement readiness. Employers are increasingly emphasizing retirement readiness and education as a priority, reflecting a possible concern, according to Deloitte, that participants are “trending in the wrong direction with respect to understanding their retirement needs and saving appropriately.”

In addressing this concern, plan sponsors are offering resources for professional investment guidance and advice, providing retirement income projections, and building automatic features into plan design. In addition, employers are enhancing automatic enrollment programs with contributions and investment features, and leveraging other plan features to improve the employee plan experience.
Eligibility and enrollment

Employers are continuing efforts to increase plan participation by reducing eligibility and enrollment restrictions. Over one-half (58%) of sponsors allow for immediate entry into the plan.

Automatic enrollment. While the expansion of automatic enrollment tapered in 2012, plan sponsors who implemented automatic enrollment experienced a positive impact on participation rates (86%), participant awareness (62%), and nondiscrimination results (52%). In addition, 57% of plan sponsors indicated that the average contribution rate of participants increased following the adoption of auto-enrollment.

Step-up contributions. The most common default deferral percentage under automatic enrollment plans remains 3% (48%), although 14% maintain a rate of 4% and 17% offer a rate of 6% or more. To compensate for the lower default deferral rate, nearly one-half (49%) of the plans offer a “step-up” contribution feature. Most plans (54%) require participants to opt-in to the feature, while 46% make it a default option. However, because only 18% of plans reported over 25% participation in the step-up program, Deloitte suggests that sponsors may increasingly default participants into the feature.

The most common default incremental step-up percentage is 1% (61%). However, plans are increasingly adopting a percentage of 2% (4% in 2012, up from 2% in 2011).

Reenrollment. In addition to using qualified default investment alternatives (QDIAs) as a default investment option within the automatic enrollment program, employers are also utilizing QDIAs as part of a reenrollment campaign to correct improperly or inadequately diversified participant investment elections. The initiative allows employees who were defaulted into an option prior to the adoption of a QDIA to increase default deferral elections or change default investment elections. While only 6% of employers have implemented reenrollment, 4% indicated they are considering the program.

Employers are increasingly removing barriers to increased levels of plan contributions. For example, 34% of sponsors in 2012 (compared to 24% in 2011) did not place limits on participant contributions up to the statutory limits. However, average deferral percentages remain relatively flat, a median 5.6% (7% for highly compensated employees) in 2012.

Roth 401(k). Employers are increasingly offering Roth 401(k) features (53% in 2012, up from 47% in 2011). Participant adoption rates, however, remain low, with 31% of sponsors reporting adoption by less than 1% of employees and 32% reporting adoption by 1-5% of employees. However, 17% (14% in 2011) reported adoption rates of 10% or more.

Matching contributions. Most employers (94%) offer either a matching, profit-sharing, or combined contribution to their employees. Employers typically match 50% of the first 6% of an employee contribution (21%) or 100% of first 6% of an employee’s contribution (10%).

Note: The rate of matching contributions has stabilized since 2010. For example, 59% of employers in 2012 (19% in 2010) increased the matching contribution, while only 9% (44% in 2010) decreased the match. In addition, 65% were considering an increase in the match, compared to 39% in 2010.

Employers were less likely in 2012 to allow employees immediate eligibility for matching contributions (56% of sponsors, compared to 66% in 2011). However, 87% of employers allow participants to direct the investment of matching contributions.

The survey revealed a slight increase (31%) in the number of plan sponsors reporting expense ratios of 0.5 or lower. Deloitte expects to see this trend continue over the near term as plan sponsors adapt to the fee disclosure rules and participants become more aware of fund expenses.

The survey also indicated a continued shift from proprietary funds (i.e., limited open architectures) to open architecture, in which a plan offers a broader ranger of investment options.

Most sponsors actively monitor and manage investment performance, with 69% benchmarking market performance on a quarterly basis. In addition, 47% of sponsors replaced funds due to poor market performance in 2012 (compared to 43% in 2011).

Professional investment advice. The number of plans offering managed accounts increased to 34% in 2012, from 31% in 2011. In addition, the number of sponsors offering individual financial counseling or advice to plan participants increased to 61% in 2012, from 50% in 2011.

Note: Nearly ¾ of sponsors estimate that 10% or less of the employees utilize the provided financial counseling services. One-third (33%) estimate that less than 1% of their employees use the services.

Most sponsors (52%) offering individual financial counseling or advice offer it through their recordkeeper/investment manager. However, a slight increase in the number of employees utilizing independent providers could, according to Deloitte, signal a trend towards the use of resources offering a more independent perspective.

Plan sponsors are slowly adding annuity features for both the asset accumulation (in plan) (4%) and asset distribution (at-retirement) (6%) phases. However, 65% of sponsors indicated that they are not considering the at-retirement income option and 81% are not considering an in-plan retirement income product. Deloitte cautions, though, that the annuity feature may become more common as retirees seek a means to convert 401(k) account balances into a reliable stream of retirement income.

401(k) administration and recordkeeping fees are primarily paid through investment revenue (51% in 2012, down from 55% in 2011). However, 34% of plan sponsors were charged direct fees by their recordkeepers in 2012, compared to 31% in 2011.

A significant development revealed in the survey was an increase to 17% (from 7% in 2011) in the number of sponsors reporting that recordkeeping costs are shared by the employer and employees. While one-half of sponsors pay all fees, this represents a decrease from 59% in 2011.

ERISA account/fee credit. Plans with an ERISA account/fee credit as a result of revenue share collected in excess of plan administration fees, increased to 28% of respondents in 2012 (compared to 20% in 2011). Deloitte suggested that this development may be a function of the fee disclosure rules and the attendant sponsor awareness of revenue sharing and its potential benefit to the plan.

Unbundling services. The survey noted a slight increase for 2011 in the percentage of employers unbundling (or paying separately) for 5500 reporting (32%) and communication services (24%). However, the vast majority of services are not bundled. For example, only 29% of respondents pay separately for compliance and nondiscrimination testing.
Administrative issues

The vast majority of plan sponsors (89%) report that data provided through online plan sponsor portals is sufficient for their plan management and analysis needs. However, nearly one-half of the respondents found the portals lacking in the areas of: processing indicative data, showing plan benchmarks, and processing payroll Automatic Clearing House (ACH) funding. In addition, plan sponsors highlight improving participant education (53%), improving participant readiness for retirement (63%), and improving the participant experience (e.g., enhanced websites) as areas in which recordkeepers need to improve.
Retirement income projections

The majority of plan sponsors (72%) offer retirement income projections to plan participants. The projections are provided online (50%), via participant statements (13%), or via separate communications (9%). While 28% do not provide retirement income projections, this may change if proposed rules being developed by DOL are implemented.
Provider relationships

The majority of plan sponsors (75%) continue to use a single vendor to coordinate all services and funds within a bundled recordkeeping structure. In addition, most plan sponsors (45%) have remained with their current recordkeepers for over 10 years.

Source: 12th Annual 401(k) Benchmarking Survey, conducted by Deloitte, the International Foundation of Employee Benefit Plans, and the International Society of Certified Employee Benefit Specialists.

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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