LINCOLNSHIRE, Ill., Oct. 30, 2013 /PRNewswire/ -- The continued shift from defined benefit (DB) plans to defined contribution (DC) plans has placed a greater emphasis on employees to take responsibility for their own retirement readiness. A new survey by Aon Hewitt, the global talent, retirement and health solutions business of Aon plc (NYSE: AON), reveals that employers are increasingly taking bolder actions to help ensure participants achieve greater financial security. Recognizing the vast majority of employees are not prepared to maximize their 401(k) savings potential, employers are making significant changes in plan structure and investments while also increasing the amount of guidance provided to participants.
Aon Hewitt surveyed more than 400 plan sponsors, representing over 10 million employees, in plans that total $500 billion in retirement assets, to determine their retirement benefits strategies, plan design and administrative practices. For 77 percent of employers surveyed, DC programs such as 401(k) plans are the primary source of retirement income for their employees. When asked how they measure the success of their DC plans, employers' top responses were "facilitates adequate retirement income" (18 percent) and "high participation rate" (17 percent).
"Employees know they need to save for retirement, but it's usually not a priority and they often need some help and guidance in mapping out a path for getting there," said Rob Austin, director of Retirement Research at Aon Hewitt. "Fortunately, employers are stepping up to the plate and strengthening their offerings in ways that will not only increase participation, but empower employees to take full advantage of the myriad investment opportunities the DC plan affords them."
Paving the Way to Retirement Readiness
Aon Hewitt's survey shows employers are taking a multi-faceted approach to strengthening their programs and promoting more retirement savings among individuals:
Boosting the Employer Match
To help contribute to employees' retirement security, a growing number of employers have increased their company match to the 401(k) plan. Aon Hewitt's research shows the most common match is now $1.00 per $1.00 on the first 6 percent of employee deferrals, with 19 percent of employers reporting this formula, up from 10 percent in 2011. Previously, a match of $0.50 per $1.00 on the first 6 percent was the most popular. Overall, nearly all employers (98 percent) provide some sort of employer contribution to the plan.
"In the 20 years we've been doing this study, this is the first time we saw the most common match increase," said Austin. "At a time where the defined contribution plan is the primary retirement savings vehicle for many individuals, it is refreshing to see employers increase their matching contribution amounts. Our experience shows that almost three-quarters of employees save at a level equal to or above the company match threshold. Increasing the amount employers are willing to contribute may help encourage those employees to save at more robust rates."
Relaxing the Rules
Rather than making employees wait to enter the plan, employers have drastically relaxed their eligibility requirements over the past decade. Seventy-six percent of plans now allow workers to begin making pre-tax contributions immediately upon hire, up from 71 percent in 2011. Just 45 percent of employers allowed for day-one contributions in 2001. In addition, 53 percent of plans have corresponding immediate eligibility for employer-matching contributions, while 50 percent of plans that offer a non-matching employer contribution allow immediate eligibility.
"The 21st century workforce is drastically different in terms of loyalty, tenure and the relationship between employers and employees," said Austin. "People hop from job to job with increasing frequency and many employers find it is important from an attraction perspective to have a retirement plan that is designed to give employees the best chance at achieving retirement readiness. Providing new hires with immediate eligibility helps ensure they don't lose ground in terms of saving."
Broadening Roth Availability
Recognizing that individuals have different tax situations, employers have grown increasingly keen on adding Roth provisions to their plans. Over the last six years, the percentage of employers that allow Roth contributions has increased from 11 percent to 50 percent. Where Roth is available, 27 percent of plans allow in-plan Roth rollovers/conversions. Another 16 percent of companies are planning to add the feature within the next 12 months.
"The Small Business Jobs and Credit Act of 2010 and the American Taxpayer Relief Act paved the way for an increasing number of employees to reap the benefits of a Roth account," said Austin. "Plan sponsors are enthusiastic about making the Roth provision available to their workforce and allowing them to benefit from any tax advantages."
Facilitating Access to Expert Resources
Because many employees possess limited investment knowledge, employers have significantly increased the availability of outside investment advisory services to help workers make critical decisions that will ultimately impact their ability to adequately save for retirement. Three out of four plan sponsors now offer access to such services, with the most common being one-on-one financial counseling (59 percent), online guidance (55 percent), managed accounts (52 percent) and online advice (46 percent). The largest increase came in the number of employers offering managed accounts, which stood at just 29 percent in 2011. Target date funds, another popular form of investment advice, are now offered by 86 percent of plan sponsors.
"Different segments of the workforce prefer various forms of help. Some prefer to simply hand over the keys to their retirement savings to someone else—hence the growing popularity of managed accounts—but a large percentage of employees prefer to take a more hands-on approach to directing their investments," said Austin. "Many employers are responding to this diversity by offering a spectrum of support, which should ultimately provide the most participants with the expert resources they need to improve their retirement readiness."
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About Aon Hewitt
Aon Hewitt empowers organizations and individuals to secure a better future through innovative talent, retirement and health solutions. We advise, design and execute a wide range of solutions that enable clients to cultivate talent to drive organizational and personal performance and growth, navigate retirement risk while providing new levels of financial security, and redefine health solutions for greater choice, affordability and wellness. Aon Hewitt is the global leader in human resource solutions, with over 30,000 professionals in 90 countries serving more than 20,000 clients worldwide. For more information on Aon Hewitt, please visit www.aonhewitt.com.
Aon plc (NYSE:AON) is the leading global provider of risk management, insurance and reinsurance brokerage, and human resources solutions and outsourcing services. Through its more than 65,000 colleagues worldwide, Aon unites to empower results for clients in over 120 countries via innovative and effective risk and people solutions and through industry-leading global resources and technical expertise. Aon has been named repeatedly as the world's best broker, best insurance intermediary, reinsurance intermediary, captives manager and best employee benefits consulting firm by multiple industry sources. Visit www.aon.com for more information on Aon and www.aon.com/manchesterunited to learn about Aon's global partnership and shirt sponsorship with Manchester United.