LINCOLNSHIRE, Ill. — A new survey by Hewitt Associates, a global human resources consulting and outsourcing services company, shows employers continue to design their 401(k) plans in a way that encourages positive saving and investing behaviors and helps employees meet their increasing retirement income needs. These efforts include significant increases in the adoption of automated features and target date funds, better investment education tools and an increased focus on lowering plan expenses.

According to Hewitt, an increasing number of companies measure the success of their 401(k) plans by gauging the quality—not quantity—of participation. Employee participation rates—once the most dominant success measure—have become less important over the past decade, while employee retirement income adequacy and fund performance have emerged as more critical components of success. This shift in priorities has prompted many employers to adopt tools and features that enable employees to save more, without added effort.

Hewitt's biennial survey of more than 300 mid- to large-sized companies found that the percentage of employers automatically enrolling employees into the 401(k) plan has almost doubled in just two years, from 34 percent in 2007 to 58 percent in 2009. Of those plans using automatic enrollment, 69 percent now default workers into a target date fund, up from 50 percent in 2007. Hewitt's survey also showed a steady increase in the number of employers defaulting employees into contribution rates at 3 percent or higher, from 83 percent in 2007 to 89 percent in 2009. In addition, the number of companies offering automatic contribution escalation—where employees can elect to have their contribution rates automatically increased over time without any additional action—also increased to 44 percent in 2009, up from 35 percent in 2007 and almost five times higher than in 2005 (9 percent). Further, 47 percent of employers now offer automatic rebalancing, compared to only 26 percent in 2005.

Prevalence of Features in 401(k) Plans

 
"Over the past decade, design changes in 401(k) plans have generated many positive improvements in certain employee investment behaviors and participation rates, but there's still work to do," said Pam Hess, Hewitt's director of retirement research. "Companies need to be focused not only on getting workers to save, but getting them to save at levels that put them closer to meeting their retirement goals. This means reviewing appropriate default contribution rates and investment funds, and considering coupling automatic enrollment with other automated tools, targeted education and resources that force employees to save and invest more wisely."

Demystifying Investment Selection

In addition to automating features, more companies are taking the guesswork out of retirement investing by offering funds and advice tools that simplify investment decisions and help employees make wise choices. Hewitt's survey revealed that 78 percent of companies now offer target date portfolios, up from 58 percent in 2007 and 28 percent in 2005. Further, half of employers (50 percent) offer workers outside investment advisory services—including advice, guidance and/or managed accounts—up from 40 percent in 2007 and 37 percent 2005. Nearly three in ten plans (29 percent) offer one-on-one financial counseling and 28 percent offer online guidance, compared with 22 percent and 18 percent, respectively, two years ago. More than a quarter (26 percent) offer managed accounts, up from 11 percent in 2007.

"For most workers, investment decisions can seem daunting. Confusion and lack of investment knowledge may play significant roles in employees choosing a portfolio that's either extremely conservative or extremely risky," said Hess. "To maximize retirement savings, workers need to choose a diversified mix of funds that take into account risk levels and age until retirement. In many cases, employees just want to be told what to do. Target date portfolios and investment advisory services allow employees to get that level of attention and advice from independent experts outside of the company, and can be valuable for employees who want guidance on developing a personal retirement savings strategy."

Keeping Plan Expenses Low

Lowering plan expenses is becoming a higher priority for an increasing number of employers, particularly as the topic gains significant attention among regulators, litigators and the media. According to Hewitt's survey, 84 percent of employers have attempted to calculate the total cost of maintaining their 401(k) plan—up from 60 percent in 2007 and only 29 percent in 2001. Almost three-quarters of employers (74 percent) have made efforts to reduce expenses, up from 57 percent in 2007. These efforts include negotiating with their current service provider to reduce fees (66 percent), swapping out funds for lower cost alternatives (51 percent) and working with fund managers for alternative pricing—through collective trusts and separate accounts (18 percent).

Nearly six out of ten employers (59 percent) ranked investment fees/expense ratio as one the most important factors in selecting investment options for their 401(k) plans.

Hewitt's survey found that fee disclosure is also becoming an increasing priority. Today, most plan sponsors proactively disclose administrative fees to participants. Just 18 percent of plans disclose administrative fees only upon a participant's request, versus 28 percent from two years ago.

"It's encouraging to see more companies examining their 401(k) plan expenses. From an employee standpoint, saving even a small amount in fees can substantially—and positively—impact their long-term retirement income," said Hess. "Leveraging plan assets through the use of lower-cost institutional funds—such as collective trusts and separate accounts—can reap large rewards for workers."

Other Key Findings

• Almost all companies (93 percent) offer some type of employer contribution to the 401(k) plan. The majority (65 percent) offer a fixed match, most commonly $1.00 per $1.00 of employee contributions up to 6 percent of pay.
• Seventeen percent of employers invest the employer matching contribution exclusively in company stock, down from 23 percent in 2007 and 45 percent in 2001.
• Ten percent of companies temporarily suspended their employer matching contributions over the past two years. An additional 10 percent stopped making nonmatching profit sharing contributions (7 percent) and employer nonmatching contributions (3 percent), which are typically contributions made by companies based on financial measures such as profit and operational performance.
• Employers are providing workers with earlier access to 401(k) plans. In 2009, 74 percent of plans did not have a service requirement for participation in a 401(k) plan, up from 61 percent in 2007.
• In plans with a matching contribution, workers received an employer match earlier than before: 56 percent of plans do not have any service requirements for participants to receive employer matching contributions, up from 44 percent in 2007.
• Continuing an upward trend, the percentage of plans offering a self-directed brokerage account increased from 18 percent in 2007 to 26 percent in 2009.

About Hewitt Associates

Hewitt Associates (NYSE: HEW) provides leading organizations around the world with expert human resources consulting and outsourcing solutions to help them anticipate and solve their most complex benefits, talent, and related financial challenges. Hewitt works with companies to design, implement, communicate, and administer a wide range of human resources, retirement, investment management, health care, compensation, and talent management strategies. With a history of exceptional client service since 1940, Hewitt has offices in more than 30 countries and employs approximately 23,000 associates who are helping make the world a better place to work. For more information, please visit www.hewitt.com.

Catherine  Brandt

,  Hewitt Associates,  (847) 883-1000

MacKenzie Lucas

,  Hewitt Associates,  (847) 883-1000