LINCOLNSHIRE, Ill. – Recent changes to the financial and legislative environment, as well as waning employer confidence that employees are saving enough for retirement, are prompting many companies to take a closer look at their retirement programs this year, according to a new study by Hewitt Associates, a global human resources services company.  What's on their agendas for 2007?  An overall evaluation of retirement programs, a continued focus on managing costs and risks, enhanced retirement education and guidance, and a continued emphasis on automating the 401(k) plan to help employees maximize the benefits of their retirement plans.

Hewitt's study of 146 large U.S. companies reveals that many are likely to reassess their retirement plans in the coming year, with almost 40 percent likely to measure the competitive position of their current programs and 35 percent likely to assess their program design.

At the same time, companies are planning to become more proactive in their efforts to educate and make it easier for employees to participate in their retirement programs.  More than half (58 percent) will automatically enroll employees into 401(k) plans by the end of the year, and approximately one-third (34 percent) already couple or plan to couple automatic enrollment with contribution escalation features.  Eighty-five percent offer or plan to offer target maturity/premixed lifestyle funds, and more than half (54 percent) offer or plan to offer investment guidance, enabling companies' employees to receive direction on investment selections based on asset classes.

"Recent legislative and financial developments, coupled with rising cost pressures, are causing many employers to reassess their retirement programs to ensure they are aligned with business objectives and have the appropriate impact on employee engagement and satisfaction, the ability to attract and retain new workers and on workforce productivity," said Pamela Hess, director of retirement research at Hewitt Associates.  "At the same time, companies remain skeptical about employees' abilities to take accountability for their own retirement future, and as a result, they will continue to take more aggressive steps to equip workers with tools that help improve their saving and investing habits."

Moving Beyond Automatic Enrollment

According to Hewitt's study, almost one-fifth (19 percent) of companies that already offer automatic enrollment say they plan to increase the default contribution rate, and more than two-fifths (43 percent) plan to change the default investment fund to a Qualified Default Investment Alternative (QDIA), such as a target maturity fund, balanced fund or managed account.  Almost one-fifth (19 percent) plan to apply automatic enrollment to additional classifications of workers, and expand the feature beyond just new hires.

"The provisions of the Pension Protection Act and the Department of Labor's guidance are accelerating the rapid shift toward automation in 401(k) plans," said Hess.  "What's particularly encouraging is we see an increasing number of companies focusing their efforts on improving the quality of 401(k) participation, particularly under automatic enrollment – choosing more appropriate default contribution rates and investment funds, and/or coupling automatic enrollment with other automated tools, targeted education and resources.  Implementing these tools will not only get employees into the 401(k) plan, but help them save and invest more wisely."

Staying the Course With Pension Plans

The defined benefit environment continues to be challenging, particularly with new legislation, new accounting rules and a continued low interest rate environment.  In spite of these challenges, the majority of companies offering pension plans are not likely to make changes to them in 2007, which is consistent with the past two years.  However, 6 percent of companies sponsoring open plans say they are very likely to close participation to new employees, 4 percent plan to freeze accruals, and 11 percent are very likely to change the design of their pension plan.  An additional 6 percent plan to move from a traditional pension plan to either a cash balance or pension equity plan.

While most companies do not plan to make changes to their pension plan this year, they still plan to address the challenges of sponsoring one in the current environment.  Hewitt's survey found that companies – both with ongoing plans and with closed and frozen plans – are likely to focus attention on funding policy and asset allocation in 2007, with 81 percent saying they are very or somewhat likely to perform funding and accounting projections and 73 percent very or somewhat likely to review funding strategy.  Almost half (46 percent) say they are very or somewhat likely to adjust the overall asset allocation of their plans.

"Contrary to common perception, pension plans are not obsolete and still provide benefits to significant numbers of employees," said Alison Borland, a senior benefits consultant at Hewitt.  "Companies are constantly assessing the continued appropriateness of their plan design, funding policy, and investment policy, and a significant portion of them are concluding that the efficiency of pension plans, the tools and strategies available to manage them, and the needs and preferences of the workforce still render pension plans a valuable and worthwhile benefit."

Renewing Focus on Operations and Fund Offers

According to Hewitt's study, half of companies (50 percent) say they plan to review their defined contribution fund operations, including fund expenses, revenue sharing and communication to employees, and almost half (48 percent) will conduct a comprehensive review of fund offerings.  Just 12 percent, however, said they were very likely to find ways to reduce the costs of funds they offer.

"Increased employer focus on defined contribution operations may be, in part, a reaction to increased attention by government agencies on plan fees and disclosures as well as recent lawsuits filed against companies for claimed violations in this area," said Hess.  "It's particularly encouraging to see more companies focusing on fund expenses, since they can make up the largest portion of a 401(k) plan's cost.  However, we'd like to see more companies take the initiative to assess and reduce these costs, particularly since they can make a significant impact in increasing employees' retirement nest eggs over time."

Other Key Findings

• Almost 60 percent of companies (57 percent) already offer or are very likely to offer automatic rebalancing in 2007, up from 47 percent in 2006.
• About one in 10 companies (12 percent) added a Roth 401(k) in 2006, and 11 percent said they were very likely to do so in 2007.
• Forty-three percent of companies say they offer or are very likely to add third party investment advisory services, and nearly one in five (19 percent) offer or plan to offer an in-person investment adviser.
• One quarter (24 percent) of companies offer or plan to offer managed accounts by the end of 2007, which is consistent with last year.
• Consistent with previous years, the majority of companies say they plan to make no changes to their company match (78 percent).  Eight percent say they plan to add/increase the company match, and only 1 percent plan to reduce or eliminate the company match.

About Hewitt Associates

With more than 65 years of experience, Hewitt Associates (NYSE: HEW) is the world's foremost provider of human resources outsourcing and consulting services.  The company consults with more than 2,300 organizations and administers human resources, health care, payroll and retirement programs on behalf of more than 340 companies to millions of employees and retirees worldwide.  Located in 35 countries, Hewitt employs approximately 24,000 associates.  For more information, please visit www.hewitt.com.

Maurissa Kanter

,  Hewitt Associates,  (847) 883-1000