Sponsors of 401(k) and other defined contribution (DC) plans are taking steps to lower risks to participants from a surge in inflation and from substantial market declines, restoring matching contributions and jettisoning waiting periods for enrollment, new research shows.
Callan Associates’ 2010 Defined Contribution Trends Survey: Getting the DC Plan Back on Track, conducted near the end of 2009, reveals that DC plan sponsors have:
• Stepped up their monitoring and evaluating of fund performance.
• Increased their communications to calm participants’ fears about the market decline.
• Reviewed plan-related expenses.
Respondents indicated that keeping an eye on plan expenses was the most important fiduciary action they took in 2009. In 2010, however, they indicated that strategic initiatives—which include reviewing investment structure and plan design—will rise in importance.
“In 2009, plan sponsors were consumed with managing poorly performing investments and helping participants navigate the market collapse,” said Lori Lucas, defined contribution practice leader at Callan Associates, an investment consulting firm. “Now that most of the fires have been put out, sponsors are focusing on how to reposition their plans for any market challenges ahead.”
Investment Options Adjusted
Concerns about future inflation and stock market risk are prompting plan sponsors to revise the investment selection in their plans. The survey found that:
• In 2009, real return/TIPS (Treasury Inflation Protected Securities) funds were the most common investment option additions made to DC plans and are likely to be so again in 2010.
• Target-date funds, which rebalance equity (stock) and fixed-income (bond) holdings in an effort to reduce volatility as participants near retirement, were the second most common fund additions in 2009 and are expected to hold that rank in 2010.
• 61 percent of plan sponsors re-evaluated their plan's investment structure in 2009, with 28.1 percent increasing the number of fund options and 14 percent reducing them.
“It is encouraging that the popularity of target-date funds as an investment default continues,” said Lucas. “However, too many plan sponsors still view target-date funds as commodities, using the proprietary target-date funds of their recordkeeper.” In 2009, 55.9 percent of plan sponsors offered the target-date mutual fund of their recordkeeper, and that number is expected to be 56.5 percent in 2010, the survey revealed. (To learn more, see Hitting the Target with Target-Date Funds.)
Small-cap and mid-cap equity funds were the options most dropped in 2009, “likely the result of the extraordinarily poor performance of active small/midcap managers in the third quarter of 2008,” the report said.
A Tip on Treasury Inflation Protected Securities
"For plan sponsors looking at individual categories, it seems a natural choice to offer investors the opportunity to invest in TIPS, which provide inflation protection," says Robert Arnott, chairman of investment management firm Research Affiliates LLC, interviewed in the December 2009 issue of PIMCO DC Dialogue. "In fact, it's shocking to me that DC plans often don't have TIPS as an option," Arnott adds. "After all, what's one of the biggest risks that your employees face as they approach retirement? Inflation." (To learn more, see Plan Sponsors Tipping into TIPS to Provide Inflation Protection.)
Matching Contributions Return
Employers are re-lighting their matches, according to survey findings:
• Nearly 19 percent of plan sponsors reduced or eliminated their company matching contribution in 2009, but in 2010 only about 8 percent plan to take that action.
• Among sponsors that reduced or eliminated the match, 58 percent plan to reinstate it in 2010.
“As the economy recovers, plan sponsors are using the opportunity to bring back their company match,” said Lucas. “They understand that the matching contribution not only attracts participants to the company’s 401(k) plan but it makes the plan competitive and appealing to potential employees.”
Auto Enrollment/Escalation Plateau
The adoption of automatic features seems to have plateaued, the survey found:
• Just under half (43.9 percent) of plans offered automatic enrollment in 2009—a figure that has changed little since 2007.
• The proportion of plans offering automatic contribution escalation has stagnated to about one-third over the past several years.
“Market volatility and the weak economic environment in 2009 made it unpalatable for plan sponsors to add features that would involve automatic increases in payroll deductions,” Lucas said.
Other key findings include:
• Most DC plans now have a qualified default investment alternative (QDIA), with 69.3 percent of plan sponsors reporting that a target-date fund is their default.
• Virtually all of the plan sponsors (93.3 percent) had calculated the fees of their DC plan within the past 24 months, with the majority (84 percent) having done so within the past year.
• At 93.2 percent, mutual funds dominate as an available investment vehicle. However, more than half (52.7 percent) of plan sponsors also use collective trusts—often a stable value fund—and over one-third (37.8 percent) use separate accounts, in which a pool of assets is managed by an investment manager hired and overseen by the plan fiduciaries.
Callan surveyed companies representing more than $300 billion in DC assets. The majority of respondents, nearly 74 percent, offered 401(k) plans, while one in 10 had 403(b) plans.
Trend Toward Earlier Plan Eligibility Continues
In 1998, only 24 percent of defined contribution plans allowed employees to begin contributing to their 401(k) plans immediately on employment. This percentage has continued to increase over time, with almost 60 percent of plans allowing immediate eligibility in 2009, according to The Profit Sharing/401k Council of America (PSCA)'s 2009 401(k) and Profit Sharing Plan Eligibility Survey.
“This trend toward earlier plan eligibility is yet another demonstration of employers’ continued commitment to their DC plans and to helping their employees save for retirement,” said David Wray, PSCA’s president.
The PSCA survey found that for matching and non-matching company contributions, the trend is away from one-year eligibility requirements—although significantly more companies require one year or more of service to be eligible for non-matching contributions. Among the specific survey findings, in 2009:
Participant Contribution Service Requirements
• 57.4 percent of plans and 71.1 percent of plans with 1,000 or more employees permit immediate participation in their 401(k) programs.
• Employees are eligible to participate within the first three months of employment at 75.8 percent of companies and at 85.5 percent of large companies (1,000 or more employees).
• Only 11.5 percent of all plans have a service requirement of one year or longer prior to eligibility.
Company Contribution Service Requirements
• Only 28.5 percent of companies required one year of service or longer for matching contribution eligibility.
• 47.1 percent of employers require one year or more of service to be eligible for non-matching company contributions.
Minimum Age Requirements
• A large percentage of plans have no minimum age requirement for participant deferrals (43.9 percent) or for non-matching company contributions (44.0 percent).
• 21 years is the most prevalent minimum age requirement for participant deferrals (30.8 percent of plans).
• 18 years is the next most prevalent minimum age requirement for participant deferrals (24.3 percent of plans).
Stephen Miller is an online editor/manager for SHRM.
Recasting the Message on 401(k)s, HR Magazine, January 2010
Many Misunderstand, Misuse Target-Date Funds, SHRM Online Benefits Discipline, December 2009
Automation, Lower Fund Fees and Advice Becoming Standard in 401(k)s, SHRM Online Benefits Discipline, November 2009
Plan Sponsors Tipping into TIPS to Provide Inflation Protection, SHRM Online Benefits Discipline, April 2009
SHRM Online Benefits Discipline