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As Stocks Fell, 401(k) Sponsors Evaluated Investments
Plus other findings from an annual survey of plan benchmarks

By Stephen Miller  9/24/2010
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As markets fluctuated and the 401(k) system came under pressure in the wake of the 2008-09 financial crisis, plan sponsors responded by reviewing and altering plan investments, according to the 53rd Annual Survey of Profit Sharing and 401(k) Plans by the Profit Sharing/401k Council of America (PSCA), a nonprofit association.

PSCA's Annual Survey reports on the 2009 plan year experience of 931 plans with 8.6 million participants and more than $628 billion in plan assets. Surveyed plans represent companies of all sizes and regions across the United States. Among the findings:

20 percent of plans made changes to their investment lineup in 2009.

64.4 percent of plan sponsors reviewed investments quarterly.

The majority of plans (85.8 percent) had an investment policy statement.

In addition to monitoring investments more closely, plan sponsors worked to help participants make good investment choices. The survey found that in 2009:

31.4 percent of plans offered a professionally managed alternative, up from 26.2 percent in 2008.

60.1 percent of plans offered investment advice to participants, a 20 percent increase from 2008, with 21.6 percent of participants using it when offered.

62.3 percent of plans offered a target-date fund in the plan, a 40 percent increase over the previous two years.

“Plan sponsors stepped up to the plate to help participants through this difficult economic time and to ensure that their plan meets the needs of their employees,” said David Wray, president of PSCA. “This is one of the unique attributes of the 401(k) system—participants have an informed advocate working on their behalf in their employer.”

Additional survey findings in key areas are highlighted below.

Asset Allocation

The typical plan has approximately 60 percent of assets invested in equities. In 2009, assets were most frequently invested in actively managed domestic equity funds (28.9 percent of assets), target retirement date funds (10.3 percent) and stable value funds (9.7 percent).

Automatic Enrollment

Automatic enrollment of new hires was used by 38.4 percent of plans and was most common in large plans—53.7 percent of plans with 5,000 or more participants reported having automatic enrollment. The most common default deferral was 3 percent of pay, present in 58 percent of plans. Moreover, 53.1 percent of plans automatically increased the default deferral percentage over time. The most common default investment option was a target retirement date fund (57 percent of plans). (For a related article, see "Automatic Shift: More Employers Add 401(k) Features to Drive Participation and Savings.")

Company Contributions

Profit-sharing plans tended to offer the most generous contributions, averaging 8.1 percent of pay. The average company contribution in 401(k) plans was 2.1 percent of pay and in combination plans it was 4.7 percent of pay.

Company Stock

Company stock was an investment option for participant and company contributions in 13.8 percent of plans, while 3.1 percent of plans allowed company stock as an investment option for company contributions only, and 26.4 percent of plans limited the amount of plan assets that could be invested in company stock. In addition, 35.8 percent of plans made matching company contributions in company stock. An average of 18.1 percent of total plan assets was invested in company stock.

Employee Eligibility and Participation

Most (89 percent) of U.S. employees at respondent companies were eligible to participate in an employer-sponsored defined contribution plan. On average, 87.3 percent of eligible employees had a balance in the plan. Participants who retired in 2009 participated in the plan for an average of 15.3 years, while 22.4 percent of plan participants were no longer actively employed by the plan-sponsoring company.

Investment Options

The number of funds offered to plan participants appeared to be leveling out after many years of steady increase. Plans offered an average of 18 funds for both participant and company contributions. The funds most commonly offered were actively managed domestic equity funds (87.3 percent of plans), actively managed international equity funds (86.0 percent of plans) and indexed domestic equity funds (82.4 percent of plans).

Investment Advisors

Most plan sponsors (66.7 percent) retained an independent investment advisor to assist with fiduciary responsibility. For 54.2 percent of those companies, the fee was a fixed amount, while for 36.1 percent the fee was a percentage of plan assets.

Investment Advice

Advice was offered in 60.1 percent of plans, up from 51.8 percent in 2008. However, only 21.6 percent of participants used advice when it was offered. Participant usage tended to be greatest in small plans. (For a related article, see "More Employers Offer 401(k) Help, but Few Take Advantage.")

Loan Availability

Loans were permitted in 90.2 percent of 401(k) plans, 86.6 percent of combination 401(k)/profit-sharing plans and 35.5 percent of profit-sharing plans. A majority (51.9 percent) of plans with loans permitted only one loan at a time. In plans with a loan feature, an average of 23.1 percent of participants had loans outstanding, with an average loan amount of $8,760. Loans accounted for 2.5 percent of total plan assets among plans with loans. (For a related article, see "401(k) Loans and Hardship Withdrawals on the Rise.")

Hardship Distributions

Hardship withdrawals were permitted in 85.6 percent of plans. The most common reasons for permitting hardship withdrawals included purchase of a primary residence, to prevent eviction or foreclosure (97.9 percent), medical expenses (97.2 percent) and post-secondary education expenses (93.5 percent). When permitted, 1.9 percent of participants took a hardship withdrawal in 2009.

Roth 401(k)

Among plans that permitted participant contributions, 41.3 percent allowed participants to make Roth after-tax contributions (up from 36.7 percent in 2008). Just 13 percent of participants made Roth contributions when offered the opportunity. (For a related article, see "Roth 401(k)s Are Catching On, Report Shows.")

Safe Harbor Plan Design

34.2 percent of plans had a "safe harbor" plan design under U.S. Department of Labor rules, in order to avoid annual compliance testing. About a quarter (23.4 percent) of plans use a safe harbor match and 10.7 percent use a safe harbor non-elective contribution. (For a related article, see "Clearing Annual 401(k) Compliance Test Hurdles.")

Target-Date Funds

The availability and use of target-date funds continued to grow, and 62.3 percent of plans offered them. The average allocation of plan assets in target-date funds more than doubled since 2007 to 10.3 percent. (For a related article, see "Target-Date Funds Bounce Back in Retirement Plans.")

Vesting Schedules

Immediate vesting for matching contributions was provided by 39.5 percent of plans, while 23 percent provided immediate vesting for profit-sharing contributions. Among plans that did not have immediate vesting, graduated vesting was the most common arrangement for all plan types.

Stephen Miller is an online editor/manager for SHRM.

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