Changes in 401(k) Plans Spur Higher Participation

By Stephen Miller, CEBS Oct 15, 2012
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More U.S. companies and participants are putting money into 401(k) plans, and they are doing​​ so at higher rates than in previous years, according to the not-for-profit Plan Sponsor Council of America's (PSCA) 55th Annual Survey of Profit Sharing and 401(k) Plans.

The survey, which was conducted in early 2012 and reports on the 2011 plan-year experience, showed improvement in all key confidence indicators. The percentage of companies that made the matching contribution, when provided for in the plan, increased to 95.5 percent (up from 91 percent in 2010). Small companies in particular are bringing back the match, with 92.8 percent of organizations with fewer than 200 participants making the match in 2011 vs. 83.3 percent in 2010. The percentage of eligible employees making contributions to the plan also showed improvement, increasing from 76.9 percent in 2010 to 79.5 percent.

In addition, the average company contribution increased to 4.1 percent of pay (up from 3.7 percent in 2010), and the average participant deferral rate increased from 6.2 percent to 6.4 percent of pay.

“The continued upward trend in participation and contribution levels is a result of the ongoing, sustained efforts of plan sponsors to effectively communicate their plan and educate their participants on the benefits of enrolling and staying in the plan,” said Bob Benish, PSCA’s interim president and executive director, in a media statement.

Popular Features

Plan design changes intended to increase participation continued to grow in popularity, following the trend of the past few years. These included:

Target-date funds. The availability of target-date funds increased from 61.5 percent to 68.6 percent of plans. The average allocation of plan assets invested in target-date funds reached 12.4 percent.

Roth 401(k) option. Roth after-tax contributions were permitted in nearly half of plans (49 percent), up from 45.5 percent in 2010. At retirement, distributions from Roth contributions, including dividends and capital gains, are tax free. When offered the opportunity, Roth contributions were made by 17.4 percent of participants. The average Roth deferral was 3.7 percent by lower-paid participants and 4.9 percent by higher-paid participants.

Automatic enrollment deferrals. Automatic enrollment is used by 45.9 percent of plans (up from 41.8 in 2010). The percentage of auto enrollment plans with a default deferral rate greater than 3 percent increased from 25.8 percent of plans in 2010 to 32.2 percent. The most common default investment option was a target-date fund, present in 69.7 percent of plans.

Plan Benchmarks

Other survey highlights included:

Asset allocation. The average plan has approximately 60.6 percent of assets invested in equities (stocks or stock funds). Assets are most frequently invested in actively managed domestic U.S. equity funds (24.8 percent of assets), target-date funds (12.4 percent), stable value funds (10.7 percent), indexed domestic equity funds (8.8 percent) and actively managed bond funds (8 percent).

Company stock. 15.5 percent of plans allow company stock as an investment option for both participant and company contributions.

Employee eligibility. 88.4 percent of U.S. employees are eligible to participate in their employer’s defined contribution plan. Most companies allow employees to begin contributing to the plan immediately upon hire (60.3 percent of companies).

Hardship distributions. Hardship withdrawals were permitted in 90.5 percent of 401(k) plans; 1.8 percent of participants took a hardship withdrawal in 2010, when permitted.

Investment advice. Investment advice is offered by 57.8 percent of plan sponsors, and 19.3 percent of participants used advice when it was offered. Participant usage tended to be greatest in small plans.

Investment advisors. 68.2 percent of companies retained an independent investment advisor to assist with fiduciary responsibility.

Investment options. Plans offered an average of 19 funds for both participant contributions and for company contributions. The funds most commonly offered to participants are actively managed domestic equity funds (90.3 percent of plans), actively managed international equity funds (87.4 percent of plans), indexed domestic equity funds (82.8 percent of plans) and actively managed domestic bond funds (79.6 percent of plans).

Loans. Loans were permitted in 89 percent of 401(k) plans; 54 percent of plans allowing loans permit only one loan at a time.

Participation. The average percentage of eligible employees who had a balance in the plan was 85.9 percent. An average of 79.5 percent of eligible employees made contributions to the plan in 2011, when permitted.

Vesting schedules. 38.9 percent of plans provide immediate vesting for matching contributions, while 23.9 percent provide immediate vesting for profit sharing contributions.

The survey collected data from 840 companies with 10.3 million participants and $753 billion in plan assets.

Related Articles:

Generation Y Favors Target-Date Funds and Roth 401(k)s, SHRM Online Benefits page, August 2012

401(k) Auto Features Impact Communication Strategies, SHRM Online Benefits page, July 2012

Quick Links:

SHRM Online Benefits page

SHRM Online Retirement Plans Resource Page

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