Most Big Employers Auto Enroll, Restore 401(k) Match

Majority of large companies using target-date funds as their default option select funds unaffiliated with their record keeper

By Stephen Miller Jul 5, 2010

A majority of large U.S. employers now enroll workers automatically into their 401(k) plans, the nation’s predominant vehicle for employees to save for retirement, according to a survey by consultancy Towers Watson.

The Towers Watson Defined Contribution Survey, conducted during April and May 2010, received responses from a cross section of 334 large U.S. employers with at least 1,000 employees, collectively employing more than 5.3 million plan participants.

Matching Contributions Restored

Since the financial crisis hit in September 2008, 18 percent of the respondents reduced or suspended matching contributions to their 401(k) plans. The survey found that, among those employers, less than half (49 percent) had yet to restore the match, although virtually all indicated they are considering reinstating all or a portion within the next 12 months.

Of companies that reinstated the match, the vast majority restored it to its previous level. A relatively small number of companies reinstated a smaller fixed match or reinstated a match that may fluctuate based on the company achieving certain goals.

“While we fully expect [that] many more companies will reinstate their matching contributions if the economic recovery persists, they may restore it in different ways,” said Alec Dike, senior retirement consultant at Towers Watson, in a statement about the survey. “While some companies will reinstate their previous matching formula, others may tie all or part of the match to profits. In this way, companies can be transparent about the need to connect the match with performance, as well as offer the potential for increased contributions when times are good to balance reduced matches when times are not.”

Auto Enrollment Dominates

Most large U.S. companies now use automatic enrollment to promote participation in their plan. The survey found that:

Fifty-seven percent of large companies automatically enroll employees into their 401(k) plans, with 39 percent automatically enrolling new employees and 18 percent automatically enrolling all employees.

Another 3 percent plan to begin automatic enrollment by 2011, and an additional 18 percent are considering it.

Relatively few employees declined to participate after they were automatically enrolled; 85 percent of large companies report fewer than 10 percent of employees opted out of the 401(k) plan.

“The Pension Protection Act of 2006 made it easier for employers to take advantage of new methods for getting workers to save for retirement,” Dike said. “Since the first of several rules from that law went into effect, many employers have adopted the automatic enrollment and escalation of contribution provisions as they seek to help employees save for their retirement."

Another Survey, Another Viewpoint

An AARP survey of 806 large U.S. employers with 401(k) plans, fielded December 2009—February 2010, found that among those with at least 500 employees, nearly 60 percent had not adopted auto enrollment in their 401(k) plans. However, most were aware of this feature and its potential benefits, including helping employees save more for retirement. Still, only 16 percent of employers that did not have auto enrollment reported that they were likely to add it in the upcoming year.

Target-Date Funds Top Default Option

The survey also found that target-date funds are the most prevalent default investment option:

Nearly three-fourths of respondents (72 percent) use target-date, or “lifecycle,” funds as the default option, followed by 13 percent who use balanced, or lifestyle, funds.

78 percent of large companies using target-date funds as their default option have selected funds not affiliated with their record keeper.

“Evaluating target-date funds is critical for employers, particularly as the number of plan sponsors that use these funds as their default option for workers who are automatically enrolled in 401(k) plans continues to grow,” said Sue Walton, senior investment consultant at Towers Watson, also in the statement. “Choosing and developing the most appropriate target-date fund strategy will be crucial for employers to help their employees save for a secure and comfortable retirement.”

Retirement Benefits Under Pressure

The Society for Human Resource Management’s 2010 Employee Benefits survey, conducted in February 2010 by polling a random sample of SHRM members, found that 72 percent of HR professionals said the benefits offerings at their organizations have been affected by the economic downturn.

Despite employees’ desire for more help with retirement savings, this benefit took a hit as organizations sought to reduce spending. Among the savings and retirement benefits offered by fewer organizations in 2010 than in 2006: individual investment advice (40 percent in 2010, down from 48 percent in 2006) and retirement planning services (39 percent, down from 52 percent in 2006). Traditional defined benefit pension plans continued their decline (27 percent, down from 48 percent in 2006).

The only retirement savings and planning benefitsoffered by more organizations in 2010 than in 2006 were 401(k)-type defined contribution plans, with automatic enrollment into these plans.

Stephen Miller is an online editor/manager for SHRM.

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