Retirement Plans Seen as Tools for Retaining and Recruiting

A look at how plan design changes affect participation and savings, along with other trends

By Stephen Miller, CEBS Nov 1, 2011

Almost half (48 percent) of large U.S. companies have implemented automatic enrollment into their defined contribution retirement plans, and 36 percent are considering adding this feature, which could result in its near universal adoption among large employers, according to Report on Retirement Plans—2011, a study by Diversified, a provider of retirement plan services. The survey data was based on the 2011 plan year and focused on the defined contribution and defined benefit plans of U.S. companies with more than 1,000 employees.

Beyond Auto Enrollment

The adoption of automatic enrollment is most prevalent at the largest U.S. companies—those with 10,000 employees or more (57 percent vs. 48 percent of surveyed firms overall).

Large plan sponsors are looking at other automatic features to varying degrees to help employees achieve a funded retirement. For example, while less common than auto enrollment, automatic deferral escalation was in place among one-third of respondents, with another third currently considering such a feature. Automatic account rebalancing was expected to grow at nearly the same rate as automatic escalation.

Automatic Features

Have Implemented

Currently Considering

Automatic enrollment

48%

36%

Automatic deferral escalation

32%

32%

Automatic rebalancing

20%

36%

Source: Diversified, Report on Retirement Plans—2011

Of surveyed employees that had adopted automatic enrollment, 54 percent enrolled new employees only while 46 percent also periodically re-enrolled existing employees who originally opted out (most frequently on an annual basis).

“This approach ensures that all employees will be systemically offered an automatic enrollment opportunity,” Diversified Vice President Laura White explained.

Retention vs. Recruitment

While 41 percent said they maintain their defined contribution plans primarily to retain employees, only 14 percent use their plan as a primary tool to recruit employees (in contrast to the 49 percent who felt that offering a defined benefit pension had a major impact on recruitment).

The findings suggest that employees who think highly of their defined contribution plan and who have accumulated large balances might factor that comfort level into their decision to stay with an employer, but job candidates rarely chose an employer based on its 401(k).

Low Default Levels Impair Savings

When designing retirement plans, sponsors should bear in mind the primary goal they have established for their plan. For example, while plan sponsors felt that it was important for employees to achieve a fully funded retirement, more than half (51 percent) acknowledged that their default deferral rate was not sufficient for participants to achieve a funded retirement, and this was consistent across companies of all sizes.

According to the study, employees typically were enrolled automatically at a 3 percent deferral rate or less (33 percent at 3 percent and 20 percent at less than 3 percent). Considering that such default levels are viewed by retirement specialists as insufficient (many recommend deferring 10 percent of income or higher throughout an employee's working life), companies will continue to face challenges in terms of helping employees prepare for retirement.

Measuring 'Success'

According to the survey, “most sponsors measure their plan’s success by assessing the participation rate as opposed to deferral rate adequacy or the size of their participants’ retirement savings gaps, which many industry experts now believe to be a better indicator of retirement preparedness,” White said. “Sponsors may need to embrace more holistic plan measures and use multiple metrics to engage employees,” she noted.

Disappearing Defined Benefit Plans

Increasingly, the success of defined contribution plans is important as defined benefit plans continue to decline. According to the survey:

67 percent of large plan sponsors offered an active defined benefit pension in 2011, down from 72 percent in 2009.

36 percent offered a “hybrid” cash balance plan, down from 43 percent in 2009.

While 43 percent of surveyed defined benefit plan sponsors expected to maintain the plan for the next five years, 35 percent said they will no longer offer the plan to new employees during that period and another 22 percent expected to freeze or terminate the plan.

Just 34 percent of companies with 1,000 to 2,499 employees expected to continue to offer defined benefit plans, while 49 percent of companies with 10,000 or more employees were likely to continue to offer these plans in the next five years.

Changes to Active Defined Benefit Plans

(Next Five Years)

Continue to offer defined benefit plan to all employees.

43%

Continue to offer defined benefit plan to existing employees only

35%

Freeze active defined benefit plan but not terminate

13%

Terminate active defined benefit plan

9%

Source: Diversified, Report on Retirement Plans—2011

Additional Highlights

Other key findings from the Report on Retirement Plans—2011 include:

Offering advice has led to increased savings rates (according to 55 percent of respondents), more investment reallocations (41 percent) and increased plan participation rates (26 percent).

To provide participant investment advice,plan sponsors were likely to turn to their plan provider, with surveyed companies with 1,000 to 2,499 employees most likely to do so (73 percent vs. 67 percent overall).

Plans with employer matching contributionshad slightly higher participant deferral rates, averaging 9 percent, than plans with fixed employer contributions, with an average deferral rate of 8 pe

rcent.

Vesting periods impacted participation, significantly with 73 percent of employees participating with immediate vesting vs. 64 percent with cliff vesting.

Administrative expenses were most likely paid through asset-based fees (37 percent) or by direct payments by the plan sponsor (23 percent). Only 12 percent of surveyed sponsors pay 401(k) plan expenses from an expense budget account.

As Baby Boomers approach retirement age, plan sponsors are shifting the focus of participant education from accumulation and investment to distribution and retirement income. Nearly 70 percent sent print materials to Baby Boomers on retirement preparation, while half held seminars.

Stephen Miller, CEBS, is an online editor/manager for SHRM.​

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