The most common employer 401(k) match is now on a dollar-for-dollar basis, according to a new survey report from consultancy Aon Hewitt. Employers also are automatically enrolling employees into their plans at higher salary-deferral rates and making other design improvements to increase participation and encourage savings.
The 2015 Trends & Experience in DC Plans Report, based on a survey of more than 360 employers with over 10 million employees, shows that organizations are making changes to their 401(k) plans in several key areas.
To encourage workers to save more, employers are contributing more:
• 42 percent of companies now match dollar-for-dollar, up from 31 percent in 2013. Before 2013, a 50-cent per $1.00 match was the most common formula.
• The majority of plans (56 percent) require workers to save 6 percent or more in order to receive the full employer-matching contribution.
“At a smaller company, it’s still a good idea [to offer a 401(k) match] to be as competitive as possible,” said Jeff Schulte, head of product development and client services at ForUsAll, a provider of small-business 401(k) retirement plans. Small companies “might be surprised to learn that because these matching contributions are tax-deductible, the true cost is lower than you might think.”
He added, “If you’re a small company and you’re worried about running out of cash in the near future” by covering the cost of a typical employer match, which might represent a 3 percent increase in payroll, then “you’ve got many more things to worry about.”
Employers that automatically enroll employees into defined contribution plans are raising the percentage of salary used as the default rate:
•52 percent automatically enroll workers at a savings rate of 4 percent or more, up from 39 percent of employers in 2013.
•51 percent default workers at or above the company match threshold, nearly 10 percentage points higher than in 2013.
Most employers only automatically enroll new hires, but many are taking action to ensure more workers participate in the plan:
• 16 percent of employers automatically enroll current employees who aren’t participating in the plan (called "back-sweeping")—double the percentage that did so in 2013.
"With more workers falling short of their retirement savings needs, employers are being more aggressive about making plan design changes that will help workers close the savings gap," said Rob Austin, director of retirement research at Aon Hewitt. "While these tweaks to the plan may seem small, they can have a profound impact on workers' ultimate retirement wealth."
Employers also are continuing to add Roth 401(k) features:
• Nearly 6 out of 10 employers (58 percent) offer Roth contributions—up from 50 percent in 2013 and 11 percent in 2007.
• When Roth contributions are available, one-third of employers (33 percent) allow for in-plan Roth conversions. In 2013, the ratio was closer to one out of four (27 percent).
Plan Fee Clarity
Employers are taking actions to make fees more transparent and equitable:
• In 2011, 83 percent of employers charged plan administrative fees to workers by using mutual funds with revenue-sharing. In 2015, that percentage dropped to 40 percent.
• Conversely, the percentage of plans that allocate administrative fees as a periodic flat-dollar charge (paid by plan sponsors or deducted from employees' accounts) rose from 14 percent in 2011 to 39 percent in 2015.
In revenue-sharing arrangements, a mutual fund company charges an additional fee as part of an investment fund's expense ratio and then refunds a portion to the plan's third-party administrator/recordkeeper to cover administrative costs.
Although legal, revenue-sharing has been cited in class-action lawsuits in which the plaintiffs charged that the practice results in investment menus stacked with high-fee funds that enrich mutual fund providers and plan sponsors at the expense of participants who end up paying the higher fees.
For additional findings on plan fee trends, see the October 2015 SHRM Online article 401(k)s Shifting to Fixed-Dollar, Per-Head Fees.
Tips for Plan Sponsors
“Since only a small number of workers have relationships with financial advisors, addressing basic topics in the workplace such as financial wellness and income planning in retirement can help boost employee engagement and plan participation,” said Fredrik Axsater, global head of defined contribution at financial services firm State Street Global Advisors. He noted some “quick tips for plans sponsors” in his firm’s Global Retirement Survey 2015 report, released in October:
• Automate higher contribution levels. If you don’t use auto enrollment, make implementing it a top priority. In addition, consider setting bolder default contribution rates, closer to 10 percent, for your plan.
• Review your company match. Employer matching can play a huge role in encouraging higher savings. For example, rather than matching dollar per dollar up to 6 percent, consider matching 50 cents on the dollar up to 12 percent. This signals to employees that the optimum contribution is 12 percent.
• Add or expand financial wellness programs. Helping employees with financial basics such as budgeting can help boost retirement savings rates. In addition, providing forums in which employees can talk about financial topics with their peers can encourage them to take action.
“Engagement may lead to higher retirement confidence. And financial wellness may lead to more satisfied and productive employees,” Axsater noted.
Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow me on Twitter.