Benefits November 15, 2010

A Rebuilding Year for DC Plans?

November 15, 2010 (PLANSPONSOR.com) - Just a year after a number of high-profile employers chose to suspend and/or eliminate their 401(k) matches, there was evidence of a modest restoration in the 2010 PLANSPONSOR Defined Contribution Survey. 

 

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Matching contributions were offered by more than three-quarters of the plans responding to this year’s survey, but while that was slightly higher than the 73.6% in 2009, it was not enough to offset the 12.3% who, in last year’s survey, indicated that they had recently eliminated the match/employer contribution.  That said, while the overall trends were largely unchanged, more than half the “mega” plan respondents indicated a match equivalent to between 51% and 99% of 6% of salary, compared with 37.9% that identified that match level a year ago, with most of that difference coming from the “50% on 6% of salary” matching category.  More than a quarter of responding plans vested participants in that match immediately (43.4% of mega plans), though more than one in five (23.6%) made participants wait five years, consistent with trends in the 2009 survey. 

Only a quarter (24.9%) of plan sponsor respondents said that “all or nearly all” of their participants were deferring enough to take full advantage of the employer match, a reading that declines sharply with plan size.  And participation rates were roughly flat with a year ago; with responding plans reporting a combined participation rate of 71.5%, compared with 72.3% a year ago.  The median participation rate was also lower; 75.0% in 2010, compared with 78% in last year’s survey. 

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Auto-Motives 

As for automatic enrollment, the 2010 trend line was mixed.  While the overall adoption rate was slightly lower this year, there  was a discernable uptick in adoption at the largest programs (62.7% in 2010, compared with 52.3% a year ago), and about a 10% increase in the number of mid- and large-size programs—but small and micro plans showed no change at all.  That said, the primary motivation this year, as it has been the past two, has been to be more proactive in helping workers save.  Indeed, 63% of responding employers said that this year, compared with 60% in 2009.  A push for more participation was cited by a mere 13.6%, and just one in 10 said that they were inspired by the Pension Protection Act’s clarity on feature adoption. 

On the other hand, the pace of contribution acceleration slowed in 2010.  The overall pace slipped from a 15.5% adoption rate in 2009 to just one in 10 plans this year, though most of that decline came from the smallest plans.  However, even the adoption rate at the largest plans was effectively flat from a year ago.  The median rate of increase was 1.0%, as it was a year ago. 

Large programs were significantly more likely to embrace immediate enrollment; more than eight in 10 mega programs provide for that, compared with a mere 17.5% of micro plans and just 30% of small programs.  Nearly half (49%) of micro plans say their employees are eligible to participate after six months, though just 2.7% of mega plans and only 5.2% of large plans make them wait so long.  Those same trends were also in evidence a year ago. 

Coming tomorrow:  Investment Options, Menus, and IPS

 

Benefits November 15, 2010

401(k) Scorecard Shows Good News and Bad News

November 15, 2010 (PLANSPONSOR.com) - The Bank of America Merrill Lynch "401(k) Contribution Activities Scorecard" for Q3 2010 found modest improvements in participants’ saving behavior, but also record levels of loans and hardship withdrawals.
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The report is based on the activities of approximately 1.4 million actively contributing participants and found that among those who have taken some type of savings action year-to-date in 2010, 67% took a positive action (started or increased saving) versus 33% who took a negative action (stopped or decreased saving) – compared to 60% who took a positive action and 40% who took a negative action during the same six-month period in 2009.

Kevin Crain, head of institutional client relationships for BofA Merrill Lynch, told PLANSPONSOR that the ratio between positive and negative action has been steadily improving each quarter since Q2 2009.  When Crain started paying close attention to this ratio in Q4 2008, he says the ratio was horrible-less than 50% taking positive action, with slightly more than 50% taking negative action.  The ratio was about 50/50 in Q1 2009, and in Q2 2009, the ratio slowly started to favor positive action.  Now, he said, we’re getting close to a 70/30 ratio, which would be great news.  

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In fact, Crain pointed out that the ratio of participants enrolling in 401(k)s or increasing their contributions versus those not contributing at all or withdrawing from the plan, is mostly likely even better than it was before the recession.  The reason for this, he says, is dramatic increases in the number of plans using auto-enrollment and auto-increasing features, as well as making advice that is more readily available. These trends are seen in the BofA Merrill Lynch plans:

  • Year-over-year (since September 30, 2009), BofA Merrill Lynch has seen a 23% increase in plan sponsor adoption of its product, Advice Access, with nearly 400 plan sponsor clients now live with it, out of approximately 1,500.  (Crain says 25 out of 30 of BofA Merrill Lynch’s largest plans have incorporated the tool.)
  • Plan participants using Advice Access rose 83%, with another 54% implementing specific advice into their plan.  
  • The study reports a 17% increase in the use of auto-increase, with 128 plans live with this feature, and an 8% increase in the use of auto enrollment, with 247 plans live with this feature.

The scorecard also revealed record highs for the first three quarters of a year (since 2007, the earliest year data was reviewed for this report) in terms of the volumes and dollar amounts being distributed from 401(k) plan participant accounts through loans as well as hardship and in-service withdrawals:

  • New loan issuance transactions and total amount borrowed were up 3.0% and 13.2% respectively over the same nine month period in 2009
  • Hardship withdrawal transactions and total amount distributed were up 4.6% and 2.6% respectively over the same nine month period in 2009
  • In-service withdrawal transactions and total amount distributed were up 8.3% and 3.7% respectively over the same nine month period in 2009

Crain says it’s important to note, however, that even though the numbers of participants taking negative action against their accounts increased this year, the increase is not as steep as it has been in the past.  

To prevent the number of participants taking loans off their 401(k) or taking hardship withdrawals from continuing to rise, Crain says there are several steps sponsors and advisers can take. BofA Merrill Lynch is helping plan sponsors have more targeted messages to the participants–giving them personalized messages telling them to think very carefully about the implications a 401(k) loan or withdrawal can have (but they cannot go so far as to say, "You can't make this withdrawal.") 

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