Employers Shift Retirement Savings Burdens from Participants

Deloitte said its 401(k) Benchmarking Survey: 2008 Edition revealed fewer than one in five plan sponsors believe “most” employees will be financially prepared for retirement. The concern is being addressed in one way by an increasing number of employers who have implemented “automatic” plan features.

According to the report, 42% of employers surveyed now have an auto-enrollment feature – nearly double from the last survey (23%) – and 26% of respondents reported they are considering adding an auto-enrollment feature. Nearly all employers (96%) who have implemented this feature expressed satisfaction with it.

The survey also documented a big jump in employers using “easy enrollment” systems, such as a postcard or similarly simple authorization form provided to non-participants. Fifteen percent of respondents reported using such systems, up from 11% in the last survey.

To further prod employees to increase their retirement savings, two-thirds (68%) of employers said they use 3% for the default contribution rate in automatic enrollment plans, versus 53% in the last survey. In addition, only 16% of companies reported using a default percentage of 2% or less, versus 26% previously.

Automatic deferral percentage increases are used by 35% of survey respondents, compared to 18% who used the feature last year.

In addition, Deloitte said that for the first time, the majority (51%) of employers said employees are eligible for plan participation immediately upon their hire.

Not only have employers shifted the participation decision from participants’ hands, they are also letting workers off the hook for managing their plan assets. Fifty-seven percent of this year’s Survey respondents offer lifecycle funds, whereas, in 2004, only 28% of employers surveyed offered lifecycle funds. Another 10% reported they are considering adding such funds in the future.

However, the use of risk-based, lifestyle funds has decreased. Twenty percent of employers said they offer risk-based, lifestyle funds, down from 31% in the last survey.

The top indicator of a plan's "success" in the eyes of plan sponsors is participation rates, the survey found. "Employee appreciation" ranked third, behind investment performance. Few (8%) employers identified "cost effectiveness" as their primary indicator of plan success, followed by "easy accessibility/technology."

Given that participation was the primary success factor listed by employers, respondents named "a lack of employee understanding" and "ineffective employee communications" as the biggest impediments to plan success. Employers appear to be least concerned about "lack of provider support," investment performance, or employee turnover, Deloitte said.

Employers overwhelmingly (81%) identified "where to invest/which funds to use" as the most confusing aspect of 401(k) plans for employees, followed by "how much to save for retirement" (55%).

Average participation rates were 76% this year, inching up slightly from 75% in the last Survey. The average deferral percentage (ADP) for nonhighly compensated employees (NHCEs) stands at 5.69%, while the proportion of NHCEs contributing 6% or more of their compensation is 36%, compared to 33% previously.

Plan sponsors said they consider their 401(k)s effective recruiting tools that assist them in retaining existing employees. The majority (53%) of survey respondents said they consider their plans "as competitive" as those of their peers, and more than one-third (34%) consider their plans "more competitive."

A total of 436 employers responded to this year's survey. The survey report is available here .