Hewitt: Auto Plan Features on the Rise in 2005

A news release said that a Hewitt poll of 450 large firms found that just under o ne in five (19%) automatically enrolled employees in their 401(k) plans, compared with 14% in 2003, and more than a quarter (26%) provided automatic rebalancing, up from 11% two years ago.

Not only that, Hewitt reported, but the number of companies that offered, or planned to offer, contribution escalation features – which enable workers to automatically increase their K plan contributions over time – increased to almost 20%, up from just 3% in 2003. In addition, almost two-thirds (63%) offered pre-mixed/lifestyle funds, up from 55% in 2003.

N early two-thirds (64%) said the K plan was their primary retirement savings vehicle in 2005, up from 55% in 2003.

Release of the Hewitt data comes less than a week after the latest Congress effort to encourage automatic plan features (See Senate Pension Bill Eases Auto Enrollment, Auto Increase Provisions). Under the proposal by US Senators Gordon Smith, (R-Oregon), and Kent Conrad, (D-North Dakota), employers who adopt auto enrollment, auto increase, an accelerated vesting schedule and a certain level of contributions will receive relief from complex nondiscrimination testing and top-heavy rules. The bill will also clarify that automatic enrollment is not impeded by state wage withholding laws and will direct the Department of Labor to provide guidance on appropriate default investments for auto enrollment arrangements and defined contribution plans.

“For US workers, 401(k) plans play an increasingly important role in retirement income security, but many employees continue to underutilize them – whether it’s because they don’t feel comfortable investing in the plan or they simply lack the motivation to save,” said Lori Lucas, director of participant research at Hewitt Associates, in the news release. “A number of employers are taking more aggressive steps to address this issue by automating features of the 401(k) plan – essentially taking the ‘legwork’ out of retirement saving and investing by enabling employees to maximize the value of their 401(k) plans without having to spend a lot of time thinking about or proactively managing them.”

Education and Advice

In addition to automating features of the 401(k) plan, nine out of ten (91%) companies provided investment education to employees in 2005 and more than one in three (37%) offered outside investment advisory services, compared with 28% in 2003, according to the news release.

The other major piece of pension legislation introduced last week included an advice provision (See Latest GOP Pension Reform Bill Includes Advice ). Under the bill, employers will be able to provide workers with access to a qualified investment advisor. The measure also calls for fiduciary and disclosure safeguards to ensure that advice provided to employees is in their best interest, the press release said.

Among other areas of K plan operations, Hewitt said that for the first time since the inception of the survey, the average number of investment options offered in 401(k) plans did not increase – remaining consistent at 14. Further, in 2005, fewer companies offered employer stock (43%), compared with almost half (49%) in 2003. Only 8% of companies offered company stock, matched in company stock and restricted diversification in their 401(k) plans in 2005, which is down from 11% two years prior.

Hewitt’s study also shows that companies continue to be concerned about the impact of fees on employees’ retirement savings. Just over half (52%) said they have tried to calculate the total cost of maintaining their 401(k) plan – an increase from 34% in 2003. Fees ranked as an important factor in investment selection, with 75% of companies indicating fees as the second or third most important factor in selecting investment options for their plans after investment performance.

Other findings included:

• Consistent with Hewitt’s 2003 survey, 43% of companies consider their participation rate the most important measure in evaluating plan effectiveness.
• Three out of 10 companies said they were very or somewhat likely to add Roth 401(k) accounts to their 401(k) plans when permissible on January 1, 2006.
• 20% of companies now offer annuities as a form of payment for final distributions, up from 17% in 2003. When available, 6% elected an annuity, which is up from 2% in 2003 (See After Math ).

Copies of the complete report, “Trends and Experience in 401(k) Plans,” are available for $350 by contacting the Hewitt Information Desk at (847) 771-2500 or at infodesk@hewitt.com .