Is the 401(k) Ready for Change?

April 7, 2009 (PLANSPONSOR.com) - The 401(k) may be "down", but the reports of its death are as "exaggerated" as Mark Twain's death once was, according to a recent presentation.

Kristi Mitchem, Head of Defined Contribution, Barclays Global Investors, noted that participant balances had been significantly impact by the recent downturn, citing data from Hewitt Associates that said the average 401(k) participant balance was down 28% through December 31, 2008 from the year before.

However, despite the dramatic market sell-off, Mitchem, speaking at BGI's 2009 Retirement Breakfast Briefing, noted that a return to normalcy would bring a quick recovery for most investors. Specifically, citing data from the Employee Benefit Research Institute (EBRI), she noted that younger participants (who have smaller balances, on average), could recover in as little as two years, and that even older savers could recover in five years.

That said, Mitchem said that a comparison of the current 401(k) model to that kind of benefits/security provided by a defined benefit plan illustrated some stark differences, and some room for improvement(s).

A 401(k) "Makeover"

Noting that contributions to defined benefit (DB) plans were mandated, that the investments of those programs were typically institutionally priced, that there were significant vesting/accumulation periods, and that a "lifetime income" option was "always offered", and sometimes mandated in those programs, she made a case for "making over" the 401(k). She noted that the Pension Protection Act (PPA) had done much to strengthen and streamline the 401(k) contribution structure, through the use of automatic enrollment and contribution acceleration (both of which are experience an uptick in usage since the PPA's passage), as well as the availability of qualified default investment alternatives (QDIA).

Mitchem noted, in fact, that more than half of the largest 1,000 employers currently use automatic enrollment, and indicated that about a third of all plans currently do. Furthermore, she noted studies that indicate that automatically enrolled participants tend to stay where you default them, and cited the findings of a Harvard research team that participants defaulted at a deferral rate as high as 9% (the "default comfort zone") were unlikely to exodus from that rate.