401(k) Still Rates High in Employers' Minds

Despite the effect of the market on 401(k) accounts since last year’s study, finance and HR executives still view 401(k) plans as an important part of maintaining and retaining a productive and retirement-ready workforce. While employees are understandably concerned about the losses in their retirement savings, neither employees nor employers appear to be making or desiring drastic changes in their 401(k) plans, according to the study report.

When asked to grade the existing 401(k) system to determine the level of change needed, a majority of respondents (56%) give the current system a “B,” agreeing with the statement that it is working and needs only slight modification. Another third of respondents (32%) give the 401(k) system a “C,” saying that it is generally working but could use a number of improvements.

While few respondents (9%) are willing to give the current system an “A,” indicating that no improvement is needed at all, even fewer express strong dissatisfaction with the system. Only 2% of respondents give it a “D” (“needs widescale changes”), and just 1% give it a failing grade (“needs to be replaced”).

Three-quarters or more of respondents tend to express satisfaction with most elements of their current plans. The vast majority say they are at least somewhat satisfied with the mix of investment choices available to their employees (88%) as well as with the quality of those investment choices (86%).

Despite market losses over the past year, 94% of respondents indicate satisfaction with the financial stability of their plan providers.

Because workers' confidence in both 401(k)s and their ability to make sound investing decisions has been shaken, employers strongly support making education and advice on 401(k)s, as well as making broader retirement and financial advice, more readily accessible for workers, according to the CFO Research/Schwab study.

Respondents express the most dissatisfaction with their own ability to provide planning advice to employees. About one-fifth of the respondents (22%) have either a negative view or no opinion about their companies' ability to provide employees with advice on their 401(k) plans, while 42% are negative or have no opinion about their own ability to provide broader financial advice.

Three-quarters of respondents (76%) believe that making investment advice for 401(k) plans more available in the workplace would have a positive impact on employees, with very little downside for the company itself. In fact, 44% of respondents say that making 401(k) advice more available would have a positive impact on the company as well, and only 13% view it as negative for the company.

When asked about the importance of different features of a 401(k) plan, 87% of respondents rate providing access to 401(k) investment advice as at least moderately important, second only to providing company matching contributions. About a quarter of respondents (23%) report that their company has either suspended the company match or is considering doing so, as a result of the current economic downturn; however, many executives in the survey also say that eliminating the match is one of the most harmful actions a company can take.

The matching contribution is widely viewed as one of the most important features of a 401(k) plan, necessary for attracting employees into the program as well as for ensuring that employees save enough for retirement.

Eighty-eight percent of respondents characterize employees within five years of retirement as "very concerned" about the adequacy of their retirement planning in light of poor economic and market performance. This percentage is cut by more than half (39%) for middle-aged employees, and only 7% of respondents say their younger employees are "very concerned."

Employee concerns over their 401(k) investments are reflected in the increased level of activity observed by respondents at their own companies. Sixty-eight percent of respondents report that the number of employees switching to more conservative investments is increasing, and 64% say that more employees than before are making changes in their 401(k) investment portfolios.

About half of the respondents (48%) report that some employees are lowering their contribution rates, and 43% see some increase in the number of employees who are taking hardship loans from their 401(k) plans.

According to the study report, respondents note that employees are seeking out more advice on how to best manage their retirement investments in a down economy. Fifty-seven percent of executives in the survey report seeing increased employee interest in advice for their 401(k) plans, and 39% see interest in advice for financial planning overall.

Many employers responding to the survey favor loosening some of the current restrictions on employee contribution limits and hardship distributions as a way of keeping employees enrolled and contributing toward their retirement. However, few think any large-scale or permanent changes in the structure or oversight of 401(k) plans are necessary, and almost all employers are against additional intervention by the federal government, the study report said.

Nearly half (49%) of respondents said raising the maximum voluntary contributions allowed for all participants in defined contribution plans would have a positive impact on the company, while 86% said it would have a positive impact on employees. Half of respondents said the government should continue the temporary halt on age 70 ½ mandatory withdrawals or adjust the rule permanently.

More than half said the rules should be changed to allow participants to take a loan from a 401(k) up to a certain limit without penalty. Finance and HR executives also were in favor of providing more investment choices, including fixed-income and guaranteed-rate options.

Only two of the hypothetical changes suggested were viewed negatively by respondents - creating a government-run, mandatory guaranteed retirement plan, and mandating that employers make automatic IRAs available to employees through the workplace. Half of the respondents say that automatic IRAs would be negative for the company, while respondents are split between neutral and positive in their views of the impact on employees (40% neutral, 38% positive).

Respondents appear to be concerned about the cost and complexity involved with establishing automatic IRAs for all employees, as well as with giving up flexibility in their decisionmaking.

The report, "Getting Retirement Savings Back on Track, Employer Views on the 401(k) and Financial Education in the Workplace ," can be obtained at http://www.aboutschwab.com/press/research/index.html .