403(b) Sponsors Could Do More to Help Employees Save

January 15, 2009 (PLANSPONSOR.com) - While new Internal Revenue Service (IRS) regulations are the primary driver of recent 403(b) plan changes, hopefully sponsors have been considering changes that will also make their programs a better retirement savings vehicle for employees.

However, their programs cannot benefit employees that are not participating in them, and PLANSPONSOR’s 2009 403(b) Industry Report shows 403(b)s are lagging in employee participation and plan features that incent participation. The Industry Report is based on the responses of 358 403(b) plan sponsors to the 2007 Defined Contribution (DC) Survey (See Cover: 2007 PLANSPONSOR DC Survey: Picking Up the Pace ).


Overall, PLANSPONSOR’s survey found only about one in five 403(b) plans use automatic enrollment. However, among those plan sponsors that did offer automatic enrollment, 60.3% said the primary reason for offering it was to be more proactive in helping employees save.


Those sponsors offering auto enrollment also helped their participants with investment choices as the majority 59.1% used either target-date funds (36.6%) or risk-based lifestyle funds (22.5%) as their default investment for automatic enrollment.


Another plan feature that some research has indicated promotes employee participation is employer match. While the Industry Report shows 70.3% of 403(b)s include a company match, the majority of sponsors indicated a match rate of less than 50% of the first 6% of employee deferrals (40%) or only 50% of the first 6% of employee deferrals (25.9%).


A higher match rate could not only encourage more employees to participate, but may encourage them to participate at a higher savings rate. On average, sponsors reported, just two-thirds (65.9%) of participants are deferring enough salary to receive the full match.

While 403(b) plan sponsors have room to improve participation efforts, PLANSPONSOR's 2009 403(b) Industry Report shows they are doing a good job of helping existing participants invest.


According to the report, 49.2% of 403(b)s offer target-date funds, 27% offer risk-based lifestyle funds, and 20.3% offer managed accounts. On average, almost a third (31.8%) of participant balances are in these fund types.


Four in ten sponsors (42%) said investment advice is offered to plan participants through their plan providers. Further, the survey found nearly three-quarters (74.4%) of organizations that sponsor a 403(b) say they have an investment committee for the plan, and more than two-thirds (69.6%) reported they formally review investment costs and fees annually. In addition, 74.6% have a written investment policy statement for the plan.


The Industry Report also found 403(b) sponsors are more likely than sponsors of other types to offer an annuity as a distribution option for retiring plan participants. More than half (58.7%) of 403(b) plans offer an annuity option, while only 27.7% of sponsors overall offer one.


For a copy of the 403(b) Industry Report or similar reports, contact Brian Neligan at 203-595-3274 or qkeeler@assetinternational.com.