Automation and Advice Becoming Standard in DC Plans

The Trends & Experience in Defined Contribution (DC) plans survey found the percentage of employers that automatically enroll participants has plateaued at 56% of plans, similar to 2009 levels. Among those not offering, 5.5% plan to add during 2011.  

Companies that offer both DC and defined benefit (DB) plans continue to be more likely to automatically enroll employees (62%), compared to those that are DC only (47%).  

Although there has been much discussion around the needs for automatic enrollment to also reach existing nonparticipants, still the vast bulk (82%) default only new hires, the survey report said. This is nearly unchanged from 2009.  

Default investments under automatic enrollment have shifted to qualified default investment alternatives (QDIA) options, with target-date portfolios dominating. Currently, 78% of plans default participants’ funds into a target-date fund, up from 69% in 2009 and 50% in 2007. Balanced or target-risk funds are used with 13% of plans, managed accounts by 3%, and stable value or money market by 6% of employers.  

The report notes that default contribution rates have also been discussed significantly in the marketplace, focusing on whether these rates are adequate given participant inertia. Two-thirds of plans (66%) continue to use a 1% to 3% default rate. These stats have only marginally improved in the past two years, with 15% of plans defaulting at a rate of 6% or higher (up from 12% of plans).  

Automatic contribution escalation is also more popular, with 51% of plans offering the feature (up from 44% in 2009), and another 6% plan to add in 2011. Escalation is also more popular as part of automatic enrollment, with 45% of plans using automatic escalation within automatic enrollment (up from 40% in 2009). Escalation is more prevalent among plans that initially default at lower rates (76% default at 2% or 3% of pay initially).  

Advice More Prevalent  

The Aon Hewitt survey found investment education and advisory services are increasingly prevalent and top of mind. Nearly all respondents (98%) use written materials for communicating investment concepts, while only 22% report that they are very effective. The most effective media reported is on-site seminars/workshops/meetings (ranked very effective by 54% of plans), followed by call center counseling (38%) and personalized communication (38%).  

More companies are helping their employees make wise investment decisions by offering independent financial advice and education. Three-quarters (74%) of plan sponsors now offer outside investment advisory services to employees, up 50% since 2009 (offered by only 50% of plans). The types of services offered range from online advice (37%) and guidance tools (47%), one-on-one counseling (44%), and managed accounts (29%), with increases seen across all. Another 7% of employers note they will provide these types of services in the next year.  

Close to half (47%) of employers now offer participants access to online guidance, up from 28% in 2009. Additionally, 44% of plans provide one-on-one financial counseling. Both online advice and managed accounts also increased in prevalence, now offered by 37% and 29% of plans, respectively, and 8% of sponsors are likely to add each solution in the coming year.  

Among employers that do not offer outside investment advisory services to their employees, two-thirds report the main barrier being legal/fiduciary in nature. Cost concerns are reported as the primary barrier among 18% of plans.  

The Trends & Experience in Defined Contribution (DC) plans survey has been conducted every two years since 1991. The 2011 survey was responded to by a record number of employers—546 across a variety of plan types, sizes and industries.