DC Plan Focus Is Evolving

October 22, 2012 (PLANSPONSOR.com) – The goals and designs of defined contribution (DC) plans are evolving as defined benefit (DB) plans are increasingly replaced.

According to Diversified’s “Report on Retirement Plans 2012: Bridge to Your Retirement Success,” while having a high participation rate is still viewed as the best indicator of plan success, its significance is falling. In 2012, 52% of plan sponsors believe participation rate is the best indicator of plan successdown from 58% in 2011. During this same period of time, the number of plan sponsors selecting average deferral rate as the best indicator of plan success climbed from 14% in 2011 to 20% in 2012.      

Nearly all large corporate plan sponsors (95%) offer a fixed or discretionary employer contribution. Among those who offer a fixed contribution, 84% use a matching formula. The two most common matching formulas are dollar-for-dollar on the first 5% to 6% of pay (20% of plans use this formula, up from 11% in 2011), and fifty cents on the dollar on the first 6% of pay (17% of plans use this formula, up from 15% in 2011).    

More than half of all large corporate 401(k) plans (53%) offer financial advice and an additional 33% are considering adding this to their plan’s offering. The use of automatic enrollment and automatic deferral increases is also growing.  Forty-five percent of large corporate 401(k) plans sponsors have implemented automatic enrollment and 40% are considering implementing this feature.    

Automatic deferral increases have been implemented by 30% of plan sponsors, and an additional 43% are considering adding this feature in the future. However, among plans taking advantage of automatic enrollment, 58% enroll participants at a default deferral rate of 3% or less–far lower than the 6.7% average deferral rate for self-enrolled participants.  

The percentage of employees at large corporations participating in their employers’ 401(k) plans remains unchanged since 2011 at 69%; and the average deferral rate dropped sharply from 8.8% in 2011 to 6.7% in 2012. With deferral rates falling, 56% of plan sponsors report that motivating employees to save adequately is “extremely” or “very” challenging, which surpassed keeping up with regulatory challenges (52%), helping participants invest wisely (43%) and meeting fiduciary responsibilities (38%).

According to Diversified’s report, 95% of all large corporations offer a 401(k) plan (all offer some type of DC plan), and 80% offer a DB plan. However, evidence that many sponsors are likely to be terminating their defined benefit plans is widespreadonly 42% of defined benefit plan sponsors state they are likely to continue to offer defined benefit plans to all employees during the next five years. Thirty-five percent expect to continue to offer DB plans to existing employees but not new employees, 13% are likely to freeze active DB plans, and 10% believe they will terminate active DB plans during this period of time. 

Thirty percent of all DB plan sponsors indicate the plan’s impact on company financial statements is their primary concern, narrowly edging out the financial health of the DB plan, which was singled out by 26% of all sponsors. Other top concerns include the company’s long-term commitment to the DB plan (15%), investor concerns about the plan (14%) and employee appreciation of the plan (12%).  

Other highlights from the report include: 

  • Nearly half (45%) of all DB plan sponsors have created a DC plan as a DB plan replacement.  
  • Fifty-three percent of large corporate plan sponsors use an adviser–a trend that is likely to grow, as 19% of plan sponsors have plans to hire an adviser within the next 12 months. 
  • On average, large corporate 401(k) plans offer 13 investment options in 2012–up slightly from 12 options in 2011. 
  • Seventy-six percent of large DC plans offer investments that are proprietary to the service provider. 
  • Across all large corporate plans, the benefits budget allocation for all retirement plans (DC plans, DB plans and nonqualified deferred compensation plans) is nearly equal to the health care budget, with 34% dedicated to retirement plans and 32% to health care. 
  • Just 20% of all plan sponsors believe participants understand their plan’s fees “very well.”  Forty-six percent state participants understand fees “somewhat well,” and 34% report that participants do not understand the fees. 


“The Report on Retirement Plans 2012: Bridge to Your Retirement Success” survey was completed in the second quarter of 2012 by more than 270 individuals responsible for the administration of retirement benefits in a company with more than 1,000 employees.    

To request a copy of report, email RetirementResearchCouncil@divinvest.com.