DC Sponsors Ready to Bring on Their Game in 2011

January 4, 2011 (PLANSPONSOR.com) – Defined contribution plan sponsors intend to implement improvements in company contributions, use of automatic features, and the increased usage of Treasury Inflation-Protected Securities (TIPS) funds.

Callan Associates said in a news release that those steps are being contemplated as part of an effort to strengthen their savings programs after the downturn, a key conclusion of its 2011 Defined Contribution Trends Survey: Positioning the DC Plan for the Future report.

Prospects for company contributions to DC plans are getting better. Of the plan sponsors that reduced or eliminated company contributions to their plan during the past two years (nearly 20%), 58% intend to reinstate them over the next 12 months, Callan said. Nearly one-third have restored them partially or completely—and 75% of those reinstated company contributions at full prior levels.

According to Callan, plan sponsors are boosting their use of automatic features. Adoption of automatic enrollment increased from 43.9% in 2009 to 51.3% in 2010. Similarly, automatic contribution escalation soared from 33.8% in 2009 to 46.2% in 2010.

More Unbundling  

Callan found that the use of unbundled structures is on the rise. Though partially bundled plans still dominate at 49.4%, fully unbundled plans increased from 29.9% in 2009 to 34.9% in 2010. The unbundling trend may continue as large plan sponsors seek to reduce participant costs, spread fees more equitably and increase investment flexibility.

“The number of positive trends in this year’s data is encouraging,” said Lori Lucas, defined contribution practice leader at Callan Associates, in the news release. “After spending a significant amount of time reacting to market conditions, the faltering economy, and grappling with new legislation and regulations, plan sponsors are returning their focus to improving their DC plans.”

Another key area of focus for plan sponsors revolves around plan fees, Callan found. Their highest priorities in order are to ensure that fees are: reasonable, well monitored and documented, and are clearly communicated to participants. Equitable fee payments ranked fourth in the survey. Nearly 85% of sponsors have calculated their plan fees within the past 12 months and 84.1% of those benchmarked their DC plan fees.

Callan’s survey found that sponsors face several possible challenges during the year with inflation ranking high among their concerns. As a result, real return and TIPS funds were the most commonly added options in 2010 and will likely keep that spot in 2011. Conversely, few plan sponsors are eager to offer income for life products.

Other findings included 

  • The use of investment consultants by plan sponsors jumped from 64.6% in 2009 to 71.8% in 2010;
  • Nearly 50% of DC plans have Roth designated accounts – up from 27.8% in 2008; and
  • Approximately 70% of plans offer target date funds (TDFs) as their default investment fund for non-participant directed monies, but growth in TDFs prevalence is stagnant.

Callan conducted the study in October 2010. The majority of the 90 U.S. companies surveyed, 76.2%, offer 401(k) plans and one in ten sponsors a 457 plan. Nearly 80% of these plans have upwards of $100 million in assets and 46% more than $1 billion.