The 2013 Trends & Experience in Defined Contribution Plans survey found that the continued shift from defined benefit (DB) plans to defined contribution (DC) plans has placed a greater emphasis on employees to take responsibility for their own retirement readiness.
To aid their employees, employers are increasingly taking bolder actions to help ensure participants achieve greater financial security. For example, recognizing the vast majority of employees are not prepared to maximize their 401(k) savings potential, the survey found that employers are making significant changes in plan structure and investments, while also increasing the amount of guidance provided to participants.
In surveying plans to determine their retirement benefits strategies, plan design and administrative practices, Aon Hewitt found that for 77% of employers, DC programs such as 401(k) plans are the primary source of retirement income for their employees. When asked how they measure the success of their DC plans, employers’ top responses were “facilitates adequate retirement income” (18%) and “high participation rate” (17%).
“Employees know they need to save for retirement, but it’s usually not a priority and they often need some help and guidance in mapping out a path for getting there,” said Rob Austin, director of retirement research at Aon Hewitt. “Fortunately, employers are stepping up to the plate and strengthening their offerings in ways that will not only increase participation, but empower employees to take full advantage of the myriad investment opportunities the DC plan affords them.”
The survey showed that employers are taking a multi-faceted approach to strengthening their programs and promoting more retirement savings among individuals. One approach that employers are using is the boosting of the employer match. To help contribute to employees’ retirement security, a growing number of employers have increased their company match to the 401(k) plan. Findings showed the most common match to be $1 per $1 on the first 6% of employee deferrals, with 19% of employers reporting this formula, which is up from 10% in 2011. Previously, a match of $0.50 per $1 on the first 6% was the most popular. Nearly all employers (98%) were found to provide some sort of employer contribution to the plan.
“In the 20 years we’ve been doing this study, this is the first time we saw the most common match increase,” said Austin. “Our experience shows that almost three-quarters of employees save at a level equal to or above the company match threshold. Increasing the amount employers are willing to contribute may help encourage those employees to save at more robust rates.”
Another approach employers are using is a relaxing of the rules. Rather than making employees wait to enter the plan, employers have drastically relaxed their eligibility requirements over the past decade. Seventy-six percent of plans now allow workers to begin making pre-tax contributions immediately upon hire, which is up from 71% in 2011. In 2001, only 45% of employers allowed for such “day one” contributions. In addition, 53% of plans have corresponding immediate eligibility for employer-matching contributions, while 50% of plans that offer a non-matching employer contribution allow immediate eligibility. According to Austin, providing new hires with immediate eligibility helps ensure they don’t lose ground in terms of saving.
Yet another approach employers are using is the broadening of Roth availability. Recognizing that individuals have different tax situations, employers are increasingly adding Roth provisions to their plans. Over the last six years, the percentage of employers that allow Roth contributions rose from 11% to 50%. Where Roth is available, 27% of plans allow in-plan Roth rollovers/conversions. Another 16% of companies are planning to add the feature within the next 12 months.
Employers are also using the approach of facilitating access to expert resources. Because many employees possess limited investment knowledge, employers have significantly increased the availability of outside investment advisory services. Three out of four plan sponsors now offer access to such services, the most common being one-on-one financial counseling (59%), online guidance (55%), managed accounts (52%) and online advice (46%). The largest increase came in the number of employers offering managed accounts, which stood at just 29% in 2011. Advice for target-date funds is now offered by 86% of plan sponsors.
Aon Hewitt surveyed more than 400 plan sponsors, representing over 10 million employees, in plans that total $500 billion in retirement assets.
More information, including highlights and how to purchase a copy of the survey, can be found here.