Administration May 10, 2002

Firms With Pension, DC More Generous Than DC-Only Firms

October 17, 2001 (PLANSPONSOR.com) - Employers that offer both defined benefit (DB) and defined contribution (DC) plans tend to have savings plans that are more generous, use more channels for employee communication, and are more attentive to plan management activities than those that sponsor only a defined contribution plan, according to a survey.
Reported by

The survey, by William M Mercer, revealed that only 58% of defined contribution plan sponsors also offer a defined benefit pension plan that covers most of their employees – and this proportion is on the decline.

Design

In terms of plan design, the survey found that

  • half of employers offering both types of plans have no age requirement for eligibility, compared with 30% of those with only DC plans
  • employees at half of the DB/DC employers surveyed were eligible within three months of joining the firm, compared to employees at only 28% of DC-only employers,
  • 45% of DB/DC plan sponsors have immediate vesting on the employer match, compared to 27% of DC-only sponsor
  • DB/DC plan sponsors are more than twice as likely as DC-only sponsors to automatically invest company matching contributions in employer stock, 26% versus 11%

Communication

On average, companies with both types of plans use more communication channels to provide information about the savings plan.  In fact:

  • almost half of DB/DC plan sponsors use interactive computer programs to communicate with participants, compared to 38% of DC-only sponsors
  • almost 60% of the former group provide counseling for terminating employees, compared to almost 40% of the latter group
  • a third of DB/DC sponsors target communication to participants who don’t diversify, compared to 18% of sponsors at DC-only companies
  • a third of the DB/DC group target specific messages to participants nearing retirement, compared to 22% of the DC-only group
  • nearly 60% of the former group measure the effectiveness of their communication materials, compared to 43% of the latter group

Management and administration

In the plan management arena:

  • almost 70% have a recordkeeping service contract, compared to half of DC-only sponsors,
  • a little over a third rely on the vendor for investment performance monitoring, compared with 54% of the DC-only group
  • a quarter list under performing assets as a key challenge, compared to 37% of DC-only sponsors
  • only 8% cite compliance issues as a challenge, in comparison to the 17% of DC-only sponsors.

Investments

Two-thirds of DB/DC plan sponsors have an investment policy for their defined contribution plan, compared to 45% of DC-only sponsors.

Of the plan sponsors who offer both types of plans:

  • some 70% offer a stable-value fund, versus 57% of DC-only sponsors. Almost three quarters offer an indexed domestic equity fund, compared with 62% of the other group
  • almost 30% offer a large-cap core domestic equity fund, compared with 16% of the latter group,
  • almost 45% offer company stock for employee-directed assets, compared to a quarter of DC-only sponsors

However, it is less likely that employee direction is allowed for company matching contributions in organizations where the employer sponsors both types of plans, 71%, compared to 89% for DC-only sponsors.

Other survey findings

Defined contribution plans differ according to whether the finance department or the human resource department exercises the greatest influence on plan decisions.

Where the finance department holds sway, a DC plan is more likely to have a non-matching company contribution, a discretionary company contribution, performance standards that are linked to specific measures, and to have the employer pay the majority of plan fees.

One third of respondents recently loosened their eligibility requirements, primarily to increase participation, but also to attract and retain employees.

Mix and Match

More than 90% of the surveyed plans offer employer matching contributions, with the most common amount 50% on the first 6% of employee contributions.The amount of the match generally does not depend on service, end-of-year employment, or location.

A little over 20% of respondents reported having improved their matching contribution within the past three years. Nearly 40% of all plans have immediate vesting for employer contributions.

Options

The average number of investment options available for employee assets rose to 11.7 in 2000, up from 9.5 in 1998 and 4.2 in 1992.

In addition:

  • over 80% of respondents increased the number of options offered between 1998 and 2000
  • almost half plan to increase the number of investment options this year or next
  • 24% planned to decrease the number of available options.

The survey also found that between 1998 and 2000:

  • the greatest growth was in the percentage of plans offering life cycle funds, rising from 17% to 26%
  • brokerage and mutual fund window accounts, which increased from 7% to 12%
  • the percentage of plans offering a company stock fund for employee-directed investments rose from 23% to 35%

Methodology

Respondents represent 252 sponsors of defined contribution plans with assets totaling $125 billion. The average number of eligible employees per respondent is 8,100.

«