Hewitt: Employers Luring More 401(k) Investment Activity

September 3, 2003 (PLANSPONSOR.com) - Plan sponsors have not given up on 401(k) participation yet, as many lure participants with a new siren's song of improved diversification, retained company matches, and other tactics.

In an effort to improve the overall participation, 43% of sponsors are opening the flood gates of new employee enrollments, allowing new hires to enroll as soon as they join the company. This is up from just 35% two years earlier, according to a 2003 survey conducted by Hewitt Associates.

Further, in order to make the process as convenient as possible, virtually all (98%) plan sponsors now provide employees with Internet or intranet access to their 401(k) plans, a steady rise from 88% in 2001 and only 55% in 1999. Also employers are allowing participants more judgment in the how and when of enrollment, as automatic enrollment remains unchanged from last year when 14% of plans offered this option.

Current Participants

As for the employees already in the plan, employers are encouraging higher contribution levels by increasing the maximum contribution allowable under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), up to 39% from just 16% in 2001. Additionally, nine out of 10 plan sponsors are allowing catch-up contributions provided for under EGTRRA for eligible employees age 50 and older.

To further entice larger participant contributions, plan sponsors are doing what they can to hold up their end of the bargain, as the vast majority (84%) have either continued the company match into employee 401(k) accounts or increased the match (7%) in 2002. In fact, only 4% decreased their match during 2002.

With those matches, most of the firms polled (96%) make employer contributions to the plans, with 73% providing a fixed employer matching contribution. Additionally, a majority of employees (84%) invest employee contributions in employer stock, with nearly the same amount (86%) placing no restriction on the percentage of employee contributions in employer stock.

“Despite widespread news to the contrary, most large companies continued, and in some cases, increased matching contributions as a way to demonstrate their commitment to 401(k) plans,” said Lori Lucas, manager of participant research at Hewitt. “Plan participation is such a concern for employers that eliminating the company match is a last resort, even when facing tough economic times. For more than half of the employers surveyed, the 401(k) plan is the primary retirement plan available to employees. As such, it is critical for employers to find ways to ensure that eligible employees use the plan.”

No doubt, participants appreciate the extra contributions, as more than half (55%) of plan sponsors said that the 401(k) plan represents the primary retirement income plan for the employees they cover.

Larger Plan Loads

With larger contributions going into plans, companies are also trying to make the plan more attractive, but not necessarily easier to use, through diversified investments. Overall, plan sponsors have increased investment choices to 14 funds in 2003 from 12 funds in 2001.

Among the most common new funds added by employers have been lifestyle funds, now offered by more than half (55%) of the companies canvassed, a 20% jump from 2001 levels. However, with increased choice comes a word of caution from Hewitt.

“Providing more investment choice doesn’t necessarily make an employee a better or more confident investor. An employee who is already having trouble distinguishing a large US equity fund from a small US equity fund won’t find the investment decision is made easier when specialty funds are added to the mix,” said Lucas.

To help cope with the increased number of investment options and diversification, most companies polled (89%) offer investment education to employees, with four out of ten (42%) saying that the most important goal of education is increasing plan participation.

Hewitt’s research represented more than 3 million employees and $253 billion in 401(k) plan assets. Copies of Hewitt’s study, 2003 Trends and Experience in 401(k) Plans are available for $350 from the Hewitt InfoDesk by calling 847-295-5000 or by email at infodesk@hewitt.com .