Plan Designs Change, But DC Commitment Remains Strong

Simple matching formulas are the most common type of employer contribution—found in 45% of 401(k) plans in the BrightScope database.

A new report from BrightScope and the Investment Company Institute (ICI) finds the great majority of employers that sponsor 401(k) plans—more than three-quarters—contribute to their plans to promote employee financial wellness.

The in-depth study, “The BrightScope/ICI Defined Contribution Plan Profile: A Close Look at 401(k) Plans, 2014,” shows employers use a range of formulas when they provide matching contributions. It also reveals that plan sponsors offer a wide variety of investment choices and that mutual fund fees in 401(k) plans have trended down.

Data from the study was drawn from the Department of Labor (DOL) on a wide range of private-sector 401(k) plans, with additional detailed investment data drawn from the BrightScope Defined Contribution Plan Database, which covers nearly 30,000 large 401(k) plans.

“The study underscores how the 401(k) plan’s flexible structure permits employers to configure their own plan designs to encourage employee participation and meet the needs of their workforces,” observes Sarah Holden, ICI’s senior director of retirement and investor research and a researcher on the study. “As the 401(k) market evolves, plan sponsors revisit and refine their plan designs and remain committed to promoting retirement saving, offering a wide range of investment choices, and often making contributions to the plans.”

Looking across the universe of 401(k) plans, the analysis finds that employers contributed about one-third, or $115 billion, of total 401(k) plan dollars invested in 2014. In nearly all (95%) of the large plans with 5,000 participants or more, the employer contributed in 2014, while more than three-quarters of small 401(k) plans with fewer than 100 participants featured employer contributions.

NEXT: Additional findings highlight sponsor shifts 

“Focusing on a sample of large 401(k) plans reveals that in 25% of 401(k) plans in the BrightScope database, employers contributed to the plan without regard to how much the employee contributed,” the study shows. “Simple matching formulas are the most common type of employer contribution—found in 45% of 401(k) plans in the BrightScope database.”

Under simple matching formulas, an employer matches an employee contribution up to a fixed percentage of the employee’s salary (for example, 50 cents on the dollar on employee contributions up to 6% of pay). Another 14% of 401(k) plans in the BrightScope database had a tiered formula, with employers matching different levels of employee contributions at different rates, and 2% of employers matched up to a maximum dollar amount.

Among the most positive findings, researchers observe that nearly all (97%) of the sample of more than 50,000 large 401(k) plans with 100 participants or more and at least $1 million in plan assets included at least one of the three activities considered crucial to plan success by many observers—automatic enrollment, employer contributions, and carefully controlled participant loans. Twenty-one percent of the 401(k) plans in the sample reported evidence of all three activities.

“Larger plans were more likely to have all three activities in their plans,” researchers suggest. “The most prevalent combination of plan activities was employer contributions in plans that also had participant loans outstanding—observed in 47% of 401(k) plans in the sample.”

NEXT: Fund fees trending down 

Based on the data from the BrightScope database, the study found that mutual fund fees in 401(k) plans trended downward between 2009 and 2014. The study also found that fund expenses are typically lower in larger plans.

“For instance, the average asset-weighted expense ratio for domestic equity mutual funds was 82 basis points for 401(k) plans with $1 million to $10 million in plan assets, compared with 39 basis points for 401(k) plans holding more than $1 billion in plan assets,” researchers observe.

Brooks Herman, head of data and research at BrightScope, a unit of Strategic Insight, further observes that fees in 401(k) plans continue to trend downward over time, due in large part to increased transparency in the form of public disclosure that have allowed plan participants and plan sponsors to better judge the impact of fees on 401(k) savings.

As in years past, other key findings show mutual funds were the most common 401(k) investment vehicle, holding 46% of 401(k) plan assets in the sample in 2014. Collective investment trusts (CITs) held 26% of plan assets; guaranteed investment contracts (GICs) held 9%; separate accounts held 4%; and the remaining 16% was invested in individual stocks, bonds, brokerage, and other investments. In the qualified default investment alternative (QDIA) slot, target-date funds (TDFs) are still supreme; 76% of 401(k) plans in the sample offered target-date funds, compared with 32% in 2006. During the same period, the share of participants who were offered target-date funds rose from 42% to 77%.

The research further shows the offering of index funds rose from 79% to 89% from 2006 to 2014, and the percentage of plan assets invested in index funds rose from 17% to 29% during that period.

The full report is available for download here