Principal: Participation, Deferral Rates Were Up in 2002

A new Principal survey of its 27,000 401(k) plan sponsors and 1.9 million participants found that the overall participation rate actually enjoyed a slight 2% increase in 2002 over the year before, while the deferral rate likewise jumped 0.2% to 6.5% of salary. Those earning between $30,000 and $50,000 saved the most from each paycheck, the company found, with the average account balance of $38,423.

Despite the sizable number of employers slashing their K plan match in the name of cost savings, Principal found that opposite was true – if only slightly. The study of Principal’s plan base – heavily concentrated in the small- and mid-sized end of the market with 73% at companies with fewer than 500 employees – found that the employer discretionary match increased this year to an average of $.36 per dollar of employee contribution from $.35.  

“Contrary to recent headlines about Fortune 500 companies cutting back on retirement benefits for employees, in the often overlooked small and medium-sized business sector, the opposite trend is playing out,” said Larry Zimpleman, executive vice president, retirement and investor services at The Principal.   “These businesses are at minimum holding steady and many are actually improving their retirement plan benefits.   Further, smaller-company employees, who often benefit from a more personalized, intimate work environment, are saving at higher rates than their large-company employee peers.”

When it came to plan participation rate – the percentage of eligible employees with active plan accounts – Principal found that:

• Companies with fewer employees tend to have more people in the plan. All the plan size categories larger than those with $29.9 million in assets – except for $100 million to $499.9 million – have lower rates.   Plans in the $15 million to $29.9 million category had a 64% rate while those in the largest category of $500 million or above had 57% of employees in the plan. Those with 1,000 or more workers had a 38% rate while those with fewer than 50 employees enjoyed a 69% figure.
• There was a lower percentage of employees participating in the $50,000 to $75,000 and $76,000 and above categories in their plans – 66% in both cases – than the 76% of participating workers in the $30,000 to $50,000 range.
• Some 71% of those designated as “highly compensated” were in the plan compared to 63% of those that were not.
• Those in the 45 to 54 year old range had a 68% participation rate while those in the 55 to 64 year old category showed 51% in the plan.

The Principal also studied the average amount participants had withheld from their paychecks with the deferral rate showing increases with a participant’s age, years of service and compensation. Findings in this area include:

• The 55 to 64 year old segment topped the deferral rate chart at 7% while those under age 35 at a 2.2% rate.
• Workers with five to nine years of service had the highest deferral at 6.4%.
• Plans with $50 million to $99.9 million had the juiciest deferral rate at 11.1%.

The Principal researchers also found – not at all surprisingly – that the highest balances were those with the longest company service ($65,906), at the smallest companies with one to 49 workers ($28,913), in plans with $100 million to $499.9 million ($37, 535) and with those earning more than $75,000 ($69,611).

The plan provider also looked at the investment option lineups of its plans. It found that equity funds (domestic and international) made up nearly 50% of its K plan assets while stable value offerings (guaranteed income and money market) represented another quarter. Fixed income and asset allocation funds made up the remainder.

Further:

• Participants younger than 25 years old had the greatest portfolio chunk in equities (53%), while the highest paid workers making more than $75,000 had the fattest stock holdings at 52%.
• Those who had been at the company between three and five years put the most in equities at 53%.

Another area of potential plan sponsor concern is the number of investment options and whether it's too long for employees to handle. Studies have shown that giving participants too many choices can also be harmful to participation and deferral rates (See  Report: Too Many Fund Choices Can Drive Away Participants ):

• The average among the Principal plans is 16 with larger firms offering more than their smaller counterparts. Some 36.5% of plans have a lineup with 11 to 15 funds, while 15.1% allow a choice from eight to 10.
• Company stock is included in more than 100 Principal plans with 23% of assets in company securities among those plans offering it as an option.
• Measuring by plan size, plans with 500 to 999 workers had the longest fund lists with 21 options while those at companies with fewer than 50 workers only had 15 to choose from.

The latest Principal survey disclosed a growing participant interest in being able to access their accounts and get education on the Internet. "Participants want up-to-date information that is available at their convenience," Principal wrote in the study report. "The Internet solution can provide them with 24-hour access to retirement plan information in addition to a wide variety of planning tools."

Online Plans

Principal said 52% of the plans using its online Impact401(k) plan are in the services sector, while 14% are in financial services and 10% in manufacturing.

Impact401(k) clients had less money in domestic stocks than those in the traditional K plan (37% versus 42%) and more in stable value (35% versus 24%).

Granting plan loans is another often sticky area for plan sponsors because, while they are tremendously popular with employees, many benefits administrators fear that participants could unknowingly be harming their retirement savings balance by dipping into it now.

Principal found that the average loan for its plans was $6,198 with most borrowers only carrying one loan at a time. Those in the 35 year old to 54-year-old groups were the most prolific borrowers with twice as many loans as the rest of participants combined, Principal said.

Finally, the plan provider found that 21% of those with account balances took a plan distribution in 2002, accounting for 15% of the total K plan assets. Of those taking a distribution:

• 55% took cash
• 11% rolled into a Principal IRA
• 16% put their money into an external IRA.