Survey: K Plan Participation Decline Calls for Back to Basics Ed.

August 1, 2003 ( - Trends in the US 401(k) market of drooping participation and deferral rates represent a chance for plan sponsors to get back to basics in their participant education programs, a new survey said.

The Defined Contribution Market Insights 2003 survey maintains that participants’ apparent reaction to the down market, corporate scandals, and their own household income worries should prompt sponsors to once again start beatting the drum about “the basic premises on which DC plans were built.” Survey sponsors were the National Defined Contribution Council (NDCC), , and the Spectrem Group, .

Specifically, the study recommends concentrating education efforts on:

  • saving for retirement on a tax-deferred basis
  • the tax-free accumulation of assets
  • a 401(k) plans access to diversified investment opportunities
  • long-term investment strategies.

The notion of declining participation rates was amply borne out in the NDCC/Spectrem survey. According to the report, 401(k) plan participation jumped from 62% in 1984 to a high of 80% in 1999, but then gave back some of the advance through a 10% drop to 70% in 2002.

The large end of the market has been hardest hit.   By plan size, the drop between 1999 and 2002 was:

  • 2,500 or more employees, 11%
  • 500 to 2,499 workers, 10%
  • 100 to 499 workers, 8%
  • Fewer than 100 employees, 8%.

The survey also chronicles the trend for participants to save less out of each paycheck into the K plan account with an average drop in the average deferral rate to 7% from 8.6% between 1999 and 2002. The small market segment (fewer than 100 participants) got whacked the hardest on the issue with a 1.7% deferral rate decline to 7.2% in 2002 from 8.9% three years earlier.

Interestingly, mega-size plans with more than 2,500 participants actually upped their deferral rate 0.7% to 6.3% in 2002 from 5.6% in 1999.

Among the other size plans, deferral rate changes were:

  • 500 to 2,499 participants, 1.5% to 5.9% in 2002 from 7.4% in 1999
  • 100 to 499 participants, 0.4% to 6.5% in 2002 from 6.9% in 1999.

One possible reason for the participation rate drop, the researchers said, is the shrinkage in the number of sponsors offering an employer match, which the survey labels “a key motivator in garnering employee participation.” Some 77% of plans offered a match in 2002, down dramatically from the 83% who did so in 1995.

Given the data about the participation rate decline, it’s hardly surprising to find that nearly a third of sponsors (27%) pointed to increasing plan participation as their top plan objective over the next three to five years. The rest of the plan objectives list included:

  • offer more employee education, 18%
  • earn a better return on investment, 17%
  • increase contributions/deferrals, 10%
  • offer retirement planning tools, 10%
  • increasing matching contributions, 8%
  • offer more investment options/diversification, 7%
  • maintain employer contributions, 6%
  • maintain participation, 6%
  • increase Web site usage, 6%.

The survey respondents have clearly gotten the message about trying to step up their participation rate since the 19% of sponsors listed that as their main participant education goal in 1999 while a whopping 43% came to that conclusion three years later.

Finally, as far as addressing participants’ concerns about US corporate scandals and their effects on the market slump are concerned, only about a third of sponsors initiated a communications program on the issue. Among those who did take action, 16% conducted employee meetings while 15% hit on the topic in letters and Web site postings.