Nearly all (93%) respondents to the 2006 Best Practices in Retirement Plans Survey sponsor a 401(k) or other similar plan, and four out of five employers said they view it as the primary vehicle for their employees’ retirement income, according to a Wells Fargo press release. One-third of respondents provide a defined benefit or traditional pension plan to their employees.
However, survey results indicate the number of employers sponsoring a DB plan will decline as one in five companies with a DB plan report they intend to close it to new employees, 14% intend to replace their pension plan with a 401(k) or similar plan, 13% intend to freeze current benefits in their pension plan and 5% intend to terminate their pension plan within the next 12 months.
The study found employers most concerned (43%) that their employees are not saving enough for retirement, the release said. Other concerns include educating workers about their retirement plans (27%), the increasing cost of providing retirement plans (17%) and uncertain or changing legislation and regulations (11%).
Enhancing DC Features
To address the concern that employees are not saving enough, employers responding to the survey are changing their 401(k) plan design by adding features such as:
- Automatic Enrollment – One-quarter of employers (26%) report automatically enrolling workers in 401(k) plans, and 10% plan to add that feature in the next year. Plans with automatic enrollment had participation rates 10% higher than those without the feature (74% vs. 64%). The typical plan with automatic enrollment used 3% as the default contribution rate and stable value or money market funds as the default investment option. Six percent of respondents plan to offer automatic portfolio rebalancing to employees and 5% plan to add an automatic contribution increase program within the next 12 months.
- Target Funds – Nearly half of all companies in the survey (48%) offer target date or target risk funds, which are investment options managed to a particular risk tolerance and/or retirement date. The funds geared to a particular retirement date are the most popular, with 60% of these employers offering target date funds. One in five employers (21%) offer target risk funds and 19% offer both types of target funds. Nine percent of employers plan to add these funds within the next 12 months.
- Managed Accounts and Advice – More than two-thirds of respondents (69%) already provide some form of investment advice or education resource to employees. Five percent of employers plan to add managed accounts within the next 12 months.
- Roth 401(k) Contributions – Only 3% of survey respondents currently offer a Roth 401(k) plan feature, but 16% plan to add the feature within the next 12 months.
Additionally, the survey showed the greatest concern for 43% of employers who offer a DB plan was the increasing cost of providing retirement plans. Seventy-six percent of those employers say they are already taking steps to reduce DB plan costs. The top four cost-reduction strategies included:
- changes in actuarial assumptions (45%),
- changes to portfolio mix (35%),
- strategic plan changes, including amendments or plan freezes (34%), and
- asset-liability forecasts (30%).
Twenty-four percent of employers surveyed report offering one or more non-qualified deferred compensation plan, generally available to company executives. Most of the employers that sponsored a non-qualified plan (71%) had 500 or more employees.
The survey asked employers about their compliance strategy for the most recent development in the area of non-qualified plans – Section 409A of the Internal Revenue Code. Twenty-four percent indicate they do not know what their strategy will be.
Of those that have already adopted a compliance strategy:
- 18% have grandfathered prior deferrals and established a new plan,
- 18% have grandfathered prior deferrals for former participants and applied the new requirements to active participants’ prior and future deferrals,
- 14% are waiting for further guidance before amending their plan,
- 7% have applied 409A to prior and future compensation, and
- 3% have terminated their prior plan and established a new plan.
BPS&M conducted its survey from mid-March to early June 2006. Respondents included more than 450 employers of all sizes from all regions of the US, with a concentration among private employers with between 500 and 10,000 employees.
A copy of the survey results can be obtained by calling 615-665-5335.