Turning the corner into 2012, 401(k) plans are regaining some of their lost glitter, but more buffing needs to be done.
In October, Towers Watson came out with the welcome news that more employers are restoring the matching plan contributions they suspended during the recession.
Out of 260 employers surveyed by the consulting firm, 75% that suspended their 401(k) matching contributions between January 2008 and January 2010 have now restored them, Towers Watson reports.
Among those employers, about three in four (74%) reinstated the matching contributions to their previous level, 23% of employers restored them at a lower rate, and 3% actually increased them. The most frequent employer match formula before and after the suspension matched 50% of employees' salary deferrals, up to 6% of pay.
The median duration for match suspensions was 12 months. Forty percent of employers had reinstated their matching contribution by the beginning of 2010, and the second-largest wave of reinstatements was in early 2011. The researchers noted that the rate of reinstatement varied by industry, with health care and manufacturing out front (see chart).
"The fact that the vast majority of employers have reinstated their matching contributions is good news," says Robyn Credico, a senior retirement consultant at Towers Watson. "There was a concern after the stock market fall and the suspensions of the employer match about whether 401(k)s were still a good retirement savings option. The fact that employers still want to contribute to them is an important message."
Pumping up participation
Restoring matching contributions is likely to increase the number of employees investing in 401(k)s. But experts say more can be done in 2012 to improve both participation and savings rates.
One area that plan sponsors and advisers should examine is the automatic enrollment feature now in many DC plans.
"Vanguard did a study that showed participation rates have gone up on average, but savings rates have gone down," notes Credico. "How is that possible? It's because more employers are adopting auto-enrollment, which is good, but they are defaulting to a 3% contribution on average. That's a lot less than many employees would do on their own, and it's certainly not enough for a meaningful retirement.
"Going forward, we need to look at how to get people to save more, whether it's defaulting them in at a higher rate, making automatic increases in the contribution rate, or educating them to increase their savings rate," she maintains. "There's a big opportunity for improvement."
Research demonstrates that defaulting employees to a higher savings rate does not cause them to drop out, Credico says. Data also indicate that people will save up to the company match.
"So you could design your match to get people to save more. For example, you could match 100% on the first 4% employees save or 50% on the first 8%. It will cost you the same amount of money, but more employees will go for the 8% match to get the full benefit. That's an extreme example, but it makes the point."
Minimizing plan costs is another way to help ensure that participants wind up with fatter nest eggs. Plan fees will be uppermost in sponsors' and advisers' minds as they move to implement the DOL's regulations on 401(k) fee disclosures, which takes effect on January 1. The Labor Department's Employee Benefits Security Administration published an interim final regulation on participant-level fee disclosure regulation in October 2010, and the final rule was expected at press time.
The rule requires 401(k) plans to disclose information about the plan's investment alternatives, including fee and performance information, which must be provided to participants and beneficiaries in cases where they have the ability to direct the investment of their individual accounts. Most plans will be required to furnish the first set of disclosures under this regulation by May 31, 2012.
"As a result of the rule, there will be a lot more information going to plan participants," says Judy Miller, director of retirement policy at the American Society of Pension Professionals & Actuaries. "The concern now is how to deliver that information in a way that is hopefully helpful and not overwhelming."
To that end, ASPPA has asked DOL to permit sponsors and administrators to provide disclosure information to participants electronically rather than in print form.
"We've requested that sponsors be permitted to use electronic distribution as the default," Miller explains. "People should always be able to get paper when they ask for it, but given the volume of information, for most people electronic [delivery] would be more useful. We were disappointed in DOL's guidance on this, so we're raising the issue on Capitol Hill in hopes of getting lawmakers to prod the department."
Retirement income products
Complying with the fee disclosure rules will be particularly important for plan sponsors that are considering adding a retirement income product to their 401(k) or other defined contribution plan, according to the Institutional Retirement Income Council. IRIC cautions that employers will have to clearly communicate what fees participants will be paying for these products and what value they will be receiving, which is no simple task.
"As plan sponsors become more interested in offering guaranteed lifetime income products, understanding the fee structures will be critical," explains Clark Frese, principal at Asset Strategy Retirement Plan Consultants and author of a new IRIC issue brief, Understanding How Guarantee Fees are Structured and Paid in Institutional Retirement Income Products. "While income annuities can provide higher amounts of guaranteed lifetime income, the fees associated with them are not explicitly stated. Conversely, guaranteed minimum withdrawal benefits generally provide lower amounts of guaranteed income, but provide for greater flexibility and have explicit fees for both investment management and income guarantees. Plan consultants and advisers can assist their clients to better understand the trade-offs with each approach and each income product."
Despite the fact that the economy is still struggling and real income is not projected to increase anytime soon, experts believe that it's possible to move more employees into plans and get them saving at higher levels. The keys are better communication, education and plan design changes, which should all be on plan sponsors' and advisers' radar in 2012.
"There's still money to put into plans," Miller observes. "We don't have 95% participation yet."
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