U.S. Employers Remain Committed to 401k Plans

Notably, according to Hewitt's research of nearly 500 large employers nationwide representing more than 3 million employees and $253 billion in 401k plan assets, a great majority of companies (84 percent) either continued the company match or increased the match (7 percent) in 2002. Just four percent of companies surveyed decreased their match during 2002.

"Despite widespread news to the contrary, most large companies continued, and in some cases, increased matching contributions as a way to demonstrate their commitment to 401k plans, said Lori Lucas, manager of participant research at Hewitt. "Plan participation is such a concern for employers that eliminating the company match is a last resort, even when facing tough economic times. For more than half of the employers surveyed, the 401k plan is the primary retirement plan available to employees. As such, it is critical for employers to find ways to ensure that eligible employees use the plan."

Employers Boost Participation

More employers said they are making 401k plans available to employees. Currently, 43 percent of companies say they are allowing employees to enroll in 401k plans as soon as they join the company, up from 35 percent in 2001.

Employers are also encouraging higher contribution levels by increasing the maximum contribution allowable under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) -- from 16 percent in 2001 to 39 percent in 2003. Likewise, the vast majority -- 90 percent of plan sponsors--now allow catch-up contributions to the plan for those eligible employees age 50 and older. "There's been a big push to allow employees to contribute as much as possible under the new regulations," Lucas said.

Improving Diversification is Key

In some cases, the improvements cited by companies surveyed may make the plan more attractive, but not necessarily easier to use. Employers cited "not diversifying investments adequately" as the most common mistake employees make in investing in their 401k accounts. As such, employers reported that they are making more diversification opportunities available, increasing investment choices from 12 funds in 2001 to 14 in 2003. However, Lucas cautioned, "Providing more investment choice doesn't necessarily make an employee a better or more confident investor. An employee who is already having trouble distinguishing a large U.S. equity fund from a small U.S. equity fund won't find the investment decision is made easier when specialty funds are added to the mix."

More Employers Offer Lifestyle Funds

Among the most common new funds added by employers have been lifestyle funds. Currently, 55 percent of companies surveyed offer these funds, up significantly from 35 percent in 2001. Lifestyle funds offer a diversified, pre-mixed portfolio designed for employees who are looking for a turnkey investment solution. "Lifestyle funds really do simplify the investment lives of employees -- diversification and rebalancing is done for them," said Lucas. "The challenge for employers is communicating that lifestyle funds aren't just another single asset class to choose from, but that they are a different animal altogether -- a diversified mix of asset classes that can serve as a total portfolio."

Additional Survey Highlights

• Nearly all (98 percent) employers provide employees with Internet or intranet access to their 401k plans, up from 88 percent in 2001 and 55 percent in 1999.
• Automatic enrollment remains unchanged from last year when 14 percent of plans offered this option.
• Most companies (96 percent) make employer contributions to the plans and 73 percent of plan sponsors provide a fixed employer matching contribution.
• A majority of employees (84 percent) invest employee contributions in employer stock and 86 percent place no restriction on the percentage of employee contributions in employer stock.
• More than half (55 percent) of the employers said that the 401k plan represents the primary retirement income plan for the employees they cover.
• Most employers in the survey (89 percent) offer investment education to employees. Four out of ten (42 percent) said that the most important goal of education is increasing plan participation.

Employers Can Help Employees Fix Common Mistakes

"Potentially driving employers' interest in improving their plans is the fact that only 17 percent gave their plans top scores for participation, and only 15 percent scored themselves highly for the plan being valued and appreciated by employees," Lucas explained and offers the following advice to companies.

1. Target, personalize and simplify employee communications. Recognize that certain people may be "reluctant consumers" -- or at the very least, disinterested investors. Offer a strategic mix of targeted, personalized, and simplified messages to employees. For example, younger workers may respond more readily to messages about general financial security and the benefit of the company 401k match. In contrast, messages of retirement, tax savings, and long-term accumulation may resonate more with older workers.
2. Understand that some consumers simply won't be reached through even persistent communication efforts. Such workers may be served best by automating certain features of the plan, such as enrollment, contributions and rebalancing.
3. Be aware that plan design may affect employee behavior in unexpected ways. When the employer match is up to 3 percent of pay, it's critical to communicate to employees that they are responsible for determining the level of contributions that will allow them to reach their retirement goals. Provide tools such as online forecasting, which can help workers select an appropriate savings rate. Likewise, when the match is invested in company stock, communicate the importance of directing contributions to a well-diversified mix of investments.
4. Don't confuse the vocal minority and silent majority. Although more investment-savvy consumers may request more funds and choices, having more choice can be distracting and confusing to the majority of less-investment-savvy participants.
5. Consider a multiple-media approach to communicate with employees. Different employees will respond to on-line versus print versus in-person communication. Once again, one size won't fit all employees.

This article was provided by Hewitt Associates, a global human resources outsourcing and consulting firm.

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