As the popularity of defined contribution (DC) plans grows, sponsors in the United States are taking a number of positive steps to help their employees, finds a study by Greenwich Associates.
More than one-third of DC plan sponsors are using automatic enrollment in their 401(k) plans, up from about one-quarter of plans in 2006. Among plans with less than US$250 million in assets, 36% have taken this step.
The study also finds that the popularity of target retirement funds is rising. The percentage of large plan sponsors that offer target retirement funds as an investment option in their 401(k) plans increased to almost 80% in 2007 from 60% in the previous year. At the same time, the share of non-users saying they are seriously considering offering such funds in the next two years increased to 48% last year from 36% in 2006.
In terms of assets, allocations to target retirement date funds increased to 3.4% in 2007 from 2.2% in 2006 among large plans, and to 7.0% from 5.0% among plans smaller than $250 million. Approximately 40% of funds that have adopted automatic enrollment use target retirement date funds as their default, compared with about one-third using money market funds.
Plan sponsors are also helping their members maximize contributions. Among companies with more than $250 million in DC plan assets, more than 30% contribute to employees’ 401(k) plans even if participants do not make any contributions of their own. More than 40% of plan sponsors with less than $250 million in assets say they make DC contributions regardless of whether individual participants decide to contribute.
Large DC plan sponsors have taken the lead in adopting another provision intended to raise employee contributions: automatic increases in the percent of salary deferred in the 401(k) plan that take effect as participant compensation increases.
“As companies continue to close their defined benefit plans to new employees, the performance of 401(k) plans is becoming increasingly important to employees and to society as a whole,” says Greenwich Associates consultant Chris McNickle. “The changes being enacted by corporate plan sponsors will have a positive effect on DC plan participation rates, investment returns and, ultimately, outcomes for both participants and plan sponsors.”
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