American employers are actively participating in their retirement plans, says a study. It also notes that the plans offer a wide variety of investment choices and that mutual fund fees in 401(k) plans have trended down over time.
The study of 401(k) plans conducted by BrightScope and the Investment Company Institute (ICI) finds that more than 80% of employers that sponsor 401(k) plans make plan contributions. Simple matching formulas, where the employer matches a certain percentage of employee contributions up to a maximum percentage of employee salary, were the most common type of employer contribution.
Forty percent of plans had a simple match formula in 2012, while other types of employer matches were seen in less than 10%. Employers made other types of contributions (such as percentage of salary and lump-sum contributions, contributed without regard to employee contributions) in 37% of plans.
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The most common simple matching formula—used in 17% of plans in 2012—was matching 50% of contributions up to 6% of salary, followed closely by the 15% of plans in which employers matched 100% of contributions up to 6% of salary.
“This study reveals a high level of engagement and commitment by employers as 401(k) plan sponsors, in making contributions to their plans,” said Sarah Holden, ICI’s senior director of retirement and investor research. “We also found that employers typically provide employees a wide range of investment choices on the plan menu.”
Investment options
The average 401(k) plan in 2012 offered a wide range of investment options for employees to choose from—25 options—of which about 13 were equity funds, three were bond funds, and six were target-date funds (TDFs). Although the number of investment options varies little by plan size, there is considerable variation between plans. For example, 10% of plans offered 15 or fewer investment options and 10% of plans had 37 or more.
Domestic equity funds, international equity funds, and domestic bond funds were the most likely investment options to be offered in 401(k) plans in 2012. Nearly all plans in the study had these funds in their investment lineups. When domestic equity funds are an option, multiple funds—10 funds, on average—are offered, compared with three international equity funds and three domestic bond funds offered, on average.
TDFs have become more common in 401(k) plans since 2006, when they were offered by about 29% of plans in the study. By 2012, nearly 70% of plans offered TDFs as an investment option. During the same six-year period, the percentage of 401(k) plan assets invested in TDFs increased to 13% from 3%. On average, in 2012 there were about eight TDFs in a suite of TDFs covering a range of anticipated retirement dates.
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Index funds held nearly a quarter of 401(k) assets in 2012. Index funds held a greater share of assets in larger 401(k) plans, rising from about 10% of assets in plans with $10 million or less in plan assets to more than 20% of assets in plans with more than US$250 million in plan assets. The number of index funds offered by plans between 2006 and 2012 doubled to an average of more than four index funds from a little more than two index funds.
Fund fees
Mutual funds account for 46% of assets in 401(k) plans in 2012. An analysis of the consistent plans between 2009 and 2012 showed that average mutual fund expense ratios in these ongoing plans tended to decrease. This finding aligns with prior research by ICI looking at snapshots of mutual fund fees paid by all 401(k) participants.
“As the data demonstrate, we see downward pressure on 401(k) fees over time. This can be attributed to the rising awareness by both plan sponsors and plan participants of fees and their effect on 401(k) savings,” says Brooks Herman, head of data and research at BrightScope. “Our comprehensive database on plans will help advance that awareness.”
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This study provides insight into how mutual fund expenses vary across the wide cross-section of 401(k) plans in the sample. Based on a 2012 snapshot, mutual fund expense ratios tend to be lower in larger plans. For example, the asset-weighted average expense ratio for domestic equity mutual funds was 0.48% for plans with more than US$1 billion in plan assets, compared with 0.95% for plans with less than $1 million in plan assets.
The analysis focuses on about 35,500 DC plans, nearly all of which were 401(k) plans with 100 or more participants, drawn from the BrightScope Defined Contribution Plan Database. The data are mostly drawn from audited reports that the plans were required to file with the Department of Labor.