Keeping Your 401(k) Plan Competitive And Effective


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Human Resource & Payroll Services And Solutions - Houston, Dallas, Austin - Texas Employee Guide to 401(k) retirement plans.

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Keeping Your 401(k) Plan Competitive And Effective

  1. 1. Toll Free: 877.880.4477 Phone: 281.880.6525Keeping Your 401(k) Plan Competitive and Effective 401(k) Plan Competitive and Effective
  2. 2. » When the economy tanked after the 2008 financial crisis, it was an easy "survival mode" decision for many employers, large and small, to suspend 401(k) matching contributions.» But in the most recent member poll by the Plan Sponsor Council of America, matches have been restored by all but about 7 percent of the smaller employers (defined as under 200 employees). Thats down from about 16 percent the prior year.» Similarly, employees themselves are thinking more long-term, with 80 percent of those eligible making contributions to their plan, up from about 77 percent the year before.» Their average deferral amount also grew somewhat, from 6.2 percent to 6.4 percent. (The PSCA data reflects what employers were doing in 2011, and the organization believes these upward trends have continued in 2012.)
  3. 3. Small Employers as Generous as Large» Noteworthy in the survey is the fact that the smallest employer group (under 50 employees) is about as generous as the largest group (5,000+ employees). Only about three percentage points separate them on the prevalence of offering a matching contribution.» And when it comes to the actual dollars contributed to eligible employee 401(k) accounts -- when 401(k) plans are a component of a profit sharing plan, which is the most common arrangement -- large and small employers are about dead even, at 5 percent of payroll, according to the PSCA data.
  4. 4. » What are employees doing with these dollars? Target date funds (TDFs), whose asset allocation becomes more conservative through time based on employees proximity to their expected retirement, continue to grow in popularity. Overall, about 69 percent of plans offer those funds, up from 62 percent the prior year.» Employee dollars invested in target-date funds is 12.4 percent of all fund assets covered in the PSCA survey. This is greater than the "stable value funds" which came in at 10.7 percent -- the category that once dominated the 401(k) landscape. Target Date Funds Target Date Funds
  5. 5. » Target date funds have plenty of competition for employee dollars. The typical plan has 19 investment choices, and small employers offer an average of 22.» With so many choices, most employers (58 percent) make investment advice available to employees, either through online automated tools or through humans.» But less than one in five (19 percent) of employees bother to use these services, according to the PSCA survey.» Its been that way for a long time, according to Hattie Green an, PSCAs research manager. Employers should just keep encouraging employees to take advantage of them, she says.
  6. 6. The Role of Target Date Funds» Low utilization of advice services is all the more reason employers should make sure employees understand TDFs, according to, a large asset management company and strong believer in that investment concept.» A recent report by the company highlights the distinction between confident, active employee investors (38 percent of AllianceBernsteins universe), and the rest, which it calls "accidental investors" -- employees forced to make investment decisions simply by being in a 401(k) plan. Role of Target Date Funds Role of Target Date Funds
  7. 7. » According to the report, "accidentals… invest inconsistently and lack confidence in their ability to make good investment decisions. All the education and communications provided wont likely change that… We shouldnt expect that access to investment education will turn participants into investment pros."» It is perhaps for that reason that TDFs are the overwhelming favorite (chosen by 70 percent in the PSCA survey) default investment for 401(k) plans that automatically enroll new employees or "auto-enroll" non- participating employees, putting the onus on them to not participate in the plan.
  8. 8. Ambivalence on Auto-Enrollment» Small employers have, however, been more reluctant to embrace auto- enrollment. Overall nearly half of employers in the PSCA poll auto-enroll, focusing primarily on new hires.» But auto-enrollment is still rare (12 percent) among the smallest survey segment, which is companies with under 50 employees, and used by 37 percent of employers in the 50-200 employee bracket.» Among employers that do auto-enroll, the most common default deferral percentage is 3 percent, used by 54 percent of those surveyed.
  9. 9. » Only certain kinds of investments are "qualified default investment alternatives," or QDIAs. Those include target date funds, "target risk funds," such as a spectrum of balance funds described as suitable for "aggressive," "moderate" or "conservative" investors, as well as stable- value funds. However, stable value funds can only be used temporarily, for the first 120 days after an employee begins contributing.» AllianceBernstein stresses the importance of picking a default investment option carefully. "As more plans continue to adopt automatic enrollment, the selection of a default option will increase in importance," according to the report. "Within 10 years, QDIAs will likely account for the vast majority of plan assets."» Overall, the news on the retirement front seems positive. Employer match is making a comeback and employees are expressing renewed confidence to some degree, by focusing less on the woes of todays economy and looking instead at stabilizing the horizon of the future. Confidence breeds strength.
  10. 10. 14550 Torrey Chase, Suite 100 Houston, TX 77014 USA Toll Free : 877.880.4477 Phone : 281.880.6525 Fax : 281.866.9426 E-mail :