Plan sponsors have had enough of lagging 401(k) account balances, so many are taking aggressive steps to help workers become better savers for retirement.
Some 77 percent of respondents to Aon Hewitt’s 2013 Trends & Experience in Defined Contribution Plans survey say 401(k) plans are the No. 1 way workers save for retirement. Plan sponsors made a significant shift in defining success for their plans this year, saying successful plans are ones that help workers save enough, as opposed to 2011’s top response citing high participation rates.
“We’ve seen a common theme of employers boosting efforts to help workers save more,” said Rob Austin, director of retirement research at Aon Hewitt. “The 401(k) is the primary savings vehicle for most people, and in light of that, employers are strengthening plans so people are saving more robustly.”
Two years ago, employers focused on specific features like automatic enrollment and auto-percentage boosts in worker contributions, Austin said. Now that those pieces have been in place for a while, plan sponsors are moving to the next level that will help employees improve their account balances.
“Employers are looking at not just one data point,” Austin said. “There are a number of different spots we see employers focusing on.”
For the first time since the study’s inception in 1991, plan sponsors changed the formula for the 401(k) employer match. Today, the most common match is dollar-for-dollar on the first 6 percent workers save in their 401(k) plans. From 1991 to 2011, the most popular formula was employers contributing 50 cents for each dollar employees contributed, up to 6 percent.
That 50-cent change can make a serious long-term difference in account balances, Austin said. For example, using the same data for pay, salary increases, worker contributions and investment returns, a 65-year-old employee with the new employer-contribution formula could see a 33 percent, or $215,529, difference in an account balance when comparing it with the old formula, Austin said.
Employers today are moving on all fronts, simplifying and strengthening plans to help workers get the most out of their accounts. Some of the changes Aon Hewitt recorded include:
Relaxing eligibility requirements: For years, workers had to wait a year or more before being allowed to join their 401(k) plans. In 2013, more than 75 percent of plan sponsors allow workers to participate right away, Aon Hewitt reported.
Simplifying investment choices: Making options easy to understand is critical, especially in plans that don’t have automatic enrollment. Today 86 percent of plans surveyed offer target-date funds — investments that automatically become more conservative as the investor nears retirement.
Offering savings education and advice: Three out of four employers surveyed are helping employees understand their plans better by offering outside investment advisory services. Nearly 60 percent have one-on-one financial counseling, 55 percent use online guidance, and 52 percent offer managed accounts, which jumped from 29 percent in 2011.
Other areas of focus include increasing the availability of tax-savvy Roth 401(k) accounts and decreasing the reliance on company stock.
These trends are taking shape, but not as quickly as it might seem, said Brooks Herman, head of data and research for BrightScope Inc., a financial information company that specializes in analyzing 401(k) plan activity. Aon Hewitt’s research is significant, he said, but it may not include information from smaller plans.
“Jumbo plans are the trailblazers,” Herman said. “We are seeing company matches move back up and past the pre-financial crisis level, but, overall, these ideas take time to trickle down to the smaller plans.”
Aon Hewitt surveyed more than 400 plan sponsors with 10 million employees in plans with $500 billion in assets. The survey has been conducted every other year since 1991.