Monday, November 28, 2005

Increasing 401(k) Plan Participation

According to many research studies, the embedded rate of 401(K) plan non-participation is about 25% - 30% regardless of matching levels or other plan features. In order to improve plan participation and to pass plan discrimination tests, sponsors have gone beyond self directed accounts and sector funds and are now considering a number of new options including ; auto-enrollment, target retirement asset allocation funds, managed accounts and annuities according to the WSJ.

Utilization of these options varies according to the Hewitt Associates study referenced in the article. For instance,
19% of 401K plans offer auto-enrollment. We have noted in other studies that this 19% is composed primarily of large plans. We are also aware that some states may have anti-garnishment laws that could conflict with these practices so plan sponsors should beware of this issue. This plan attribute probably correlates highest with increased participation.
16% of Plans have Managed Accounts - Our experience would suggest that this is a large market or high average plan balance phenomena as well.
63% of plans have asset allocation funds -this percentage does not include generic balanced funds but does include lifestyle funds and target maturity funds.
51% of Plans offer one on one financial planning - providing access to on line planning tools probably accounts for the high percentage here even though participant utilization of this option remains quite low.
26% of Plans offer automatic rebalancing of participant accounts.

When benchmarking your plan features, it is important to reference best practices in the industry. However, take care to understand the plan population used as a comparator since large market plan characteristics can be quite different than small and mid market plans.

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