Tuesday, May 16, 2006

Hewitts 2006 DC Plan Study

As reported today in the WSJ/PlanSponsor, Hewitt’s “ 2006 Universe Benchmarks- How Well are Employees Saving and Investing 401(k) Plans” study examined the saving and investment behavior of more than 2.6 million eligible employees and more than 1.7 million active participants based on empirical data across over 130 large defined contribution plans, with an average of 20,000 eligible employees in each plan. Key findings were:

Automatic enrollment increases participation.. The study found that, in 2005, the average participation rate for plans with automatic enrollment was 14 percentage points higher compared to the participation of plans across the entire Hewitt Universe.

The participation rate of low-tenure, younger, and lower-wage employees dramatically increases when workers are automatically enrolled in their 401(k) plans. Under auto enrollment, participation was 30 percentage points higher for workers with less than one year of tenure, and participation was 21 percentage points higher for workers with less than $20,000 in annual salary. Meanwhile, for workers ages 20 - 29 participation was 22 percentage points higher under automatic enrollment. In spite of these statistics, enrollment for younger, lower-tenured, and lower-salaried workers remained relatively low.

Auto enrollment is highly effective at improving participation levels but cannot guarantee high quality of participation. About one-quarter of participants had a nominal total plan balance at the end of 2005. Younger, lower-tenured, and lower-salaried participants are most likely to contribute in a nominal way, which Hewitt attributes in part to nominal deferral percents in auto enrollment programs.

The use of Lifecycle portfolios that utilize auto-rebalancing is helpful to workers. The study finds that workers are still prone to not rebalance their assets on a periodic basis. There are many reasons why 401(k) participants do not rebalance or reallocate their portfolios on a periodic basis, Hewitt found. Participants may confuse rebalancing and reallocation with market-timing, which they have been told to avoid.

Company stock remains the single largest holding for participants in plans with company stock. As in prior years, the average participant's largest holdings in 2005 were in company stock (21.9%), GIC/stable value (18.2%), and large US equities (18.2%). At the same time, participants’ allocation to non–US equities increased in 2005. The average participant had 6.1% of balances in international and emerging market equity funds, up from 4.4% in 2004.

In 2005, the average defined contribution plan in the Hewitt Universe offered 14 funds diversified across eight asset classes while the average participant spread his or her 401(k) investments across 3.9 asset classes.

In 2005, 67.2% of eligible employees participated in their defined contribution plan.


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