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More 401(k) Plans Adding Automatic and Roth Features, Survey Finds

As concerns mount that employees are not saving enough for retirement, U.S. employers are making significant enhancements to their DC plans, according to a new survey by Willis Towers Watson.

Based on responses from 349 large and midsize U.S. companies that sponsor a DC plan, the firm’s Defined Contribution Plan Survey conducted in November 2017 finds that more employers are adding automatic and Roth design features to their 401(k) plans, increasing their employer contributions, streamlining investment choices and enhancing fee transparency.

“With most employers now offering a DC plan as the primary retirement savings vehicle, they have become very focused on how to improve their plans and deliver better outcomes to participants,” explains Tammy Hughes, senior retirement consultant, Willis Towers Watson. “The enhancements they are making should go a long way toward encouraging greater participant savings as well as wiser investment decisions.”

According to the findings, nearly three in four respondents (73%) now automatically enroll new participants, compared with 68% in 2014 and 52% in 2009. Moreover, Willis Towers Watson notes that 60% of respondents now provide an auto-escalation feature, up from 54% in 2014.

Other DC plan improvements that plan sponsors reported making include:

  • Roth features: 7 in 10 respondents now offer Roth features within their 401(k) plans, compared to 54% in 2014 and 46% in 2012.

  • Employer contributions: One in four employers increased their plan contributions over the past five years. Of those that did, 60% increased the employer match; 51% did so by encouraging employee savings and employee engagement and 44% by offsetting benefit changes in their DB plan.

  • Investment options: More than 4 in 10 respondents (42%) reduced the number of investment options they offer over the past three years, and another 41% plan to do so by 2020.

  • Target date funds: 93% of respondents use TDFs as the qualified default investment alternative (QDIA) — up from 86% in 2014 and 64% in 2009.

  • Health Savings Accounts: 80% of employers offer HSAs, with another 12% looking into adding them by next year.

  • Fee transparency: 41% of sponsors pay a fixed-dollar amount per participant for recordkeeping fees, rising from 32% in 2014.

  • Financial wellness: 78% expect to increase their efforts to educate employees on retirement planning issues; of this group, 64% plan to offer guidance on how to draw down funds after retirement.

Retirement Readiness

Is there additional opportunity for sponsors to focus their retirement readiness efforts? The survey found that only a third of respondents (35%) measure their participants’ retirement readiness annually, and the vast majority (88%) only measure basic plan statistics, such as participation rate, account balance and contribution rate.

Moreover, 83% of investment committees at the largest plan sponsors say their top priority is to improve retirement readiness and associated workforce risks, yet only 17% spend time at meetings on retirement readiness, the findings show.

Shift in Retirement Offerings

A second Willis Towers Watson study finds that most large employers now provide only DC and other account-based plans to newly hired employees. “Retirement offerings in the Fortune 500: A retrospective” examines the primary retirement plans offered by current Fortune 500 companies between 1998 and 2017.

As detailed in the report, only 16% of Fortune 500 employers offered a DB plan (traditional or hybrid) to salaried new hires in 2017, down from 59% in 1998. Fifty-one percent of these companies still employ workers who are actively accruing pension benefits, and 93% of those who sponsored a DB plan in 1998 still manage plan obligations and assets.

The report shows the various paths taken by DB sponsors to arrive at their current plan structure, noting that some closed or froze their traditional DB plans and then moved workers into hybrid pensions, while others transitioned workers to a DC-only environment, sometimes offering a hybrid plan along the way:

  • approximately 93% of employers that sponsored a traditional DB plan in 1998 no longer offer the plan to new hires;

  • 50% froze or closed their primary plan and transitioned to a DC-only environment for salaried new hires; and

  • 43% amended the traditional DB plan to a hybrid DB design.

While the shift to a DC-only environment has been well documented, the report explains that there have been variations among sectors. For example, between 1998 and 2017, the most “striking uptick” in DC-only sponsorship was in the food and beverage sector (79%), automobiles and transportation equipment (78%), communications (69%), transportation (62%), manufacturing (59%) and finance industries (55%).

The study notes that those sectors, along with the wholesale industry, have also seen significant shifts (over 20%) from DB to DC-only since the 2008 financial crisis, with employers in the communications sector having had an “especially high number” of DB-to-DC transitions over the past few years.

Changes to DC Plan after DB Freeze

When analyzing what happened to DC plans when the sponsor moved all employees to a DC-only program after a full pension freeze, the study found that the majority of employers either added a nonmatching contribution to the DC plan, increased the current match or adopted some combination of the two.

In 15% of companies that completely froze their primary DB plans, former DB plan participants received larger DC contributions than those who were never enrolled. The data further shows that in transitioning from the original DC to the enhanced DC plan, former DB participants gained an average 3.1% of pay in their DC plans. In addition, the difference between new hires and former DB participants was approximately 0.8% of pay, most of which derived from nonmatching contributions, the report notes.