"The Pension Protection Act of 2006 made it easier for employers to take advantage of new methods for getting workers to save for retirement," said Alec Dike, senior retirement consultant at Towers Watson. "Since the first of several rules from that law went into effect, many employers have adopted the automatic enrollment and escalation of contribution provisions as they seek to help employees save for their retirement."
Target-Date Funds Most Popular Default Option
The survey also found that target-date funds are the most prevalent default investment option. Nearly three-fourths of respondents (72%) use target-date or "life cycle" funds as the default option, followed by 13% who use balanced or lifestyle funds. The survey also found that 78% of those using target-date funds as their default option have selected funds not affiliated with their recordkeeper.
"Evaluating target-date funds is critical for employers, particularly as the number of plan sponsors that use these funds as their default option for workers who are automatically enrolled in 401(k) plans continues to grow," said Sue Walton, senior investment consultant at Towers Watson. "Choosing and developing the most appropriate target-date fund strategy will be crucial for employers to help their employees save for a secure and comfortable retirement."
Employers Consider Annuities
One aspect of 401(k) plans that is receiving attention at the employer, regulatory and legislative levels is the use of lifetime income options such as annuities. The Towers Watson survey found that about two out of 10 employers (18%) either currently offer annuities to participants or plan to do so this year or next. However, 30% of respondents are considering offering this option. Of the employers that offer annuities as a distribution option, 79% report that only 5% or less of their plan participants choose this option.
"With the continuing shift in corporate America away from traditional defined benefit plans and toward account-based plans like 401(k) and cash balance pension plans, annuities and other distribution designs can provide a steady stream of retirement income and help retirees' nest eggs last through their lifetimes," said Robyn Credico, senior retirement consultant at Towers Watson. "But we're still not at the point where annuities are being widely used in 401(k) plans to bridge the gap between traditional-style pensions and defined contribution plans."
Matching Contributions Being Restored
Since the financial crisis hit in September 2008, 18% of the respondents have either reduced or suspended their matching contributions to their 401(k) plans. The survey found that, among those employers, less than half (49%) have yet to restore the match, although virtually all indicated they are considering reinstating all or a portion within the next 12 months. Of the companies that have reinstated the match, the vast majority restored it to its previous level. A relatively small number of companies reinstated a smaller fixed match or reinstated a match that may fluctuate based on the company achieving certain goals.
"While we fully expect many more companies will reinstate their matching contributions if the economic recovery persists, they may restore it in different ways," said Dike. "While some companies will reinstate their previous matching formula, others may tie all or part of the match to profits. In this way, companies can be transparent about the need to connect the match with performance, as well as offer the potential for increased contributions when times are good to balance reduced matches when times are not."
