Deloitte Consulting 401k Benchmarking Survey Uncovers Tremendous Scrutiny Around Plan Investments

Fifth Annual 401k Benchmarking Survey Also Reveals More Interest in Fee Transparency and Plan Automation

NEW YORK, NY, April 5, 2005 -- Dramatic increases in the use of investment advisors and greater fee transparency from providers and vendors underscore the mindset of human resources and employee benefits executives nationwide, according to a national survey released today by the Human Capital practice of Deloitte Consulting LLP.

Plan sponsors are also looking to improve employee participation in 401k plans via plan automation techniques, according to Deloitte Consulting's 2004 Annual 401k Benchmarking Survey.

Investment Advisors on the Rise

"The poor performance of many 401k plans during the early years of the new millennium still leaves a bad aftertaste in the mouths of employers, as evidenced by the astounding increase in the use of investment advisors," states Leslie V. Smith, director of the annual survey and a director in the Human Capital Total Rewards practice of Deloitte Consulting. In 2004, the use of internal investment committees rose to 64 percent -- a 25 percentage point increase. Moreover, 82 percent of survey respondents have formal investment policies in place, and the use of outside investment consultants rose to 45 percent of respondents, or a 10 percentage point increase since 2003.

The recent publicity around investments has also prompted numerous plan sponsors to change their investment lineups for 2005. In fact, 37 percent of respondents have replaced funds in their plan during the past year, 12 percent citing the mutual fund scandals as the reason. An additional 5 percent are considering making changes to their investment lineup. More than one-third of respondents report that the investment options in their plan impose short-term trading restrictions, and a quarter of respondents have implemented a short-term trading policy within their plan and/or have imposed short-term trading fees to discourage the practice.

The Search for Greater Fee Transparency

"The past few years have challenged most plan sponsors to take a closer look at their retirement programs, as well as their fiduciary responsibilities," notes Smith. "Fee transparency is another area that will require more attention from plan sponsors as they demand greater detail from the providers and venders that serve them." She adds that there is much more to 401k plan fees than what is being directly charged to the plan, and the well-informed plan sponsor will understand all of the revenue streams involved.

While close to 90 percent of respondents indicate that they have a good understanding of their plan's fees and 84 percent understand the normal fund operating expenses, fewer than 60 percent understand the revenue sharing arrangements in place with the mutual fund companies and the actual cost for their provider to administer their plan. It is likely that this gap in understanding will prompt further questions and analysis on the part of plan sponsors as they try to fulfill their fiduciary responsibilities.

Easing the Participant Experience

"While plan sponsors experienced considerable change in 2004, plan participation held steady around 73 percent for the third consecutive year," observes Smith. "And even though participation rates remained virtually unchanged, that still leaves more than a quarter of the employee population who are not taking advantage of what could be invested in their future."

"Plan automation" may provide a way for employers to recruit those non-participants and help them manage their accounts. Approximately 13 percent of respondents are considering adding automatic enrollment, with 15 percent of respondents already offering this feature. The number of respondents offering automatic fund rebalancing increased 11 percentage points from 24 percent in 2003 to 35 percent in 2004. In fact, more than half of last year's respondents said automatic fund rebalancing wasn't available through their provider, compared to only 36 percent this year, illustrating the changes toward automation in 2004 alone.

The survey results revealed that "easy enrollment" and "step-up contributions" are also gaining momentum as a way to increase plan participation and employee savings. An easy enrollment feature was reported by approximately 10 percent of the employers responding, with an additional 9 percent considering adding this feature. "Increasing overall participation" was the primary motivation for adding easy enrollment for 57 percent of those respondents offering it. Another key finding is an average increase in participation of more than 11 percent of eligible employees by more than two-thirds of the respondents with this feature. Not surprising, an overwhelming 95 percent of those respondents were satisfied with the easy enrollment feature.

"Our benchmarking survey shows that automated and easy enrollment options are a high-priority service enhancement, thus furthering the trend for employers to make it easier for participants to enroll in 401k plans and manage their own portfolios," explains Smith. "As 401k plans continue to rebound from the recent financial publicity and volatile equity market performance, plan sponsors will need to determine if these programs are right for their organization as they look toward new opportunities for plan design and administration improvement."

Additional key survey findings include:

• On average, the plans represented in this survey offer 15 investment options, and 86 percent of respondents offer mutual funds from multiple fund families.
• Approximately 40 percent of respondents are offering some form of financial counseling/investment advice to their participants, a trend that leveled out over the past year.
• More respondents continue to offer both fixed and discretionary components to their matching contributions.
• As critical talent becomes scarcer within the next few years, it is interesting to note that most respondents expect to have a 401k plan -- as a result, 78 percent of all respondents believe that a 401k plan is an effective recruiting tool, while 69 percent believe that a 401k plan is a good retention tool.
• For the third straight year, nearly all of the transactions available to employees on a daily basis have increased, illustrating a continuing trend toward a "true" daily operating environment for employees.

A detailed copy of the survey results is available on Deloitte's website at: www.deloitte.com/us/401kannualbenchmarkingsurvey.

About the Survey

Deloitte Consulting's 2004 Annual 401k Benchmarking Survey, conducted in August and September was sent to human resources and employee benefits executive nationwide. Data was collected via both hardcopy and Web-based questionnaires.

In all, 426 plan sponsors responded to the survey. Responding employers had an average of approximately 12,000 employees; however, the distribution was skewed by several very large employers. Nearly one-third (31 percent) of the respondents reported between 1,001 and 5,000 employees. The respondents were distributed across all regions of the country and all industries.

About Deloitte

Deloitte refers to one or more of Deloitte Touche Tohmatsu, a Swiss Verein, its member firms and their respective subsidiaries and affiliates. As a Swiss Verein (association), neither Deloitte Touche Tohmatsu nor any of its member firms has any liability for each other's acts or omissions. Each of the member firms is a separate and independent legal entity operating under the names "Deloitte," "Deloitte & Touche," "Deloitte Touche Tohmatsu," or other related names. Services are provided by the member firms or their subsidiaries or affiliates and not by the Deloitte Touche Tohmatsu Verein.

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