Hewitt Study Shows More Companies Putting 401k Plans on Autopilot

Employers Encourage Retirement Saving by Automating and Simplifying 401k Plan Features

LINCOLNSHIRE, IL, June 14, 2005 -- An increasing number of employers are stepping up their efforts to encourage workers to save and invest for retirement by offering tools that put their 401k plans on autopilot, according to a new study by Hewitt Associates, a global human resources services firm.

Hewitt's biennial survey of more than 450 large companies revealed that nearly two-thirds (64 percent) said the 401k plan was their primary retirement savings vehicle in 2005, up from 55 percent in 2003. One in five (19 percent) automatically enrolled employees in their 401k plans, compared with 14 percent in 2003, and more than a quarter (26 percent) provided automatic rebalancing, up from 11 percent. The number of companies that offered or planned to offer contribution escalation features -- which enable workers to automatically increase their 401k contributions over time -- increased to almost 20 percent, up from just 3 percent in 2003. In addition, almost two-thirds (63 percent) offered pre-mixed/lifestyle funds, up from 55 percent in 2003.

"For U.S. workers, 401k plans play an increasingly important role in retirement income security, but many employees continue to underutilize them -- whether it's because they don't feel comfortable investing in the plan or they simply lack the motivation to save," said Lori Lucas, director of participant research at Hewitt Associates. "A number of employers are taking more aggressive steps to address this issue by automating features of the 401k plan -- essentially taking the ‘legwork' out of retirement saving and investing by enabling employees to maximize the value of their 401k plans without having to spend a lot of time thinking about or proactively managing them."

Simplifying 401k Investment Selections

In addition to automating features of the 401k plan, an increasing number of companies are offering workers tools that make the investment selection process easier. Nine out of ten (91 percent) companies provided investment education to employees in 2005, and more than one in three (37 percent) offered outside investment advisory services, compared with 28 percent in 2003.

For the first time since the inception of the survey, the average number of investment options offered in 401k plans did not increase -- remaining consistent at 14. One investment type that has seen decreasing prominence in 401k plans is employer stock. In 2005, fewer companies offered employer stock (43 percent), compared with almost half (49 percent) in 2003. Only 8 percent of companies offered company stock, matched in company stock and restricted diversification in their 401k plans in 2005, which is down from 11 percent in 2003.

"Many employers realize that it's the quality, not the quantity, of choices offered in 401k plans that will make a difference for workers," said Lucas. "For example, instead of providing more 401k investment options, employers are trying to give workers vehicles -- such as lifestyle funds -- that make diversification easier, and access to tools that help them more easily choose among the existing investment options."

Lowering Plan Expenses

Hewitt's study also shows that companies continue to be concerned about the impact of 401k fees on employees' retirement savings. Just over half (52 percent) have attempted to calculate the total cost of maintaining their 401k plan -- an increase from 34 percent in 2003. Fees ranked as an important factor in investment selection, with 75 percent of companies indicating fees as the second or third most important factor in selecting investment options for their plans (after investment performance).

"There tends to be an inverse correlation between rates of return and 401k fees -- the lower the fees, the higher the rates of return," said Lucas. "In the current environment, when every basis point counts in 401k savings, it's encouraging to see companies doing more to manage the cost side of the equation."

Other Findings

Other key findings of the survey included:

• Consistent with Hewitt's 2003 survey, 43 percent of companies consider their participation rate as the most important measure in evaluating plan effectiveness. One in five say the most important measure is whether the plan is valued and appreciated by employees.
• The average before-tax maximum contribution rate in 2005 increased to 47 percent of a worker's salary, up from 39 percent in 2003.
• Three out of 10 companies said they were very or somewhat likely to add Roth 401k accounts to their 401k plans when permissible on January 1, 2006.
• Twenty percent of companies now offer annuities as a form of payment for final distributions, which is up from 17 percent in 2003. When available, 6 percent elected an annuity, which is up from 2 percent in 2003.

Copies of the complete report, Trends and Experience in 401k Plans, are available for $350 by using this online order form.

About Hewitt Associates

With more than 60 years of experience, Hewitt Associates (NYSE: HEW) is the world's foremost provider of human resources outsourcing and consulting services. The firm consults with more than 2,300 companies and administers human resources, health care, payroll and retirement programs on behalf of more than 300 companies to millions of employees and retirees worldwide. Located in 35 countries, Hewitt employs approximately 20,000 associates. For more information, please visit www.hewitt.com.

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