Hewitt Study Shows Employers Continuing to Automate 401k Plans

LINCOLNSHIRE, IL, October 29, 2007 -- Despite employers' increased adoption of automated 401k plan features like automatic enrollment, employees continue to struggle with proactively saving and investing for retirement, according to a new survey by Hewitt Associates, a global human resources services company. Accordingly, employers are starting to realize that 401k plan participation alone is not enough. In response, employers are taking more proactive steps to prepare their employees for retirement through a more sophisticated design of the automated features of their 401k plans.

Hewitt's biennial survey of more than 300 mid to large companies offering 401k plans revealed that only 25 percent of companies viewed a high participation rate as the primary measure of success for their 401k plans, down from 43 percent in 2005. Instead, many are focusing on their 401k plan's ability to facilitate a sufficient retirement income for their employees.

As a result of this shift in priorities, a growing number of companies are structuring their 401k plans in a way to not only ensure that employees participate, but also help improve the quality of participation once they are enrolled. According to Hewitt's survey, approximately one-third (34 percent) of companies automatically enrolled employees in their 401k plans in 2007, up from just 19 percent in 2005.

Of those, more than 77 percent defaulted employees into a diversified portfolio, such as target- risk, target-maturity or balanced funds. This is up from 39 percent in 2005. While this category grew, the biggest winner was target-maturity portfolios with more than 50 percent of plans utilizing them as a default. Further, 83 percent of companies set their default contribution rates as three percent or higher, compared to just 66 percent two years ago. In addition, almost 30 percent of companies (28 percent) used contribution escalation in conjunction with automatic enrollment, with more than 40 percent of companies escalating employees to target rates between 8 and 15 percent.

"It's obvious that today's employers understand that the majority of their employees take a back seat in managing their retirement. This is why we continue to see a steady number of companies putting their 401k plans on autopilot and adopting features like automatic enrollment," said Pamela Hess, director of retirement research at Hewitt Associates. "What's encouraging is that companies realize that simply automatically enrolling employees into the 401k plan will not get workers where they need to be in terms of retirement savings. As a result, they are shifting their priorities from basic enrollment to quality enrollment. Employers are helping their employees obtain sufficient retirement income by picking more appropriate default contribution rates and investment funds, and coupling automatic enrollment with other automated tools that force employees to save and invest more wisely."

Making 401k Investing Easier

In addition to automating their 401k plans, an increasing number of companies are continuing to offer workers tools and features that automate and simplify the 401k investment selection process. Forty-two percent offered automatic rebalancing in their 401k plans, up from only 26 percent in 2005 and just 11 percent in 2003. More than three-quarters (77 percent) of employers now offer target-risk and/or target-maturity portfolios, up from 63 percent in 2005. Among those plans, 58 percent offer target- maturity funds portfolios, 31 percent offer target-risk, and 10 percent offer both.

Moreover, four out of ten companies (40 percent) offer outside investment advisory services, up from 28 percent in 2003. The types of services vary with 20 percent offering online advice and 11 percent offering managed accounts.

"Employers know that the majority of their employees do not have the time or the patience to actively manage their 401k plans, despite the fact that they are relying on these plans to primarily fund their retirement," explained Hess. "As a result, companies are simplifying the investment selection and maintenance process by offering target funds, automatic rebalancing, investment education and resources that can help workers maximize their retirement savings without requiring a lot of effort on their part."

Lowering Plan Expenses

Hewitt's study also shows that an increasing number of companies are taking a closer look at 401k plan fees, a trend due, in part, to an upsurge in government and media scrutiny of companies' 401k plans. In fact, 61 percent of employers noted they are very or somewhat concerned about plan expenses. A similar number of employers (60 percent) have attempted to calculate the total cost of maintaining their 401k plan—an increase from 34 percent in 2003—and more than half (57 percent) have made efforts to reduce fund or plan expenses in the past two years. Forty percent of employers noted they were planning to evaluate the cost of their funds.

"401k plan expenses are just as important as choosing well-performing investments, as fees can eat up a significant chunk of an employees' retirement nest egg over time," said Hess. "It's promising that companies want to understand more about the fees associated with the funds in their plans and are taking steps to evaluate which ones make the most sense. Companies can help employees save hundreds—even thousands—of dollars in retirement savings simply by offering lower-cost funds in their 401k plans."

Other Key Findings

Other key findings of the survey included:

• One in five companies (20 percent) increased their employer matching contribution over the past two years.
• Nearly 60 percent of employers offer non-mutual fund alternatives as part of their 401k plan. Among plans with over $1 billion in assets, 46 percent offer only institutional vehicles, while only 12 percent offer none or only one institutional option.
• Forty-four percent of employers immediately vest employees in employer contributions, up from 34 percent in 2005.
• Nearly one-quarter (23 percent) of companies offer employer stock match exclusively in company stock, down from 36 percent in 2005. Among those that match exclusively in company stock, approximately two-thirds (67 percent) allow employees to diversify/transfer out any time, up from just one-quarter (24 percent) in 2005.
• The average number of core investments options increased from 14 to 17 in the past two years. Excluding target-risk and target-maturity funds the average went from 10 to 12 options. The most popular asset classes remain stable value (84 percent), bond (88 percent), large-cap U.S. equity (98 percent) and international equity (97 percent).

Copies of the complete report, "Trends and Experience in 401k Plans," are available by contacting the Hewitt Information Desk at (847) 771-2500 or infodesk@hewitt.com.

About Hewitt Associates

With more than 65 years of experience, Hewitt Associates (NYSE: HEW) is the world's foremost provider of human resources outsourcing and consulting services. The company consults with more than 2,300 organizations and administers human resources, health care, payroll and retirement programs on behalf of more than 340 companies to millions of employees and retirees worldwide. Located in 35 countries, Hewitt employs approximately 24,000 associates. For more information, please visit www.hewitt.com.

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