Automatic Enrollment Leads 60% to Use Professionally Managed Option
PALO ALTO, CA, April 21, 2008 -- Financial Engines, a leading provider of independent investment advice and managed accounts, today issued data showing that when plan sponsors automatically enrolled existing retirement plan participants into a managed account program, an average of 60 percent stayed with the program. Automatic enrollment into managed accounts also had a dramatic effect on the overall health of the employer retirement plan. Prior to enrollment, an average of only 7 percent of participants had well balanced, risk-appropriate portfolios. After automatically enrolling all eligible plan participants into managed accounts, an average of 59 percent of all plan portfolios -- including both participants who stayed in managed accounts and those who declined -- were well diversified and at the appropriate risk levels within 8 months.
In addition, the portfolios of participants that were automatically invested into managed accounts had higher expected growth rates after Financial Engines made allocation changes to their portfolios. On average, these allocation changes were projected to increase the expected annual growth of participant portfolios by 91 basis points annually, net of fees.
"The 401k has become the primary retirement vehicle for most of our employees," says Richard Mayer of Standard Register. "We decided that the best way to reach the people who may not be investment savvy and required assistance with their retirement planning was to automatically enroll our entire participant base into managed accounts. As a result of doing this, we were able to transform the health of our 401k plan easily and quickly."
The plan sponsors included in the data set represent a growing trend toward implementing automatic features in 401k plans to address participant inertia and help participants get on track for a more secure retirement. Initially, plan sponsors focused on using the automatic 401k to help only new employees. Today, plan sponsors are applying the automatic 401k to help existing employees as well.
Spurred by the Department of Labor's regulations on Qualified Default Investment Alternatives, a fast growing feature of the automatic-401k is automatic-investing. Through automatic investing, a plan sponsor designates an investment professional to invest a participant's portfolio on their behalf, typically through a managed account program or lifecycle fund. Of the 225,000 participants enrolled in the Financial Engines managed accounts program as of December 31, 2007, more than 20 percent were automatically invested.
"The automatic 401k is the most significant innovation in retirement since the creation of the 401k plan," says Jeff Maggioncalda, president and CEO of Financial Engines. "Companies applying the automatic 401k merely to new participants are only experiencing a small part of the benefit, whereas applying these innovations to existing employees accomplishes in months what it would take decades to achieve if only applied to new employees."
Participants With Lower Salaries, Lower Balances Stayed In Managed Accounts
In an evaluation of plan sponsors that implemented automatic investing for nearly 80,000 existing plan participants, Financial Engines found that an average of 60 percent of participants took advantage of managed accounts while 40 percent decided to manage their 401k accounts themselves after a personalized 60-day communication campaign. In general, the participants who stayed in managed accounts after being automatically invested had lower salaries, lower balances and lower savings rates. These results demonstrate that automatic investing is an effective method of reaching those participants who need the most help. Conversely, participants who chose to manage their 401k accounts on their own tended to have higher salaries, higher balances and higher savings rates.
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Managed Account Non-members (Participants
Members (Participants declining auto-
remaining in managed investment in managed
accounts) accounts)
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Average Age 43 46
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Median Salary $40,780 $56,971
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Median Balance $12,931 $36,150
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Average Balance $33,048 $76,804
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Average Contribution 6.0% 9.0%
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As of March 31, 2008, the average annual account management fee that members pay within these plans is 27 basis points. When combined with the underlying fund fees that these managed accounts members pay, the average total "all-in" fee is 63 basis points (0.63 percent), comparable to other professionally managed vehicles. For example, a hypothetical participant with a 401k balance of $33,000 would pay $210 in total annually -- including both the managed account fee and the underlying fund fees. By way of comparison, for plans in this analysis that included lifecycle funds in their investment line-up, the average lifecycle fund fee is 76 basis points (0.76 percent).
About Financial Engines
Financial Engines is a leading provider of independent investment advice and managed accounts to defined contribution plans. Founded by Nobel Prize-winning economist William F. Sharpe, Financial Engines serves millions of employees at many of America's largest corporations. Patented advice technology and institutional-quality investment methodology allow Financial Engines to offer an array of advisory service to meet the needs of a wide range of investors. For more information, please visit www.financialengines.com.
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