Hewitt Survey Reveals New Employer Trends in Retirement

LINCOLNSHIRE, IL, March 3, 2008 -- Continued changes to the retirement landscape — including recent legislation, tighter reporting and funding rules, and the gradual shift of risk from employers to employees — is prompting companies to more actively manage their retirement plans this year, according to a new survey by Hewitt Associates, a global human resources services company. In light of these changes, companies are increasing their focus on reducing retirement plan risk and ensuring that employees take appropriate advantage of their retirement plans.

Hewitt's study of 190 mid- to large-sized U.S. companies reveals that new funding rules for pensions and increased scrutiny on retirement plan operations in general are prompting more companies to take additional steps to administer their plans within a risk framework in 2008. Among those companies offering pension plans, almost two-thirds (63 percent) said they are very likely to perform funding and accounting projections, 30 percent plan to perform an asset liability study, and 29 percent are very likely to assess the risks that their pension plans are running based on current strategies. More than half (55 percent) of companies offering a defined contribution plan intend to review their fund operations, including expenses and revenue sharing. Fiduciary responsibility is also a focus, with 35 percent of companies saying they are very likely to review their 401k plan governance structure or hire a third party monitor to review their investment options.

At the same time, more than half (56 percent) of companies still rank employees' taking accountability for retirement as a high priority this year, and half (50 percent) say they plan to focus on helping employees better understand their retirement benefits. Much of their efforts will be carried out through communications. Two-thirds (66 percent) of companies are very likely to undertake a communication initiative on 401k plan participation, and 64 percent are likely to communicate to their employees about diversification and fund usage. In addition, 58 percent plan to focus their communication efforts on 401k contribution levels.

"Recent legislation, regulations from the IRS and Department of Labor, increasing postretirement needs and current litigation are putting employers under more pressure than ever to effectively manage two sides of the retirement equation — minimizing risks and unnecessary costs, while optimizing the benefit that employees will get from their retirement programs," said Alison Borland, defined contribution consulting practice leader at Hewitt. "Minimizing risk requires the implementation of processes and standards that enable employers to more effectively monitor and manage those risks within their retirement plans. Optimizing employee benefits requires careful consideration of plan design and proactive communication with employees that will support employees' efforts to make good decisions around saving and investing for retirement. As such, they are taking more aggressive steps to equip workers with tools and information that can help improve saving and investing habits.

Pension Plan Changes Slow Dramatically

Despite impending increases in the potential costs and the cost volatility of pension plans, the pace at which employers are modifying their defined benefit plan design will slow dramatically this year. According to Hewitt's survey, almost three quarters (72 percent) of companies that offer a pension plan say they will make no changes to those plans in 2008, compared with just 41 percent last year. Only 3 percent said they are very likely to close their plans, and 2 percent said they are likely to freeze their plan, down from 6 percent and 4 percent respectively.

Instead, companies are focusing on ways to manage financial and other risks of their plans more effectively, given the requirements of the Pension Protection Act. In addition to performing funding and accounting projections, and reviewing funding strategies, 29 percent said they are very likely to assess the risks that their pension plans are running based on current strategies.

"Over the past several years, we've seen a significant number of companies make plan design changes — including freezing or closing their defined benefit plans — which is due, in part, to stricter funding rules and increased costs and cost volatility," said Borland. "This year, we see companies investigating alternate methods of improving pension plan management, which mitigates financial and other risks that can be created by these benefits."

Automation Increasingly Becoming Standard in 401k plans

As a way to ensure employees take appropriate advantage of the retirement plans offered to them, automated tools are becoming standard features in 401k plans. Today, 44 percent of companies offer automatic enrollment to their employees, compared with 36 percent in 2007. Among those plans that do not currently offer automatic enrollment, 30 percent said they are very likely to offer it in 2008, while 27 percent are somewhat likely. More than one-fifth (22 percent) of companies currently enroll both existing and new participants in their 401k plans, up from 15 percent in 2007, and another 27 percent are very likely to do so in 2008. Interestingly, companies who have frozen or closed their pension plans are more likely to offer automatic enrollment to their employees than companies who offer only 401k plans or who offer an open pension plan.

Among those companies who offer automatic enrollment, almost three quarters (72 percent) plan to convert their default investment fund to a premixed portfolio fund. According to another recent Hewitt study, 69 percent of companies currently default employees into diversified investment options such as target-date portfolios, and another 18 percent said they planned to do so in 2008. Further, 83 percent of employers set their default contribution rates at 3 percent or higher.

In addition, 44 percent of companies have a form of contribution escalation in their 401k plans, up from 31 percent in 2007. More than one-fifth (22 percent) of companies offer contribution escalation as part of automatic enrollment, and 8 percent of those companies that do not offer the feature plan to add it as a default under automatic enrollment.

"While automatic enrollment has a very positive impact on employee participation rates, it doesn't necessarily encourage employees to take an active role in managing their 401k plans once they're enrolled," said Pamela Hess, director of retirement research at Hewitt. "As automation quickly becomes the norm, an increasing number of companies realize that they have to take more aggressive steps to help employees do more to accumulate adequate levels of retirement savings. This is why we're continuing to see a steady increase in the number of companies not only adding automatic enrollment to their 401k plans, but also defaulting workers into diversified investment options, choosing higher default contribution rates, and coupling automatic enrollment with contribution escalation features."

Other Key Findings

• Approximately one-fifth (19 percent) of employers currently offer a Roth 401k to their employees, up from 12 percent in 2007. Among those companies that do not currently offer a Roth 401k, 11 percent said they are very likely to add one in 2008.
• Nearly one quarter (22 percent) of companies currently offer managed accounts, up from only 15 percent in 2007. Among those companies that do not currently offer them, 6 percent indicated that they are very likely to offer them in the coming year.
• Over half (51 percent) of companies offer automatic rebalancing, up from just 39 percent in 2007. Another 12 percent said they are very likely to offer it in 2008.
• Consistent with previous years, the majority of companies say they plan to make no changes to their company match (71 percent). Twelve percent say they plan to add/increase the company match, and only 2 percent plan to reduce or eliminate the company match.
• Over two-fifths (43 percent) of employers currently offer online third-party investment advisory services and another 47 percent plan to offer them in 2008. Thirty-four percent provide in-person third-party investment advisory services, and another 30 percent plan to offer the feature in 2008.
• In an effort to reduce plan fees, three in ten (29 percent) employers plan to alter their fund options. Twenty-nine percent of employers also plan to replace higher-cost mutual funds with lower-cost institutional funds.

About Hewitt Associates

For more than 65 years, Hewitt Associates (NYSE: HEW) has provided clients with best-in-class human resources consulting and outsourcing services. Hewitt consults with more than 3,000 large and mid-size companies around the globe to develop and implement HR business strategies covering retirement, financial and health management; compensation and total rewards; and performance, talent and change management. As a market leader in benefits administration, Hewitt delivers health care and retirement programs to millions of participants and retirees, on behalf of more than 300 organizations worldwide. In addition, more than 30 clients rely on Hewitt to provide a broader range of human resources business process outsourcing services to nearly a million client employees. Located in 33 countries, Hewitt employs approximately 23,000 associates. For more information, please visit www.hewitt.com.

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