Fewer Companies Adopting Automatic Enrollment and Other High-Cost Retirement Programs

LINCOLNSHIRE, IL, February 2, 2009 -- With few signs that the current economic situation will improve in the next 12 months, many companies are looking for ways to lower the costs of their retirement benefits while still encouraging their workers to invest wisely for retirement. According to a new survey by Hewitt Associates, a global human resources consulting and outsourcing company, the number of employers adopting premium retirement features, such as automatic enrollment and company matches, has plateaued in response to the economic climate. Instead, they are focusing their efforts on offering more lower-cost strategies, such as automatic rebalancing and target-date funds in an effort to mitigate immediate cost pressures and stay fiscally responsible.

Hewitt's annual survey of about 150 mid- to large-sized employers reveals that half (51 percent) currently offer automatic enrollment (up from 44 percent in 2008). However, among the companies that don't currently offer the feature, only one-quarter (25 percent) are somewhat or very likely to add it for new hires, and just 15 percent are likely to adopt it for existing employees in 2009, down from 57 percent and 27 percent, respectively, in 2008. Of those companies not planning to add automatic enrollment, more than half (55 percent) cited the increased cost of the employer match as the primary reason why they did not plan to offer it, which is up nearly 10 percentage points from 2008. Some employers may opt to take an even more drastic cost-cutting step, choosing to eliminate their company match in the coming year. Although a few high-profile companies announced 401k match cuts in 2008, Hewitt's survey shows that just 2 percent of employers have cut or temporarily suspended their 401k company match since the markets tumbled, and 5 percent are expected to do so in 2009. However, depending on the duration and depth of the current recession, Hewitt believes it is possible that upwards of 10 percent of companies could potentially take that step in the coming 12 to 18 months.

While companies are making these cutbacks to keep their bottom line in the black, they are also aware of the financial hit their employees' retirement savings have taken during the market tumble. As a result, companies are turning to lower-cost—yet effective—tools designed to help their employees not only make smart investment choices, but also continue to save wisely through volatile market conditions. According to Hewitt's survey, more than three-quarters (77 percent) of employers now offer target-date funds—up from 66 percent last year—and among those that do not currently offer them, more than half (53 percent) plan to add the funds in 2009. In addition, about half (49 percent) of companies offer automatic rebalancing—a tool that helps employees regularly balance their portfolios with their target allocations—and another 20 percent are likely to add the feature in 2009.

"The continued bleak economic outlook is forcing many companies to make difficult decisions with respect to their retirement benefits. The reality is that automatic enrollment and matching employer contributions can be two of the costliest discretionary expenditures companies incur in a given year,” explains Pamela Hess, Hewitt's director of retirement research. "In an effort to avoid taking more drastic measures—such as cutting jobs or salaries—employers are opting not to add new features and/or they are temporarily suspending these initiatives in order to stay solvent in the flagging economy. Nevertheless, employers know that the recession is also adversely affecting their employees' savings. And since the majority of employees are already facing a more difficult retirement reality, companies are increasingly focusing on less expensive initiatives to encourage their employees to stay in the plan and contribute in a way that minimizes future risks.”

Helping Employees Make Sense of the Economic Turmoil

According to previous Hewitt research, most employees continued to invest in their 401k plans through 2008. Nevertheless, plunging portfolios and bleak predictions for the markets have prompted employees to transfer record amounts of their 401k investments from stocks and mutual funds into less-risky options, such as stable-value funds. The overall equity allocation in 401k plan accounts decreased by 14 percentage points—from 66.9 percent at the end of 2007 to 52.9 percent—and holdings in stable-value funds went up more than 11.6 percent to 32.3 percent by the end of 2008. Because of this dramatic shift in asset allocation, employees' 401k investment portfolios are less diversified, and as a result, workers may potentially miss out on future gains when the markets rebound. To help mitigate employees' knee-jerk investment elections, the majority of employers in Hewitt's survey plan to step up their communication efforts on weathering the markets by staying properly diversified (91 percent), staying the course and investing for the long term (87 percent), and rebalancing on a regular basis (50 percent).

Still, Hewitt's most recent survey found cash flow issues are changing the methods of employer communication, preventing some companies from implementing financial education programs in 2009. Historically, these have been a key element in many employers' efforts to help employees improve their investment elections and behaviors in their 401k plans. The number of employers planning to provide in-person investment education seminars or classes in the coming year dropped 12 percentage points—from 72 percent in 2008 to 60 percent in 2009. Instead, to get these messages to their workers, employers are turning to less expensive—yet still valuable—means of outreach: three-quarters (75 percent) of companies are using their intranet site, 60 percent are making use of e-mail blasts, and 49 percent are using webinars.

"While most employees haven't made any changes to their 401k investment strategy so far during the market meltdown, some workers—watching their 401k balances plunge into the red—panicked early on, and we saw a steady move of investments to slower-growing funds,” added Hess. "However, this is a risky move, as these funds grow too slowly for employees to amass any level of wealth over time. In a wise effort to get this message across to their workers, companies are focusing their communication efforts around the proper way to save for retirement. Still, many employees need more help than just communication can provide, and there are some low-cost educational initiatives employers can offer in light of the financial constraints imposed by the recession, such as advice tools and managed accounts. Additionally, tools like automatic rebalancing and target-date portfolios can have a significant impact on long-term savings behavior and ultimately lead to more accumulated wealth in retirement.”

Other key findings:

• Given the current economic environment, employers are taking significant action to mitigate risk posed by their programs. Two-thirds (64 percent) plan to benchmark 401k plan administration and procedures to best practices, and more than half (58 percent) are likely to review their plan governance structures (committee structure, fiduciary ownership, processes, and procedures).
• Nearly one-third (29 percent) of companies currently offer a Roth 401k to their employees, up from 19 percent in 2008. Among those companies that do not currently offer a Roth 401k, 12 percent said they are very likely to add one in 2009.
• One-fifth (20 percent) of companies currently offer managed accounts. Of those companies that do not currently offer them, 19 percent said they are very likely to offer them in 2009.
• More than half (53 percent) of employers currently have some form of contribution escalation in their defined contribution plans, and one-third (33 percent) said they are very or somewhat likely to offer it in 2009.
• While only 8 percent of employers currently promote or facilitate the use of annuities outside their plan as a rollover option, more than one-quarter (27 percent) are likely to add them in 2009.
• Almost half (46 percent) of employers are planning to evaluate phased retirement alternatives in the coming year, up from 40 percent in 2008.

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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