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November 07, 2007
Employers' 401(k) Priorities Shift

Only 25 percent of companies offering 401(k) plans say that that they view a high participation rate as the primary measure of success for their 401(k) plans, down from 43 percent in 2005, according to a study by Hewitt Associates. Instead, many are focusing on their 401(k) plan's ability to facilitate a sufficient retirement income for their employees.

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

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.

Further, 83 percent of companies set their default contribution rates as three percent or higher, up from 66 percent of companies 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.

"What's encouraging is that companies realize that simply automatically enrolling employees into the 401(k) plan will not get workers where they need to be in terms of retirement savings," says Pamela Hess, director of retirement research at Hewitt Associates. "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."

The firm conducted the survey among more than 300 mid- to large-sized companies offering 401(k) plans.

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