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Faced with a tight labor market, American
employers are trying to lure and retain workers with better retirement benefits. Over
the past decade, the retirement benefit of choice has become the 401(k) plan.
A new study by the Profit Sharing/401(k)
Council of America (PSCA) shows that these popular plans will continue to become more
friendly for participants.
How we work has changed a lot over the last 20 years. One
of the most telling signs of this is the fact that, on average, workers are changing jobs
many more times in their career than previous generations.
In other words, today's workers are more
"flexible." And their retirement savings plans are following suit.
This is the overall conclusion the PSCA reached from its
43rd annual survey of profit sharing and 401(k) plans, reflecting the 1999 plan year.
Over the past 10 years, 401(k) participants have gained
more control over their 401(k) monies. Given today's tight labor market, it's likely even
the most recalcitrant employers will need to buff up their plans in order to attract and
retain their best workers.
That means you should be looking for such features as more
investment options, faster plan enrollment times, Internet access to your account, and
maybe even investment advice to help you decide how to divvy up your money.
Labor Market Impact
Employers are improving 401(k) benefits for two reasons.
One is to attract and retain more workers. The other is to increase participation, so that
the plans will pass muster with the IRS' nondiscrimination rules requiring that plans be
offered equally to all participants, says David Wray, president of the PSCA.
To a small extent, workers are responding to these plan
improvements.
For instance, employee contributions to 401(k) plans in
1999 averaged 5.4 percent of pretax pay. That was up from 5.1 percent in 1998 and 4.2
percent in 1991. This measurement includes only nonhighly compensated employees.
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"We are witnessing the move of
baby boomers into their prime saving years. People will increase saving for retirement
when they cross age 40."
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| — David Wray,
president, Profit Sharing/401(k) Council of America (PSCA). |
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Wray expects that 401(k) contribution rates will jump even
more in the coming decade. "We are witnessing the move of baby boomers into their
prime saving years. People will increase saving for retirement when they cross age
40," he said.
Nevertheless, overall participation rates slipped slightly
last year. In 1999, 82.5 percent of eligible participants had a balance in their 401(k)
plan, whereas 82.9 percent had a balance in 1998.
One of the most significant incentives employers use to
encourage employee participation is the matching contribution. Employer contributions
remained stable from 1998 to 1999, averaging 3.3 percent of payroll. Similarly, vesting
periods have remained stagnant, Wray said.
While employers want more people to participate in their
plans, they continue to try to use vesting periods as a retention incentive, Wray
concludes.
Keeping on Track
Trying to maintain a consistent savings program in today's
quick-change job market is often tough for employees. In many instances, workers have to
put in a year on the job in order to be able to sign up for the 401(k) plan. But Wray says
that, anecdotally, he sees signs that employers are shortening eligibility periods.
That can make a significant difference in an employee's
bottom line at retirement. "If you can maintain a continuous savings program, that
can result in as much as a 4 percent higher account balance at retirement," Wray
said.
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"If you can maintain a continuous
savings program, that can result in as much as a 4 percent higher account balance at
retirement."
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| — David Wray,
president, Profit Sharing/401(k) Council of America (PSCA). |
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One heartening statistic for employees struggling to keep
their savings program on track is the fact that in 1999, 94 percent of plans were willing
to accept rollover contributions from a previous employer's plan. That was up from 73
percent in 1990. Further, 60 percent of plans were willing to accept rollover
contributions before an employee became eligible to make salary deferrals.
Where the Savings Goes
When introduced in 1981, the 401(k) plan dramatically
changed how workers save for retirement; employees took on a greater role in deciding how
much to save and how to invest the money.
Since then, employees have gained even more control over
their retirement funds. In 1987, only 74 percent of plans let employees choose how to
invest their own 401(k) contributions and 39 percent let them select the investments for
their employer contributions. By the end of 1999, those figures had grown to 96.5 percent
and 83.4 percent, respectively.
As employees gained more control over their investments,
they've asked for more investment options. In 1999, the average number of funds offered
was 11.5, up from 8.8 in 1998.
The most popular types of investments are equities. In
1999, more than 77 percent of 401(k) assets were invested in equities, with company stock
accounting for 43 percent of the total.
"Employees are clearly ... investing for the long
term," Wray said.
Automatic Enrollment Rising
"We're going to help you save for retirement whether
you want to or not." That's the message an increasing number of employers are sending
to their employees as they start automatic enrollment plans.
By almost every accounting method available, American
workers have a deplorable savings record. Employers are taking it upon themselves to make
sure that workers get a start in building a retirement nest egg. Companies are starting
automatic enrollment plans in which employees have to decide to opt out of, rather than
opt in for, the plan.
In 1999, 4.2 percent of surveyed 401(k) plans automatically
enrolled their employees; on average, they deferred 3 percent of their salary.
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| The Personal Touch |
| Nothing beats a one-on-one discussion to
encourage workers to participate in their 401(k) plans, say human resources professionals.
Indeed, that's what Al TeRonde, president of American Grinding and Machine Co., in Chicago
knows. His firm has a 94 percent participation rate in its 401(k) plan. The reason? He
personally encourages every employee to sign up. And for those who are holdouts, TeRonde
doesn't easily take "no" for an answer: "I will go back to them at the
six-month enrollment point and say 'Have you reconsidered?'" |
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Al TeRonde, president of American Grinding and Machine Co.,
believes in the personal approach in his 127-employee firm. "I need to buttonhole
people" to get them to sign up for the 401(k) plan, he said.
Yet he sees the value in automatic enrollment. "It
forces a person to sign out of the plan," he said.
Where Plans Are Going
The PSCA took a look at its surveys over the past 10 years
and reached several conclusions about where 401(k) plans may be headed in the future,
stating generally: "Participant empowerment and choice will continue to grow
..."
Some of its conclusions are:
- In the coming years, it's possible that employer
contributions to 401(k) plans will be tied to company net profits rather than a fixed
match.
- Company stock will continue to be a popular investment
choice for participants of publicly traded companies.
- International funds will continue to attract only a small
percentage of plan assets even as international fund choices increase.
- Loans will continue to be an important feature in 401(k)
plans as participants look at the plan as an intermediate savings vehicle as well as a
retirement savings tool. Nearly 80 percent of 401(k) plans allowed loans in 1999.
While many 401(k) plan service fees are absorbed by the
employer, the fees and relationship the employer has with the service provider can have an
important effect on individual participants in terms of plan features offered. The PSCA
concluded that competition among 401(k) service providers is expected to continue to
intensify over the coming years. That should help keep fees low.
This competition also affects the extra features plan
providers offer, such as investment advice. This is a commonly asked for feature by plan
participants, Wray said.
Many employers are loath to dispense investment advice
because they fear they may be increasing their fiduciary liability. Yet it's common for
employees to ask their benefits rep, "If you were in my shoes, how would you invest
your money?"
Consequently, the trend is evident. "Employees clearly
want personal advice," Wray said.
mPower, the publisher of this site, provides advice to
401(k) plan participants through contractual agreements set up with the employer. |
