Data & Research November 27, 2007

Sponsors Searching for Ways to Boost Participation Rates

Automated retirement plan features such as automatic enrollment are driving up 401(k) plan participation rates at U.S. companies, according to Diversified Investment Advisors, Inc.
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Diversified said the number of U.S. companies with 1,000 to 4,999 employees that report a 90% or better participation rate in their company’s 401(k) plan has doubled since 2006. According to Diversified’s survey, 62% of corporate plan sponsors implemented or are currently implementing automatic enrollment – a 7% increase over last year – and another 30% reported they are considering making automatic enrollment part of their plan.

In addition, the survey found twice as many plan sponsors (30% versus 15% in 2006) have or are currently implementing automatic deferral increases. More plan sponsors are also offering automatic rebalancing (31% in 2007 versus 24% in 2006) and managed accounts (37% in 2007 versus 32% in 2006), according to a press release.

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Interaction with Employees

Diversified’s “Report on Retirement Plans – 2007” also indicated corporate plan sponsors conducted employee meetings (36%), improved their employer match (29%), and offered an enhanced array of investments (28%) in an effort to bolster plan participation.

Forty-seven percent of employers plan to improve employee education over the next year, while 28% plan to offer investment advice.

Plan Offerings

Eighty percent of employers surveyed offer 401(k) plans. Plan assets continue to grow as 92% of plans surveyed report assets of $25 million or more – a 9% increase over 2006. Nearly 90% of employers reported their DC plan has had at least some impact on their ability to recruit and retain the most qualified employees and one in four said it has had a major impact, the survey found.

With 40% of employers currently offering a 401(a) defined contribution plan, the popularity of these plans has increased since 2004 when only 11% of employers offered them.

Regarding DC plan annual fees, 39% of companies said they pay less than 20 basis points. An additional 28% said they pay between 20 and 40 points.

Seventy-six percent of employers offer at least one defined benefit plan, with 70% of those offering a traditional pension plan. Virtually one in four plan sponsors is planning to freeze their DB plan within the next 12 months; almost as many say they will reduce plan benefits and another 14% plan to terminate their DB plan altogether.

Investment Monitoring

Diversified’s survey found an increasing level of investment due diligence among plan sponsors, with more than one-third of companies relying on a dedicated investment review committee to select and monitor investment options. More than half of these committees meet quarterly and 28% said they meet even more often, according to the press release. At least one in three employers offer exchange-traded, emerging market and target date funds among their fund options.

Investment flexibility is important within corporate retirement plans. More than half of corporate plan sponsors look to investment managers other than their recordkeeper for the majority of their plan assets, while 14% only offer investments from their recordkeeper’s fund family.

Additionally, two in three employers have established a formal investment policy statement to help monitor the performance, risk, and style consistency of funds they offer.

Recordkeeper Selection

Consolidation among plan providers is decreasing with 16% planning to consolidate their recordkeeping for multiple plan types with one provider (an 8% decrease from last year) and 15% are planning to consolidate investments for multiple plan types with one provider (also an 8% decrease from one year ago).

Further, interest in total retirement outsourcing continues to grow, with 29% considering it (a 9% increase from 2006).

Diversified Investment Advisors’ Report on Retirement Plans – 2007 survey was conducted by Diversified Investment Advisors, Inc. and administered by LIMRA International and FGI Research, Inc. among U.S. companies with at least 1,000 employees. The survey featured responses from 200 individuals responsible for the administration of retirement benefits in their companies. Report on Retirement Plans – 2007 contains data based on the 2006 plan year and focuses specifically on the defined benefit and defined contribution plans of U.S. companies.

For a copy of Report on Retirement Plans – 2007 send an e-mail with contact information to retirementsolutions@divinvest.com.

Compliance November 27, 2007

High Court Ponders Scope of Fiduciary Breach Suits

U.S. Supreme Court justices heard oral arguments Monday in a case that could help define the scope of participant fiduciary breach lawsuits.
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The case, James LaRue v. DeWolff, Boberg & Associates Inc., et al., turns on whether a participant can sue under the Employee Retirement Income Security Act (ERISA) to recover losses of their own rather than to recover planwide damages, according to a Law.Com news report.

James LaRue sued his employer, DeWolff, Boberg & Associates Inc., to regain $150,000 that he charged was lost from his 401(k) account because the plan administrators twice disregarded his order to move funds to different investment options.

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U.S. District Judge David C. Norton of the U.S. District Court for the District of South Carolina ruled against LaRue in 2005 and the 4th U.S. Circuit Court of Appeals agreed in June 2006 (See U.S. Supreme Court Agrees to Hear Key 401(k) Fiduciary Breach Case).

Plain Meaning

During Monday’s Supreme Court arguments, LaRue attorney Peter K. Stris, asserted that the plain meaning of the statutory language providing that “any losses to the plan” caused by fiduciary breach are recoverable “includes any diminution in value of defined contribution plan assets, regardless of the number of participants ultimately affected,” according to the Law.com report.

Justice Antonin Scalia demanded to know from Stris why LaRue did not first try to get his money back from the plan as a whole rather than focusing his legal fight on a fiduciary. “[O]nly that manner of proceeding preserves the structure of … the legislation which is that you’re supposed to first apply to the plan and exhaust your remedies there before you come into court,” Scalia said, according to the Law.com report.

In response, Stris labeled the administrative exhaustion requirement a “judicial gloss on the statute” instead of part of the statute’s plain meaning.

Attorney for the employer, Thomas P. Gies, insisted in his presentation the term “losses to the plan” connotes a collective loss. “[W]e think it’s unlikely that Congress intended every one of these he said/she said cases to give rise to a cause of action for damages. There would be no end to the kinds of claims that one could imagine,” Gies said, according to the news report.

A Hypothetical Question

Justice Stephen Breyer posed a hypothetical question to Gies: Say a trustee of a plan with a thousand members invests in a thousand diamonds and puts them in a bank deposit vault, Breyer said.

“One day he takes … 500 diamonds and runs off to Martinique. We catch him enjoying the sun,” Breyer said. That would result in a valid claim under the statute, but what if “everything is the same except each of the thousand diamonds was put in [an] individual safe deposit box with the participant’s name on it. Everything else is the same. Why should it matter?” Breyer asked, according to the news report.

Justice Ruth Bader Ginsburg quizzed Gies how many plan participants would have to be affected by a loss to support a fiduciary claim “You said it has to be more than one. How do we get that number between more than one and less than everybody?” she wondered.

Gies said the breach alleged would have to be “something systemic, something that affects the interests of the plan as a whole.”

According to the news report, Scalia told Gies: “You say at some ineffable point it becomes a loss to the plan. I can’t understand how your system works. You’re telling me it depends on how big the diamond is and — and what kind of a breach it was. How can we write an opinion like that?” Scalia asked him.

“I’m fortunate to have that not as my job, Justice Scalia,” Gies responded.

The district court ruling is here. The 4th Circuit ruling is here.

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