There was no change in 2016 in automatic enrollment adoption by 401(k) plans, according to a Cogent Wealth Report, “One Size Does Not Fit All DC Sponsors.”
While auto-enrollment remains the most popular auto-feature offered in 401(k) plans today, just three in ten (29%) plans take advantage of this option. However, usage does increase with plan size, with the large plan segment (51%) representing the highest proportion of plan sponsors with auto-enrollment as a plan feature.
In addition, the research found a significant decrease in the reported plan sponsor usage of auto-increase of deferral rates and automatic rebalancing compared with 2014. Currently, one in five (19%) plans offer automatic rebalancing, which is down from 26% two years ago. Use of auto-increase of participant deferral rates has fallen to 13% from 17% since 2014. Declines in usage for both auto-features are driven primarily by decreases in the micro and large plan segments.
Employer matching contributions are offered by fewer plans in 2016, representing a decline to 50% overall, down from 57% in 2015. Significant decreases occur across all plan size segments in offering contributions commensurate with at least a portion of the amount of money being deferred by the participant to the plan.
The report says, “Decreasing use of these features can be related back to the most commonly cited primary focus of plan sponsors need to cut fees. In a cost-constrained environment, plan sponsors may be less likely to offer auto-features if they result in a higher total plan cost of administration and may “opt out of auto” upon changing recordkeepers in efforts to maintain or lower costs.”
However, looking forward, the research found increases in the likelihood of plan sponsors adopting auto-enrollment, automatic rebalancing and auto-increase of deferral rates. Overall, 17% of plan sponsors report a top 3-box score for likelihood to initiate offering auto-enrollment for their respective 401(k) plans—up from 6% in 2015. With regard to auto-rebalancing, almost as many plan sponsors overall (17%) intend to add this feature as there are plan sponsors who already offer it (19%). In addition, 18% overall report high likelihood of adopting the auto-increase feature.NEXT: Investment options and advice
Despite plan sponsors offering fewer investment options within their 401(k) plans than they have in the past—an average of 13 today compared with upwards of 20 in previous years—there is a widening of the breadth of investment products on plan menus, according to the report. The vast majority (85%) of 401(k) plan sponsors select a default investment option in which participant contributions are placed if participants are automatically enrolled, have not made, or do not want to make investment choices themselves.
Target-date funds (TDF)s continue their collective reign as the most popular default investment option in all but the micro plan segment, which carries on its reliance on money market funds. Among small plan sponsors, the use of managed accounts and target-risk funds as default options is increasing. However, mega plans report the most frequent use of managed accounts as the default.
The research found 80% of plans currently make available to participants some form of investment advice, with the most common type being access to a financial adviser (46%). Reliance on financial advisers is even greater among smaller plans, which tend to be sold and serviced by financial advisers. Access to online automated investment advice is more likely to be offered by the plan provider (32%) rather than through an independent third-party (17%) although there are differences by plan size. Mid-sized, large and mega plans are more likely to offer access to an independent third party platform compared with smaller plans. Only 15% of plan sponsors offer participants one-on-one advice provided by an independent third party.
There is relatively strong interest among plan sponsors in adding new types of investment advice. About one-quarter of current non-users indicate they are likely to start offering one of three types of advice: access to a financial adviser (27%), one-on-one advice provided by an independent third party (25%) and online investment models provided by the plan provider (23%). Interest in adding these new modes of advice delivery is stronger among larger plans with at least $20 million in assets.
The research paper is derived from an online survey of a representative cross section of 1,435 401(k) plan sponsors across micro, small, mid-sized, large and mega plans conducted from February 15 to March 15, 2016.