Automation and Advice Becoming Standard in DC Plans

Automation has become standard in many defined contribution (DC) plans, according to a recent report from Aon Hewitt.

The Trends & Experience in Defined Contribution (DC) plans survey found the percentage of employers that automatically enroll participants has plateaued at 56% of plans, similar to 2009 levels. Among those not offering, 5.5% plan to add during 2011.  

Companies that offer both DC and defined benefit (DB) plans continue to be more likely to automatically enroll employees (62%), compared to those that are DC only (47%).  

Although there has been much discussion around the needs for automatic enrollment to also reach existing nonparticipants, still the vast bulk (82%) only default new hires, the survey report said. This is nearly unchanged from 2009.  

Default investments under automatic enrollment have shifted to qualified default investment alternatives (QDIA) options, with target-date portfolios dominating. Currently, 78% of plans default participants’ funds into a target-date fund, up from 69% in 2009 and 50% in 2007. Balanced or target-risk funds are used with 13% of plans, managed accounts by 3%, and stable value or money market by 6% of employers.  

The report notes that default contribution rates have also been discussed significantly in the marketplace, focusing on whether these rates are adequate given participant inertia. Two-thirds of plans (66%) continue to use a 1% to 3% default rate. These stats have only marginally improved in the past two years, with 15% of plans defaulting at a rate of 6% or higher (up from 12% of plans). 

Automatic contribution escalation is also more popular, with 51% of plans offering the feature (up from 44% in 2009), and another 6% plan to add in 2011. Escalation is also more popular as part of automatic enrollment, with 45% of plans using automatic escalation within automatic enrollment (up from 40% in 2009). Escalation is more prevalent among plans that initially default at lower rates (76% default at 2% or 3% of pay initially).  

Automatic rebalancing is offered by 53% of plans, up from 47% in 2009. Another 3% of employers report they plan to adopt it during the coming year.

Advice More Prevalent  

The Aon Hewitt survey found investment education and advisory services are increasingly prevalent and top of mind. Nearly all respondents (98%) use written materials for communicating investment concepts, while only 22% report that they are very effective. The most effective media reported is on-site seminars/workshops/meetings (ranked very effective by 54% of plans), followed by call center counseling (38%) and personalized communication (38%). 

More companies are helping their employees make wise investment decisions by offering independent financial advice and education. Three-quarters (74%) of plan sponsors now offer outside investment advisory services to employees, up 50% since 2009 (offered by only 50% of plans). The types of services offered range from online advice (37%) and guidance tools (47%), one-on-one counseling (44%), and managed accounts (29%), with increases seen across all. Another 7% of employers note they will provide these types of services in the next year.  

Close to half (47%) of employers now offer participants access to online guidance, up from 28% in 2009. Additionally, 44% of plans provide one-on-one financial counseling. Both online advice and managed accounts also increased in prevalence, now offered by 37% and 29% of plans, respectively, and 8% of sponsors are likely to add each solution in the coming year.  

Among employers that do not offer outside investment advisory services to their employees, two-thirds report the main barrier being legal/fiduciary in nature. Cost concerns are reported as the primary barrier among 18% of plans.  

The Trends & Experience in Defined Contribution (DC) plans survey has been conducted every two years since 1991. The 2011 survey was responded to by a record number of employers—546 across a variety of plan types, sizes and industries.