Economy Slows Auto Enrollment Trend

Many companies are looking for ways to lower the costs of their retirement benefits while still encouraging their workers to invest wisely for retirement, according to a survey by Hewitt Associates.

In a press release, Hewitt said its annual survey of about 150 mid- to large-sized employers revealed that half (51%) currently offer automatic enrollment (up from 44% in 2008). However, among the companies that do not offer the feature, only one-quarter are somewhat or very likely to add it for new hires and just 15% are likely to adopt it for existing employees in 2009, down from 57% and 27%, respectively, in 2008.

Of companies not planning to add automatic enrollment, more than half (55%) cited the increased cost of the employer match as the primary reason, up nearly 10% from those who said the same in 2008.

Hewitt said that while a few high-profile companies announced 401(k) match cuts in 2008 (see “FedEx Suspends Match, Cuts Pay“), the survey showed just 2% of employers have cut or temporarily suspended their 401(k) company match since the markets tumbled, and 5% are expected to do so in 2009. Hewitt says it is possible that upwards of 10% of companies could potentially take the step of suspending match in the coming 12 to 18 months, depending on how quickly the market rebounds.

Aware of the financial hit their employees’ retirement savings have taken during the market tumble, companies are turning to lower-cost tools designed to help their employees not only make smart investment choices, but also continue to save wisely through volatile market conditions.

According to Hewitt’s survey, more than three-quarters (77%) of employers now offer target-date funds—up from 66% last year—and among those that do not currently offer them, more than half (53%) plan to add the funds in 2009. In addition, about half (49%) of companies offer automatic rebalancing, and another 20% are likely to add the feature in 2009.

Guiding Participants through the Storm

Most employees continued to invest in their 401(k) plans through 2008, but the market turmoil has prompted employees to transfer record amounts of their 401(k) investments from stocks and mutual funds into less risky options, such as stable-value funds, Hewitt said (see “2008 a Year of Records for Hewitt 401(k) Index). The overall equity allocation in 401(k) plan accounts decreased by 14%—from 66.9% at the end of 2007 to 52.9% by the end of 2008.

Holdings in stable-value funds went up more than 11.6% to 32.3% by the end of 2008.

To help mitigate employees’ knee-jerk investment elections, the majority of employers in Hewitt’s survey say they plan to step up their communication efforts on weathering the markets by staying properly diversified (91%), staying the course and investing for the long term (87%), and rebalancing on a regular basis (50%).

However, cash flow issues are changing the methods of employer communication, Hewitt found. The number of employers planning to provide in-person investment education seminars or classes in the coming year dropped 12% from 72% in 2008 to 60% in 2009. Employers are turning to less expensive means of reaching employees, such as their intranet sites (75%), email blasts (60%), and Webinars (49%).

Re-evaluating Retirement Programs

In the current economic environment, employers are taking significant action to mitigate risk posed by their programs, Hewitt found. Sixty-four percent of respondents to Hewitt’s survey say they plan to benchmark 401(k) plan administration and procedures to best practices, and more than half (58%) are likely to review their plan governance structures (committee structure, fiduciary ownership, processes, and procedures).

Almost half (46%) of employers indicated they are planning to evaluate phased retirement alternatives in the coming year, up from 40% in 2008.

Other key findings of Hewitt’s survey include:

  • Nearly one-third (29%) of companies currently offer a Roth 401(k) to their employees, up from 19% in 2008. Among those companies that do not currently offer a Roth 401(k), 12% said they are very likely to add one in 2009.
  • One-fifth (20%) of companies currently offer managed accounts. Of those companies that do not currently offer them, 19% said they are very likely to offer them in 2009.
  • More than half (53%) of employers currently have some form of contribution escalation in their defined contribution plans, and one-third (33%) said they are very or somewhat likely to offer it in 2009.
  • While only 8% of employers currently promote or facilitate the use of annuities outside their plan as a rollover option, more than one-quarter (27%) are likely to add them in 2009.