Large Plans Still Leading the Plan Design Charge

An extensive new report from BrightScope and the Investment Company Institute finds 401(k) plans have significantly evolved towards “packages of features and choice” tailored to individuals, especially in the large-plan market. 

About two-thirds of large 401(k) plans examined by BrightScope and the Investment Company Institute (ICI) reported using at least two out of the three key plan features analyzed: automatic enrollment, employer contributions, and participant loans.

Among these large plans—with at least 100 participants and at least $1 million in plan assets—fully 18% had evidence of all three plan features, according to BrightScope and ICI. The firms explain their latest research focuses on private-sector 401(k) plans, analyzing data from the Department of Labor on thousands of plans covering a range of sizes. The organizations also studied detailed investment data from the BrightScope Defined Contribution Plan Database on more 34,000 large 401(k) plans.  

ICI Chief Economist Brian Reid summarizes the findings by noting, “as employers innovate in plan design, we see evidence that 401(k) plans have been evolving to offer packages of features and choices of investment options tailored to participants’ needs.” For example, the availability of target-date funds (TDFs) on 401(k)s menus has increased very impressively in recent years. As recently as 2006, just a third of 401(k) plans included TDFs—a figure that grew to 73% by 2013, the research shows.

It’s a positive industry development, researchers argue, given that TDFs help ensure age-appropriate asset allocations and proper rebalancing techniques. “Similarly, the percentage of participants that were offered target date funds increased from 42% to 75% between 2006 and 2013,” according to ICI and BrightScope, “and the percentage of assets invested in target date funds increased from 3% to 15% during this period.”

NEXT: Index funds are widely available in 401(k) plans 

The study shows that nine in 10 401(k) plans in the sample offered index funds in 2013.

“That year, more than 95% of plans with assets of more than $50 million offered these funds in their plan menus,” the report says, “compared with about 85% of 401(k) plans with $1 million to $10 million. In addition, index funds made up a significant component of 401(k) plan assets, holding more than a quarter of 401(k) plan assets in 2013.”

One particularly positive finding for the average plan participant shows mutual fund fees in 401(k) plans tended to fall between 2009 and 2013. Consistent with other research, the study also found that fund expenses are typically lower in larger plans—but decreases are showing up across the board.

“For instance, the average asset-weighted expense ratio for domestic equity mutual funds was 0.81% for plans with $1 million to $10 million in plan assets, compared with 0.44% for plans holding more than $1 billion in plan assets,” the report says. “A variety of factors contributed to the downward trend of both 401(k) total plan costs and the fees of mutual fund in the plans.”

These factors include continued awareness and focus by plan sponsors and plan participants on the impact of fees on 401(k) savings, says Brooks Herman, head of data and research at BrightScope.

“Whether measured for the average 401(k) plan, the average participant, or the average dollar, total plan costs also have decreased over time,” she concludes. “For example, total plan cost fell from 1.02% of assets in the average 401(k) plan in the BrightScope database in 2006 to 0.89% of assets in 2013. In 2013, the average participant was in a 401(k) plan with a total plan cost of 0.58% of assets, compared with 0.65% in 2009.”

NEXT: Plan loans and leakage  

The report finds 401(k) plans with automatic enrollment “are more likely to have both employer contributions and participant loans outstanding than plans without automatic enrollment.”

In fact, in 2013, nearly three-quarters of large plans in the sample with automatic enrollment also had both employer contributions and participant loans outstanding, compared with fewer than three-fifths of plans in the sample without automatic enrollment. “Even though loans are widely available, the amounts borrowed represent less than 2% of 401(k) plan assets,” the research explains. “In addition, DC plan recordkeeper data indicate that fewer than one in five 401(k) plan participants have loans outstanding.”

Given these stats, the report classifies auto-enrollment and plan loans both as key features for encouraging greater plan participation: “Although participants typically must pay any loans back shortly after leaving their employers, which can lead to defaults, the existence of a loan feature may encourage workers to sign up for the plan in the first place, or to defer more of their salary into the plan.”

The full report, “The BrightScope/ICI Defined Contribution Plan Profile: A Close Look at 401(k) Plans, 2013,” can be downloaded here