Most 401(k) Plan Sponsors Actively Engage in Plan Design

Employers sponsoring 401(k) plans use a range of employer match formulas and offer a variety of investment choices with lower fees.

Most employers are contributing to the 401(k) plans they sponsor, with more than four out of five making contributions, according to a study by BrightScope Inc. and the Investment Company Institute (ICI). The most common type of employer contributions are simple matching formulas, where the employer matches a certain percentage of employee contributions up to a maximum percentage of employee salary.

The study shows four in ten (40%) plans had a simple match formula in 2012. The two most commonly used formulas were matching 50% of contributions up to 6% of salary and matching 100% of contributions up to 6% of salary, used by 17% and 15% of employers, respectively. Other types of employer matches were used in less than 10% of plans, while other types of contributions such as percentage of salary and lump-sum contributions were used in 37% of plans.

The average 401 (k) plan in 2012 offered 25 investment options for employees to choose from, of which about 13 were equity funds, three were bond funds, and six were target-date funds. The number of investment options varies little by plan size, however there is significant variation between plans. For example, 10% of plans offered 15 or fewer investment options and 10% of plans had 37 or more.

The study revealed most likely investment options to be offered in 401(k) plans were domestic equity funds, international equity funds, and domestic bond funds, with nearly all plans including these funds in their investment lineups.

Target-date funds were seen gaining popularity, with 70% of plans offering target-date funds in 2012, compared to about 29% in 2006. Additionally, the percentage of 401 (k) plan assets invested in target-date funds increased from 3% to 13% over the same time period.

Index funds were used widespread as well, holding nearly one-quarter of 401(k) assets in 2012. The number of index funds offered by plans every year between 2006 and 2012 doubled, from an average of a little more than two index funds to more than four. Index funds held a greater share of assets in larger plans, rising from about 10% of assets in plans with $10 million or less to more than 20% of assets in plans with more than $250 million.

The study found fees for mutual funds, which accounted for 46% of plan assets in 2012, have fallen over time. Brooks Herman, head of data and research at Brightscope, says this can be attributed to the rising awareness by both plan sponsors and participants of fees and their effect on 401(k) savings.

“The flexible structure of 401(k) plans allows employers to shape their own plan designs to meet the needs of their workforce,” says ICI chief economist Brian Reid. “These data suggest that employers, working with employees and plan service providers, have adopted a variety of features that can encourage employee participation, provide a range of appropriate investment choices, and result generally in use of lower-cost mutual funds. The flexibility and innovation are keys to the success of the 401(k) and should be encouraged.”

The study, The BrightScope/ICI Defined Contribution Plan Profile: A Close Look at 401(k) Plans, analyzed 35,500 defined contribution (DC) plans, nearly all of which were 401(k) plans with 100 or more participants. The full report is available here.