Participant Activity Analysis Can Improve Plans

More employees are participating in employer-sponsored retirement plans, thanks to plan design changes, but there are still improvements that can be made.

The Aon Hewitt 2013 Universe Benchmarks research report analyzes participant behavior across the participation rates, savings levels, plan balances, investments, account activity and demographics of more than 3.5 million employees eligible for defined contribution plans. Four key trends emerged: participation rates hit an all-time high, and saving rates increased slightly; automation plays a strong role in many savings behaviors; leakage declined while continuing to decrease from its peak in 2010; and diversification improved and balances recovered to prerecession levels.

According to Aon Hewitt, not only can plan sponsors use the report findings as a benchmark to learn how their workers’ saving and investing behavior compares to that of the average worker, they can be used to better understand general patterns of participant behavior across demographic groups. That knowledge can then be leveraged to better determine who might benefit from certain plan features or new opportunities to improve results. In addition, demographic analysis helps plan sponsors pinpoint which groups of workers may benefit from certain targeted communications.

According to the report, at 78.0%, the average participation rate for plans hit an all-time high and increased about two percentage points over last year. At 7.3%, the average before-tax contribution rate increased slightly from the low of 7.2% in 2011. The average Roth contribution rate was 6.0%—down from 6.4% in 2011. And, 72.5% of participants saved at or above the company’s match threshold, up from 71.3% in 2011. Notably, the participation rate among employees subject to automatic enrollment into their employers’ retirement plans is 81.4%, compared with 63.5% among those not subject to automatic enrollment.

To improve the numbers among their plans, Aon Hewitt suggests plan sponsors adopt automatic enrollment if they haven’t already, and the company says, automatic enrollment should be set up with a higher default contribution rate. Plan sponsors may also consider expanding automatic enrollment to existing non-participants, offering automatic deferral escalation and automatic rebalancing, and stretching the employer match formula—for example, from 100% of up to 3% deferrals to 50% of up to 6% of deferrals.

At $81,240, the average participant’s plan balance rebounded to prerecession levels, and is up substantially from $57,150 in 2008. The median participant rate of return increased from -0.7% in 2011 to 11.9%. The median three-year and five-year annualized rates of return are 7.7% and 2.5%, respectively.

At 39.7%, the average allocation to premixed portfolios weighted by participant increased 13 percentage points in the past two years. Slightly more than 68% of average total plan balances were in equities, up from 66.8% in 2011. The average allocation to company stock among plans that offer that investment choice is 13.4%, down from 41.8% in 2002. The average number of asset classes in which participants are invested is 5.3—up from recent periods.

Aon Hewitt data shows 14.5% of participants initiated a trade during 2012, down significantly from nearly 20% in 2008. Nearly 17% of participants initiated a trade among those not using premixed portfolios—down from 18.1% in 2011. More than one-quarter (26.6%) of participants had an outstanding loan in 2012, down from the 2009 high of 27.6%. However, 6.5% of participants initiated a withdrawal, significantly higher since 2006—at 4.9%. Among those who terminated employment in 2012, 43.1% took a cash distribution.

Aon Hewitt recommends plan sponsors offer participants an array of investment advisory help, either through target-date funds or managed accounts, or by offering online guidance and personal financial and lifetime income planning seminars.

Plan sponsors can discourage plan leakage by restricting the number of loans available or the accounts from which loans can be distributed, by simplifying the loan repayment process for terminated participants, and by encouraging terminated participants to leave their money in the plan for the benefit of lower costs and education resources.

Aon Hewitt adds that employers should look for new ways to reach and communicate with employees—offer broader financial help and increase digital communications, such as webinars, podcasts, text messages and social media.

The Aon Hewitt 2013 Universe Benchmarks research report is here.