Target-Date Use, Auto Enrollment Jump

Greenwich Associates’ new U.S. Defined Contribution Pension Plan Research Study indicates almost 79% of eligible employees participated in their companies’ 401(k) plans in 2008, a slight increase over the 77%–78% recorded in 2006.

One reason for this increase, according to a press release from the company, is that more than 40% of large DC plans and almost half of smaller plans have implemented automatic enrollment.

Default Options

As they move to automatic enrollment, companies also have been shifting default investment options from conservative money market and stable-value funds to target retirement date funds.

From 2007 to 2008, Greenwich found the share of plan sponsors using money market or stable value funds as their default investment option dropped to just 19% from 35%, while the share of plans using target-date funds jumped from 35% to 53%, Greenwich said.

It is not uncommon for the equity exposures in target-date funds to reach 50% or higher, Greenwich noted. As a result, the success plan sponsors have found with automatic enrollment and new default investment options, places them in an awkward situation at the start of 2009. The result of their success has been that a large number of employees took on exposure to financial markets in general and to equity markets in particular virtually on the eve of the biggest market collapse in 70 years, according to the company.

Changes to Matching Contributions

In addition, companies are being forced to reduce or eliminate matching contributions as part of broad cost-cutting measures. The results of the 2008 Greenwich Associates study show that the proportion of large DC plan sponsors offering matching contributions declined slightly to 92% in 2008 from 94% in 2007. Considering this, how can plan sponsors face the task of convincing their new participants why they wouldn’t have been better off opting out, Greenwich asks.

The consultants at Greenwich Associates advise companies to make every effort to maintain their matching contributions and to cut or eliminate them only as a last possible option, but in the event they are forced to take this step, Greenwich urges them to give considerable thought to how the change will be communicated to participants.

In particular, Greenwich said it should be emphasized to participants that the move is a temporary measure required to enhance the financial stability of the company in a time of broad economic crisis, and that the contribution will be reinstated at the earliest possible moment. Most importantly, according to Greenwich, the plan sponsor should forcefully deliver the message that it is imperative for employees to continue their own participation in the plan.

Follow the Leader

Greenwich Associates’ research and conversations with defined benefit plan sponsors, endowments, and foundations suggest that institutional investors are coming to the conclusion that markets are broke — not their investment strategies and practices. Institutional investors seem committed to long-term efforts to diversify their portfolios.

“These are important messages for both plan sponsors and individual DC plan participants,” said Greenwich Associates consultant Dev Clifford, in the press release. For many DC participants and plans, reductions in exposure to the company’s own stock remain the most important diversification step, along with increases in international investments and cuts to share of plan assets invested in the proprietary funds of the plan’s full-service provider.

On average, Greenwich found 56% of DC plan assets are invested in the proprietary funds of the plan sponsor’s largest full-service provider, down from 59% in 2007 and 67% as recently as 2004.

Greenwich also suggests that plan sponsors should be working aggressively to make participants understand that the worst thing they can do is to abandon their equity investments at the market bottom. “Sponsors should make the direct case in favor of sticking with a 401(k)-based investment program by reminding participants of the benefits of investing in the plan, including the fact that pre-tax contributions amount to a raise equivalent to the amount of the contribution multiplied by their personal income tax rate,” Greenwich said in the press release.