Sponsors expect to increase their defined contribution plan investment options in coming years, even as 401(k) participants - particularly at smaller companies - are having difficulty understanding the options they already have.
That's the disconcerting conclusion that may be drawn from two new surveys on the 401(k) and broader defined contribution markets. The surveys are from different vantage points: that of the participant and the plan sponsor.
Participant-directed defined contribution plans, covering approximately 25 million workers, represent the fastest growing component of the private sector retirement system, according to Phoenix-Hecht, Research Triangle Park, N.C. The firm based its survey on telephone interviews with 1,008 individuals who participate in an employer-sponsored 401(k) or other defined contribution plan at an organization with at least 100 employees.
Buck Consultants Inc., New York, surveyed 479 401(k) sponsors across the country about contributions, investment options, asset allocation, loans, record keeping and administration. The survey also provides an analysis by participation rates and a view of the typical 401(k) plan.
Phoenix-Hecht concluded participant knowledge of even simple investments remains low.
Investment knowledge is higher among men and people with higher incomes, but participants overall exhibited a lack of understanding of basic investment concepts. For instance, only 47% of participants surveyed said global equity funds have stock in them; only 43% said balanced funds included stocks; 29% said fixed-income funds included stocks; and 50% said money market funds include stock, according to Phoenix-Hecht.
Given this data, Phoenix-Hecht's survey recommends the asset management process be simplified through the use, for instance, of asset allocation funds, and that the number of investment options be limited.
But 76% of plan sponsors expect to make available even more investment options. Among that group, the average number of options offered is 4.8, according to Buck. Only four sponsors are planning to decrease the number of options and those four already offer an average of 6.3 options. The Buck survey is based mostly on larger plan sponsors, with 63% of respondents having more than 1,000 employees.
The Buck survey noted what is considered a positive development: a shift of participant investments from guaranteed investment contracts.
"The results indicate increasing sophistication in what are becoming more mature programs. For the first time, daily valuation is the single most common valuation frequency, and there is a marked shift away from traditional stable value funds, (such as GICs) to the point where on average less than one-third of the assets are in these funds," noted Rick Koski, benefit consultant at Buck. That compares with 50% invested in stable value funds in 1992.
But the Phoenix-Hecht survey cited a dangerous misperception by participants at smaller companies about education.
Many companies are perceived by participants as counseling them personally about investments, much as a financial planner would do, according to Phoenix-Hecht. This finding conflicts with one national survey in which 6% of benefits managers said they provided financial planning services. Even the Buck survey, which covered mainly larger plan sponsors, found only 32% offered one-on-one meetings to educate participants. The most widely offered education tool is summary plan descriptions, offered by 68% of the companies surveyed by Buck.
"Our conclusion is that company personnel, especially in smaller companies, are providing participants with financial counseling outside of formal employer-sponsored programs. These contacts are being interpreted by participants as having access to the services of a financial planner. We also believe some company personnel are not limiting their counseling to investment education, but are giving participants investment advice in the form of specific recommendations of which investments to choose," the Phoenix-Hecht survey said.
"Plan sponsors, especially those in companies with less structured education and participant communications services, need to be particularly careful that they do not incur fiduciary liabilities resulting from informal investment counseling," Phoenix-Hecht's survey warned.
Despite the apparent confusion, 64% of participants are satisfied with the investment options offered by their plans.
While one-third of participants want someone else to manage their retirement savings for them, nearly two-thirds want to do it themselves, with advice from employers on how to invest among options, the survey found.
The survey said three subgroups of plan participants deserve special attention: low-income participants and young (under 30) participants, where rates of participation are low; and those older than 55.
"Despite their longer time horizon to retirement, only 39% of the young have money invested in stocks compared to 50% of the participants over 30," the survey said.
Older participants nearing retirement "may need to be reminded that stocks should still be an important part of their portfolios, given that retirement savings may have to last for 25 years," the survey said.
In general, Phoenix-Hecht recommended companies spend "more time and effort on educating their participants."
In Buck's survey, 82% of plan sponsors said they have taken steps to educate 401(k) participants about investment and savings principles, and 11% plan to do so. Of that 82%, 50% say they were prompted by the release of 404(c) regulations, which require, among other things, that plans offer a minimum of three different investment options diversified in terms of risk and return.
Among other Phoenix-Hecht survey results:
Participants who can track investment performance in their local newspapers are more satisfied with their plans, feel more knowledgeable and are more involved in managing their retirement savings.
Most participants - 86% - plan to use their plan savings strictly for retirement.
Forty-three percent of participants, the largest concentration, have an average plan balance between $10,000 and $60,000; 44% contribute between 5% and 9% of their salary to the plan.
Among Buck's other findings:
Eighty-four percent of 401(k) plan sponsors have four or more investment options available to participants - with an average of more than five options; last year, 73% offered four or more options. Some of the increase stems from the release of final Section 404(c) regulations.
Thirty percent of plan sponsors plan to change the types of investment options available; 18% plan to change investment managers; 15% plan to begin offering a mutual fund; 29% plan to increase the frequency for changing contributions; and 32% plan to increase the frequency for changing existing account balances. (Firms were allowed to select more than one response.)
At 77% of 401(k) plan sponsors surveyed by Buck, some or all investment options - excluding GICs, bank investment contracts and company stock - are offered through mutual funds.
After growth in the early years, levels of plan sponsorship and employee participation have hit a plateau. In 1994, 93% of organizations responding to the survey offered 401(k) plans to their employees and average participation was 78%, the same levels as last year.
Fifty-six percent of plan sponsors match employee contributions with a fixed amount per dollar to a maximum percentage of pay. The most common match is 50 cents per dollar, at 53% of companies; the most common maximum percentage matched is 6% of pay, at 44% of companies.
Only 7% of 401(k) plan sponsors handle most of the record keeping and administration for their plans internally. Thirty-nine percent use a bundled approach; 28% use several independent providers; and 13% use an alliance of service providers. Seventy-two percent of plan sponsors report the company pays for the record keeping expenses.
Changes are in the works for record keeping and administration. Seventeen percent of the respondents plan to begin using an alliance approach; 21% plan to begin using a bundled approach; 20% plan to outsource record keeping and administration; and 16% plan to outsource the entire plan and use a service center approach.
Firms with 100 or fewer employees show an average participation rate of 90%. By contrast, firms with more than 10,000 employees show average participation of 77.8%. The overall percentage with a participation rate of 40% or less has declined since 1991, suggesting the very existence of a 401(k) plan will result in an acceptable participation rate.
The typical 401(k) plan has an average participation rate of 78%; the average maximum total contribution permitted is 14.9% of annual salary. The typical plan matches employee contributions with cash and allows employees to change their future contributions quarterly and existing balances quarterly. Most plans do not require employees to pay for individual account transactions.
Some 81% of plans have a loan provision and 71% have a $1,000 minimum loan requirement. Some 47% of companies without a loan feature are thinking of adding one.
Interestingly, Phoenix-Hecht's survey found that in practice, the loans are not heavily used. Only 12% of participants said they have an outstanding plan loan. Only 5% withdrew any money in the past two years and only 2% planned to withdraw money during the next 12 months.
