Defined contribution plan sponsors have continued the trend toward offering more investment options and allowing employees greater control over their retirement savings accounts.
Two recent surveys reported continued liberalization of defined contribution plan designs and a steady increase in the number of investment options partly because sponsors have been implementing changes necessary to comply with Department of Labor 404(c) regulations in 1994.
A survey of more than 880 employers by A. Foster Higgins & Co. Inc., New York, found that half of those responding changed plan attributes within the past two years - 72% added investment options; 25% increased the frequency of account valuations; 12% added loan features; and 16% increased the employer match.
Getting into a defined contribution plan was made easier by 12% of respondents, who eased eligibility requirements. And a quarter of respondents said they intended to make changes in the next year, including the addition of investment options and a move to more frequent valuation.
The Foster Higgins survey found that 46% of employers said they made changes to improve the quality of retirement benefits, and 21% made changes to enhance plan performance. Just 8% said cost saving motivated plan changes.
Plan sponsors are making it easier for employees to manage their accounts. The number of employers that allow daily account transfers more than doubled to 33% in 1994 from 28% in 1993 and 13% in 1992. Employers also increased the average number of investment options to 5.2 in 1994, up from 4.8 in 1993 and 3.5 in 1990.
Plan sponsors also were aiming for greater participation in their defined contribution plans this year. Almost three-quarters of employers that increased the matching contribution on employee deferrals reported increased participation. One-third of sponsors that pumped up the employer match reported an increase in participation of 10% or more; 39% of that universe reported moderate increases in participation levels.
Many employers - 63% - increased plan communications during the past two years, with 26% reporting significant increases in plan participation as a result. An additional 43% said some increase in the number of employees participating in the defined contribution plan resulted from more and better communications.
The majority of plan sponsors, 81%, said they relied on summary plan descriptions and enrollment brochures as the primary form of information and education about their plan. Almost two-thirds use company newsletters and benefit brochures for communications on savings and retirement issues, and 55% use personalized statements. Word-of-mouth is still used by 100% of employers to talk up plan advantages and 72% rely on one-on-one counseling to explain options.
The Profit Sharing Council of America, Chicago, annually surveys profit-sharing and 401(k) plan sponsors. The 37th annual survey asked 557 companies about their experiences in the 1993 plan year; the results dovetail with results of the Foster Higgins survey.
The PSCA also found that plan sponsors have been increasing the number of investment options; 55% of respondents offered five or more options in 1993, compared with 39% in 1992. PSCA officials speculate that the increase is due to sponsor efforts to comply with 404(c) regulations, which suggest that defined contribution plan designs include at least three diversified investment options in order to gain safe harbor from some fiduciary liability. This view was supported by the survey's finding that 38% of plans began offering three or four investment options, a significant increase from the year before.
Actively managed equity funds and balanced funds were the most frequently added options. Active equity funds were offered by 72% of respondents in 1993, up from 44% in 1992. Balanced funds were offered by 67% of plans in 1993, compared to 38% in 1992.
Employer education efforts accompanying the addition of new funds seemed to be starting to work, since participant-directed allocations to cash-equivalent funds dropped sharply in 1993 to 5% of total plan assets from 13% a year earlier. Less conservative investment options were gaining more interest from plan participants, with 3% in indexed equities, and 8% in actively managed equities. Balanced funds attracted 13.5% of total plan assets. Core bond funds were allocated 6% of assets. Interestingly, life cycle funds, with risk parameters targeted to an individual employee's age, accounted for 9% of overall assets.
But perennial "safer" options were still popular with participants despite increased investment education programs. Company stock remained the largest allocation of defined contribution plan assets in the PSCA survey, with 32% of overall plan assets, possibly because many employers made their matching contribution in company stock and restricted transfers out of the option. Stable value and GIC funds were the second most popular investment option, with 23% of total plan assets. In all, conservative investment options still accounted for 60% of total asset allocation by defined contribution plan participants.
Comparatively, participants seem to be making out better in profit-sharing plans than in 401(k) plans. Company contributions to profit-sharing plans increased to 8.8% of participants' total annual salary, up slightly from 8.7% in 1992. Employer contributions to 401(k) plans remained steady at 2.9% in 1992, while company contributions to combination plans (hybrid defined contribution plans), dropped to 5.6% from 5.8% a year earlier.