WILTON, Conn. - More companies are making, or matching, their employer contributions to defined contribution plans in company stock than they did a year ago, a survey by Pensions & Investments and Deloitte & Touche shows.
The survey shows a 23 percentage-point increase, to 76.5%. That jump is especially noteworthy following the uproar over Enron Corp., WorldCom Inc. and other companies, where 401(k) participants lost most of their account balances because of huge employer stock holdings.
Of plan sponsors that do not allow participants to direct investments, 76.5% make contributions in company stock, up 23 percentage points from the 2001 survey. Also, of sponsors that do not allow participants to direct their profit-sharing or other discretionary employer contributions, 55.3% make the contribution in company stock.
Even so, fewer plan assets - 20.1% - are invested in company stock, down from 26.3% last year.
Plan sponsors are waiting for some litmus test or guidance from Congress, the courts or federal regulators before they modify the way company stock is treated in their plans, said Leslie V. Smith, director, Deloitte & Touche LLP, New York. "I think plan sponsors are afraid to make changes before they get more guidance, and I think there will be more guidance," she added.
"We're not seeing a lot of employers putting a cap on or loosening diversification of company stock matches, but I believe they will do it when they see the results of class-action suits, or (when the) regulators say something," Ms. Smith said. "No one will want to go out on a limb on that."
Still, 90% of the 823 plan sponsors surveyed indicated they do allow participants to direct the investment of matching contributions, up five percentage points from last year, she said.
Of the plan sponsors making their matching contributions in company stock, 20% allow participants to sell the stock only after they've held it for 10 years and reached age 55, and 14% don't allow participants to sell the stock before they retire. Only 12% allow participants to sell immediately.
Of the plan sponsors making their profit-sharing contributions in company stock, 18.5% allow participants to sell the stock immediately; 22.2% allow employees to sell after they've held it for 10 years and reached age 55; and 18.5% don't allow participants to sellbefore retirement.
Also, fewer sponsors (36.6%, down 7.7 percentage points from last year) are allowing immediate eligibility for plan participation, and more employers (55.8%, vs. 50.8% a year earlier) report having minimum age requirements. That's because a tighter labor market and increased unemployment rates mean employers are less concerned with attracting and retaining employees, Ms. Smith said.
At the same time, participants in all income brackets are contributing less this year. Some 58.4% of highly compensated workers deferred more than 6% of their salaries this year, down 8.3 percentage points from last year. Two-thirds of participants with lower salaries deferred between 4% and 8%, 7.2 percentage points less than last year.
"In this economy, people should be investing more, but what they are doing is investing less," Ms. Smith said.
U.S. equities fall
Employer stock is not the only asset class to decline in popularity. Domestic equities account for 27.7% of plan assets, down from 31% last year. "There's a lot less in equity funds, which could be the result of the stock market going down, but we're seeing a lot of people are transferring money to stable value and money markets," Ms. Smith said.
Meanwhile, plan sponsors are taking greater care than ever in selecting and monitoring the investments in their plans: 84.3% have formal fund selection procedures, up from 77.4% in the 2001 survey.
Some 71.5% have formal written investment policies, a 4.9 percentage point increase.
Most plans - 58.7% - replace underperforming funds; 13.8% phase out underperforming funds over time; and 6.8% freeze them.
Two-thirds have replaced a fund because of performance, most within the last year.
"Employers are taking their fiduciary responsibility seriously," Ms. Smith said. "When things are turning down, everyone has a million questions and plan sponsors want to make sure they are doing the right thing or, at least, have an outside consultant to get another opinion."
Some 36% of plan sponsors use an outside investment consultant, she noted, adding that the question wasn't asked last year. At the same time, half are selecting and monitoring investments through an internal investment professional or retirement committee.
Despite the fact that participants are getting more investment choices by plan sponsors who are doing more to monitor the investment options, participation rates dropped this year by two percentage points -to 73%. Meanwhile, fewer sponsors - 82.6% - see 401(k) plans as effective recruitment tools, down 2.1 percentage points from last year. Even fewer - 71.2% - view 401(k) plans as effective retention strategies, down 6.1 percentage points.
Use of automatic enrollment declined three percentage points to 10.8%, although 95.8% of the respondents that have automatic enrollment are satisfied with it. One respondent that did discontinue automatic enrollment said: "Plan participation improved very little (with automatic enrollment), not worth the confusion and administrative burden."