Defined contribution plans are suffering from participants' crises of faith.
Concerned with corporate scandals, declining account balances, fewer company matches as well as layoffs and downsizings, participants are pulling back from 401(k) plans. New research shows:
* Employee participation rates have declined 10 percentage points since 1999;
* Deferral rates have dropped to 7% from 8.6%; and
* An increasing, albeit still small, number of participants say they are extremely or very likely to stop making contributions to their defined contribution plans.
"I think it's probably true the plan participants are losing faith in 401(k) plans," said Ann Mahrdt, director of Spectrem Group, Chicago. A Spectrem study released this month shows employees are less likely to join plans now and are reducing their contributions.
Spectrem also found participant rates declined 10 percentage points in three years, to 70% in 2002. Deferral rates have dropped to 7% in 2002, from 8.6% in 1999.
Woburn, Mass.-based Boston Research Group, in a study not yet released, shows 8% of participants are extremely or very likely to stop making contributions to their defined contribution plans in 2003.
According to a study expected to be released in January, conducted jointly by Mercer Human Resource Consulting and Mercer Investment Consulting, New York, more than a third of plan sponsors rank declining participation and low deferral rates as a top concern.
How bad is it?
One stunning example of the impact on a corporate plan is California Steel Industries Inc., Fontana, Calif. When new employees joined the company previously, 90% of them enrolled in the company's $61 million 401(k) plan. Not anymore. In the third quarter, the participation rate of new employees plummeted to 25%.
With the help of the plan's consultant, Benefit Funding Services Group LLC, Irvine, Calif., and administrator, Prudential Financial, Newark, N.J., California Steel is going to issue a detailed questionnaire to employees who have declined to enter the 401(k) program, said Rod Hoover, California Steel's manager of human resources.
Until the surveys are completed and the results are tallied, California Steel is confronting the problem of low participation with a general strategy of increasing the amount of investment education it provides to workers, especially new, younger workers, said Mr. Hoover. In addition the company will embark on a more aggressive awareness campaign, he said.
California Steel is not alone.
At Merrill Lynch Investment Managers, Plainsboro, N.J., participants have been phoning the call centers to reduce contributions to their 401(k) plans because of their losses, said Diane Talbot, director of 401(k) products at Merrill Lynch. At Merrill Lynch's quarterly plan sponsor meetings, sponsors almost universally indicated employees were reducing their 401(k) plan contributions, she said.
For their part, plan sponsors are shifting from educating participants about how to invest their 401(k) dollars to why they should participate in the plan, Spectrem's Ms. Mahrdt said.
Employers need to re-emphasize the value of joining and staying in the plan, agreed David Wray, president of the Chicago-based Profit Sharing/401(k) Council of America.
Research by Hewitt Associates LLC, Lincolnshire, Ill., shows that ensuring employees value and appreciate their 401(k) plans is important to 98% of plan sponsors, said Lori Lucas, a Hewitt consultant.
Mr. Wray suggested simplifying investment menus. "It's my own view that if you give people too many choices, they actually stop. It freezes them and they don't invest in the plan," he said.
Such a shift in mindset is in the discussion stages only at a few companies, he said. And Hewitt's survey found only 17% of plan sponsors indicated simplifying investment choices would be a priority in 2003.
To make matters worse, the economy is wreaking havoc on another enticement to participate: company matches.
In December 2001, General Motors Corp., Detroit, reduced the company match for salaried employees in its $13 billion 401(k) plan to 60 cents from 80 cents on the dollar for the first 6% of pay. Then last January, GM further slashed its matching contribution to 20 cents on the dollar. On Jan. 1, 2003, GM plans to increase its match to 50 cents on the dollar, said Jerry Dubrowski, GM spokesman.
"The general sense is they (company executives) recognize the match is a component of overall compensation," Mr. Dubrowski said.
The reduced match has hurt plan participation but only slightly, he acknowledged, adding it was less than a percentage point. The plan participation rate has held fairly steady in the high 80% range, he said.
In January 2002, Ford Motor Co., Dearborn, Mich., discontinued the matching contribution for salaried employees.
"We have not reinstated it and do not have a target date for reinstating it," said Marcey Evans, financial news manager for Ford.
"Plan sponsors are looking at expenses," agreed Patricia Pou, principal of Mercer Human Resource in New York.
According to the Spectrem study only 10% of employers expect to modify their company match in 2003.
Another tough year
At Mellon HR Solutions, Fort Lee, N.J., executives did an informal survey of their largest plan sponsor clients, those with more than 30,000 employees each, said Dano Bartolai, senior vice president. "None of them are reducing their match but a lot of them are looking at the discretionary contributions like bonuses and matches that in larger companies are seen as an entitlement by employees," Mr. Bartolai said. All of this adds up to 2003 being another tough year for defined contribution providers.
"It's a danger to mutual funds and to the asset management industry in general," said Joshua Dietch, associate director of Cerulli Associates Inc., Boston. "If you lose the faith of participants - and the source of new cash to the market is defined contribution plans - and then suddenly you don't have the cash flow, it's a pretty frightening scenario."