LINCOLNSHIRE, Ill. — With the economy stumbling into a recession, capital markets fluctuating wildly and no end in sight to the subprime-driven credit crunch, retirement plan executives are getting nervous.
So nervous, in fact, that many are planning to launch studies this year to better understand — and control — risk, according to Hewitt Associates LLC’s annual “Hot Topics in Retirement” survey of 190 corporate retirement plans.
Even so, 72% of pension plan officials say they are not likely make any changes to their plans this year, up sharply from the 41% cited in last year’s survey.
“In the past we’ve seen quite a trend of freezing and closing (defined benefit) plans,” said Alison Borland, Hewitt’s defined contribution consulting practice leader and one of the survey’s authors. This year, she added, sponsors are looking at new financial strategies rather than plan design to understand and mitigate risks.
For example, the portion of respondents who said they would “very likely” take action to address risk was: assess financial and other risks 29%, conducting an asset-liability study 30%, and adjusting asset allocation based on risk 20%.
“Across the board, those are up from recent years,” Ms. Borland said.
The percentage of plans that are “very” or “somewhat” likely to implement liability-driven investing or otherwise align investments to liabilities this year was 13% and 46% respectively.
These four actions are being used by closed and frozen plans, too. “There’s still a tremendous amount of risk” in those plans, Ms. Borland said.
Among defined contribution plans, automatic features are increasingly popular, the survey found. Automatic enrollment for new employees had already been adopted by 44% of respondents, up from 36% in 2007 and 24% in 2006. Of plans that don’t offer automatic enrollment, 30% said they would “very likely” offer it in 2008, while another 27% said they were “somewhat likely” to make the move. Twenty-two percent currently auto enroll existing employees, up from 15% last year.
Among those employers who said they were unlikely to offer automatic enrollment in 2008, nearly half, 47%, pegged the cost of making matching payments as a primary barrier.
Contribution escalation and auto rebalancing are gaining in popularity, too.
The move toward automation can be explained in part by the adoption of the Pension Protection Act, but is also driven by the need to improve employee retirement savings or explained by employers recognizing that employees often aren’t saving enough for retirement.
“These are very easy and effective ways to increase overall savings,” Ms. Borland said.
Similarly, 66% of defined contribution plan sponsors said they would improve communication with employees on participation; 64% on diversification and fund usage; and 58% on contribution levels.
About half of respondents already offer in-person educational seminars or classes, with 72% of those who don’t saying they’ll likely offer such classes in 2008.
Some plan sponsors are taking advantage of new media. Thirty-four percent of respondents offer educational webcasts; 31% and 30% of those who don’t say they’re very likely or somewhat likely, respectively, to offer webcasts this year.
Although 55% of defined contribution plan sponsors said they would very likely review fund operations, including expenses, and 50% are mulling a comprehensive review of fund offerings, just 12% of defined contribution plan sponsors said they would very likely replace higher cost retail mutual funds with institutional investments.
“It’s surprising,” Ms. Borland said. “There’s a huge focus on fees now … (but) many plan sponsors believe their participants want to see those recognizable names” of funds.The survey is based on responses Hewitt received from human resources professionals in November and December 2007 about likely retirement plan changes over the next year.
