Pension Protection Act Boosting 401(k) Participation, Survey Concludes

The passage of the Pension Protection Act in 2006 has led to higher participation in 401(k) plans, in large part due to increased implementation of automatic plan features such as automatic enrollment, according to a survey by Diversified Investment Advisors Inc.

The survey of 223 companies with 1,000 or more employees found that 62 percent have implemented or are implementing automatic enrollment, a 7 percent increase from the previous year. Another 33 percent say they were considering automatic enrollment.

The 2007 report was based on the 2006 plan year. This is the fourth year the Purchase, New York-based firm has conducted the survey. The data were collected in the third quarter.

The number of companies with 1,000 to 4,999 employees that reported a 90 percent or better participation rate in their company 401(k) plan doubled from the year before. The survey also determined that plans continued to grow, with 92 percent of the companies reporting defined-contribution assets of $25 million or more, a 9 percent increase from the year before.

“This is a landmark time for retirement plans,” Laura White, vice president of marketing at Diversified, said in an interview. “They’ve truly been redefined by the PPA. What’s surprising is how quickly the companies are responding to the legislation.”

Twice as many companies have or are implementing automatic deferral increases (30 percent in 2006 versus 15 percent in 2005). There have also been increases in the number of plan sponsors offering automatic rebalancing (31 percent versus 24 percent in 2005) and managed accounts (37 percent versus 32 percent in 2005).

The increase in automatic services has not taken away from the plan executives’ desire to improve employee education, however. According to the survey, improving employee education (47 percent), adding investment options (43 percent), offering investment advice (28 percent), offering financial planning (27 percent) and allowing Roth 401(k) contributions (27 percent) were the top five actions plan executives said they expected to consider within the next 12 months.

“I’m glad to see that plan sponsors didn’t look at automatic services as the silver bullet,” White says. “They’re not seeing automatic services as a replacement for employee education.”

The survey also found an increase in the number of 401(a) plans offered. Forty percent of the companies said they offered the plans, versus 36 percent for the previous year and 11 percent in 2004. The increase is largely because of a decline in defined-benefit plans, as 401(a) plans are often used to replace terminated or frozen pension plans, White says.

Despite that increase, the 2007 report seemed to indicate a slowing of the defined-benefit decline. The percentage of plan executives who said they were planning to terminate their defined-benefit plans was 14 percent. That’s down from 25 percent in 2005 and 23 percent in 2006.

Another survey finding that White said she found surprising was the six vendors a company used on average to administer a defined-benefit plan because so many vendors offer a bundled service that is often cheaper than using several different vendors. The survey also found that the number of plans using multiple vendors has increased over time.

The low number of plans that outsource all administrative functions associated with defined-contribution and defined-benefit plans was also surprising, according to White. Only 13 percent of firms said they had implemented or were in the process of implementing outsourcing, while 29 percent said they were considering it, 26 percent said they had considered it but decided against it, and 33 percent said outsourcing was never seriously considered.

Of the companies that went to outsourcing, 75 percent were satisfied or very satisfied, while 18 percent said it was too soon to determine and 7 percent were dissatisfied.

“I was a little surprised plan sponsors hadn’t sought out relief for all the work they’re doing themselves,” White says.

Filed by Jennifer Byrd of Pensions & Investments, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.