Quicker to the (K) Zone

By Patty Kujawa

Feb. 11, 2016

Armed with new data, plan sponsors are taking significant steps with 401(k) designs to improve plan costs and participant savings rates, an Aon Hewitt survey found.

Plan sponsors have historically been conservative and slow to alter 401(k) strategies, but now that results can be seen rapidly, plan sponsors have the confidence to make changes, said Rob Austin, Aon Hewitt’s director of retirement research and author of the biennial survey.

“Data can trump a lot of opinions,” Austin said. “A lot of plan sponsors don’t want to be doing things on their own. As we see data from early adopters, it’s easy for others to follow suit.”

This year, the survey found that nearly 40 percent of plan sponsors use a flat dollar fee to pay for administrative services compared with 14 percent in 2011. Four years ago, it was more common for fees to get buried in overall investment costs. In 2015, that strategy dropped to 40 percent from 83 percent in 2011.

Several drivers account for the flat, more transparent fee, Austin said. Employers want an easy-to-understand fee structure thanks to a 2012 U.S. Labor Department rule requiring companies to show workers their 401(k) operating costs. Also, several lawsuits and settlements exposing inflated fees have opened employers’ eyes to the issue.

“There is a growing mentality that it should be flatter and more transparent,” Austin said.

But unlike many of the large companies in the Aon Hewitt survey, small companies don’t have a large workforce to scale down costs or in-house experts who can help drive fees lower, said Tom Zgainer, CEO of America’s Best 401K, also known as ABk. Companies like ABk and FeeX offer services showing employers and workers how much they are paying for their 401(k).

“For the first 30 years of the 401(k), no fee disclosure was required,” Zgainer said. “Our Fee Checker is designed to raise questions and to proactively encourage you to find out more.”

AB401k and FeeX offer an online service that taps into the 401(k) data companies need to report to the Labor Department each year. Workers and employers can type in simple information and get a general idea on costs.

The more workers pay for 401(k) plans means less money in retirement, Zgainer said. AB401k data show that three people all 35-years-old with $100,000 to invest can have radically different outcomes as a result of fees. If all three get the same 8 percent annual rate of return on their investments but pay 1 percent, 2 percent or 3 percent in fees, the lowest fee would result in $761,225 at retirement, while the highest fee would produce only $432,194.

“That’s a major difference in retirement savings over a 30-year working period,” Zgainer said.

Savings Rates

Aon Hewitt’s survey showed employers making significant increases to employees’ automatic contribution rates as well as boosting company matching dollars to lift savings rates.

For years, employers had been automatically enrolling workers into 401(k) plans using 3 percent of pay, Austin said. This year, 52 percent of employers using auto enrollment used 4 percent or more, up from 39 percent in 2013.

“This was a prime example of data telling the story,” Austin said. “Companies realized that putting people in [the plan using] 3 percent wasn’t enough.”

Another feature dogging savings rates was employer matching contributions. Four years ago, the most popular employer match rate was an employer contribution of 50 cents for every dollar an employee contributed, up to 6 percent of pay. Now, 42 percent of employers match dollar for dollar, up from 25 percent in 2011.

Companies wanted to make sure workers who missed out on participating in defined contribution plans were given another chance in 2015. The term is called “back-sweeping” and 16 percent of employers pulled veteran nonparticipant workers into plans compared with 8 percent in 2013.

“This is really where employers wanted to focus their attention because these are the most career-oriented, long-term employees,” Austin said.

All these small changes can bring powerful results for workers, Austin said. Aon Hewitt data show that a 25-year-old worker would only save $482,000 at retirement using the older formulas. With a dollar-for-dollar matching rate, a higher employee contribution and a lower fee structure, retirement savings can more than double to nearly $1.3 million over time.

“Over time these changes can make a substantial impact on an individual,” Austin said. “It literally translates into tens of thousands of dollars.”

This story was updated on Feb. 18, 2016, to correct the shortened name of the online service AB401k.

Patty Kujawa is a freelance writer based in Milwaukee.

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