Over the last few months we have discussed how to reduce or eliminate a Traditional Match, a Mid-Year Safe Harbor Match, and a Mid-Year Safe Harbor Nonelective Contribution, and we have discussed Communicating 401(k) Benefit Cuts. We have also discussed Conflicting Surveys on whether employers are reducing or eliminating matching contributions.
401(k) plan benefits: Rethinking plan design for challenging times reports the results of a Grant Thornton LLP survey that explored the impact of the current economic downturn on the employer match feature:
Clearly, the economic downturn is causing many companies to reevaluate their 401(k) plan design carefully, and in many cases, rethink their 401(k) plan strategy. Based on the survey responses, many plan sponsors are assessing whether or not to reduce or eliminate the matching contribution feature under their plans. As part of this plan design assessment, companies may want to consider the potential impact of any such change on future participation in the 401(k) plan by eligible employees. Since many employees, especially the so-called "non-highly compensated employee" group, participate in 401(k) plans because of the matching contribution feature, a key challenge faced by plan sponsors is assessing the impact of reducing or eliminating the matching contribution feature on future plan participation rates. Although generating cost savings are certainly important in a tough economic climate, an ancillary effect of a change in the company matching contribution is the impact on nondiscrimination testing and the resultant correlation to the benefits available under the 401(k) plan for key executives. This could lead to problems in how the company continues to attract, retain and motivate talent, particularly its most critical and top-performing employees, while managing its overall benefit plan costs.
The report provides a summary and supporting information on the results of the survey:
Prevalence of matching contribution feature in 401(k) plans
Almost 87 percent of companies reported that their 401(k) plans provided for matching company contributions prior to 2009.
Modification of matching contribution feature in 401(k) plans
Approximately 29 percent of companies have already modified, or currently intend to modify, the matching contribution feature in their 401(k) plans during the 2009 plan year. Two-thirds of these respondents reported that they will eliminate the match entirely, and 22 percent intend to reduce, but not completely eliminate, the matching contribution during 2009. The remaining 11 percent indicated that they expect to increase the match during 2009.
Impact of modification of matching contribution feature under 401(k) plans
While approximately 34 percent of companies felt that the reduction or complete elimination of the matching contribution feature would make it less likely that the special nondiscrimination tests (the ADP/ACP tests) for 2009 would be passed, approximately 38 percent reported that they did not expect any significant changes in the test results between the 2008 and the 2009 plan years. Almost 10 percent indicated that they felt the test results would actually improve during the 2009 plan year.
Safe harbor 401(k) plans
Approximately one-third of companies with a matching contribution in their 401(k) plans indicated that they currently have a "safe harbor" 401(k) plan. Approximately 27 percent of the plan sponsors with a safe harbor plan indicated that they are considering the reduction or complete elimination of the matching contribution feature during the 2009 plan year.
Impact of modification of match under safe harbor 401(k) plans
Approximately two-thirds of companies with a safe harbor plan that are considering a modification to the match felt that the reduction or elimination of the matching contribution feature will have a negative impact on future plan participation.
Automatic enrollment 401(k) plans
Almost 36 percent of companies with a matching contribution currently have an automatic enrollment feature in their 401(k) plan. Almost 31 percent of these plan sponsors indicated that they are considering the reduction or complete elimination of the matching contribution feature during the 2009 plan year.
Impact of modification of match under automatic enrollment 401(k) plans
Almost 47 percent of companies with an automatic enrollment feature that are considering a modification to the match felt that the reduction or elimination of the matching contribution feature will lead to more participants opting out of automatic enrollment, while 31 percent felt that this would not result in more participant opt-outs.
A press release announces the results of Getting Retirement Savings Back on Track - Employer Views on the 401(k) and Financial Education in the Workplace, a study by CFO Research Services in collaboration with Charles Schwab. As you review the results, consider the potential impact that the New Finance Rules may have on plan sponsors providing financial education and advice to their employees:
Senior Executives Give Current 401(k) System a "B" Grade, Say Workplace Education is Key to Improvement
SAN FRANCISCO--(BUSINESS WIRE)--Charles Schwab, in collaboration with CFO Research Services, today released the details of a new study "Getting Retirement Savings Back on Track: Employer Views on the 401(k) and Financial Education in the Workplace," which reveals that a majority of senior finance and human resource executives in corporate America support the 401(k) as an effective savings tool for retirement. According to the study, employers believe they play a role in improving the 401(k) as a benefit for employees, including making 401(k)-specific and general financial education more available in the workplace.
More than 200 senior finance and human resources executives from large companies in various industries across the nation were questioned about their perceptions of 401(k) plans and the role companies should play in helping their employees plan for retirement. Key findings include:
- Eighty percent think greater access to 401(k) investment planning advice is more important for employees now than it was a year ago.
- Two-thirds (66%) believe that making broader financial education in the workplace is more important for employees now than a year ago.
- Despite negative performance, 51 percent of executives report no change in their 401(k) plan participation rate.
- Sixty-three percent say employee concerns over personal finances are creating a more difficult work environment.
According to the study, nearly nine in 10 (88%) of executives report that employees within five years of retirement are very concerned about the adequacy of their retirement planning and more than half of respondents (58%) believe that employees losing confidence in the 401(k) plan is one of the most significant challenges their company will face in the coming year relative to retirement planning.
"Executives recognize that their employees are more anxious about their retirement prospects, and not surprisingly, that apprehension is felt more deeply by those who are closer to retirement," noted Steve Anderson, head of retirement plan services at Charles Schwab. "But what we have found both in this study and through our interactions with companies as a retirement plan provider is that today, employers are more prepared -- and more committed -- to playing a lead role in providing people with access to financial education."
When asked about the importance of different 401(k) plan features, 87 percent of employers say that offering 401(k) investment advice was important to their company's retirement plan – second in importance only to offering a company matching contribution (96%). In addition, 57 percent of respondents report that employee requests for 401(k) advice have increased since September 2008, and 39 percent say that employee requests for broader financial education, such as budgeting and debt management, have increased during the same time period.
Employers Grade 401(k) a "B"
Executives in the survey give little indication that the weak economy or losses in investment value necessitate any widespread changes to 401(k) plans. Respondents report confidence in the underlying structure of their 401(k) plans and believe recent account value losses are linked primarily to the performance of the overall economy, as opposed to problems with the current 401(k) system. When asked to grade the 401(k), a majority of executives surveyed (56%) give the current system a "B", affirming that it is working and needs only slight improvements. (See Figure 1 below)
Figure 1. Finance and human resources executives alike think that the fundamentals of the 401(k) system still work, even in the face of declining investment values. If you used an academic scale to grade the 401(k) system as it currently stands, what grade would you give it?
|
"A" – The current system works and doesn't need to be changed at all | 9% |
"B" – The current system works and only needs slight modification | 56% |
"C" – The current system is generally working, but could use a number of improvements | 32% |
"D" – The current system is not working and needs wide-scale changes | 2% |
"F" – The current system does not work and needs to be replaced | 1% |
Proposed Changes to Improve Americans' Retirement Savings
While the employers surveyed express faith in the fundamentals of the 401(k) system, they also acknowledge that economic troubles have generated more concern among employees and exposed the need for improvements.
According to the study:
- Seventy-six percent of respondents said that making investment advice for 401(k) plans more available in the workplace will have a positive impact on employees.
- One quarter (25%) are already offering more individualized 401(k) advice to employees in place of broader 401(k) education campaigns, educational brochures and workplace group meetings.
- Employers surveyed also show commitment going forward to some existing 401(k) plan features. Seventy-six percent say target-date retirement funds are an important feature to offer in plans, and 66 percent say that automatically enrolling employees into a plan when they are hired is important.
- When asked to rate the importance of different factors when evaluating a 401(k) plan provider, employers top three items are financial stability of the plan provider (91%), quality of investment choices available (88%), and mix of investment choices available (84%).
"Consistent with what we are seeing among our own plan sponsor clients, the employers participating in the study and their employees have a very level-headed approach to the 401(k) despite market turmoil," added Anderson. "Employers believe that the 401(k) will continue to be one of the most important tools people have at their disposal to save for retirement."