Saturday, December 12, 2009

'Holding' Patterns

In one of the more challenging economic years in memory, it is not surprising that the pace of change set in motion in defined contribution plans by the Pension Protection Act slackened. If anything, IMHO, it is remarkable that the adoption of devices such as automatic enrollment and contribution acceleration did not decline.

That said, among a record number of respondents to PLANSPONSOR’s annual Defined Contribution Survey, the pace of automatic enrollment basically flatlined—just 30.8% of plan sponsor respondents said they now employ that approach (though more than half of the largest plans now do), compared with 29.8% a year ago. And, even after the encouragement afforded by the PPA, among those that have adopted automatic enrollment, only about four in 10 extended that to all workers (the rest applied it to newly hired workers only). Perhaps as a result, the average participation rate declined—slightly—to 72.3% this year from 73.8% a year ago, but was nearly unchanged from the 72.7% in the 2007 results.

Despite all the headlines about a variety of firms’ 401(k) match suspension, only about 5% of this year’s respondents had reduced the company match/contribution, with a like number saying that they had eliminated it. Another 5% each were contemplating either cutting or suspending the match. The most encouraging news was that nearly eight of 10 had no plans to reduce, suspend, or eliminate the match, and that, even among those that had, nearly one in four planned to restore it for 2010, while roughly 60% said they planned to remain at the cut or suspended level next year.

Is change in the air? Some, apparently—and for the very most part, it is about “more,” not less: 15.5% have already added investment funds, and 17% have increased the frequency of their participant education. Roughly 9% had changed their qualified default investment alternative or QDIA (likely to a target-date fund), and nearly as many had increased their investment manager due diligence, slightly more than the 7% that had hired, fired, or changed their investment consultant. As for plans for change in the remaining months of this year (the survey was taken over the summer), the trends were much the same—though IMHO not surprisingly, in view of the recent attention focused on target-date funds, an intention to increase due diligence on their target-date option’s glide path registered much higher on the “to do” list.

Speaking of target-date funds, historical performance may not be a guarantee of future results, but for plan sponsors, that was nonetheless the highest-ranked criterion (6.07 on a 7.0 scale). However, advisers can take heart from the finding that the second-most valued criterion was the recommendation of a financial adviser (trumping fund-family reputation, risk profile, glide path, and fees).

Interestingly enough, the lowest-ranked criterion was the recommendation of their DC provider. That doubt showed up in another telling statistic: Nearly 28% of this year’s respondents said they were “not sure” if the target-date funds offered by their provider were the most appropriate (that was, however, down from the 35% that expressed that opinion a year earlier—BEFORE the market plunge).

Without question, the past 12 months have brought much in the way of change to our industry—and much of that not change for the better. And yet, all in all, it is, IMHO, amazing how resilient employers and their plan designs have proven to be. We have perhaps not made much forward progress in the past year—but there’s something to be said for being able to hold the line.


—Nevin E. Adams, JD

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