Automatic features becoming more popular among large retirement plans

Nearly half of large companies, with more than 1,000 employees, automatically enroll employees in their retirement plans, and an additional 36 percent are considering implementing this feature, according to Diversified’s Report on Retirement Plans-2011.

The report found that 57 percent of companies with 10,000 employees or more offered an automatic enrollment feature, and one-third of plan sponsors who were interviewed said they also have automatic deferral escalation in place. Another third of respondents said they would like to implement such a feature. Automatic account rebalancing is expected to grow at nearly the same rate as automatic escalation, 36 percent.

To grow participation rates, many sponsors, 58 percent of those surveyed, said they periodically re-enroll employees who originally opted out of their retirement plan.

"This approach ensures that all employees will be systemically offered an automatic enrollment opportunity," said Laura White, vice president of Diversified. "That strategy can be helpful to the 37 percent of plan sponsors who state that their primary goal in offering a defined contribution is to help employees accumulate income for retirement." Another 41 percent maintain their plans to retain employees, but only 14 percent use their plan primarily as a tool to recruit employees.

According to the report’s authors, sponsors should design their retirement plans around specific goals. “For example, while plan sponsors state that it is important for employees to achieve a fully funded retirement, more than one half of plan sponsors surveyed acknowledge that their default deferral rate is not sufficient for participants to achieve a funded retirement and this is consistent across companies of all sizes.”

Automatic deferral rates into retirement plans usually default at 3 percent or less, according to the report. Since those levels are insufficient to provide a fully funded retirement and health care costs continue to rise, “companies will continue to face challenges in terms of helping employees prepare for retirement,” the report said.

"According to Report on Retirement Plans-2011, most sponsors measure their plan's success in terms of retirement readiness by assessing the participation rate as opposed to deferral rate adequacy or size of their participants' retirement savings gaps, which many industry experts now believe to be a better indicator of retirement preparedness. Sponsors may need to embrace more holistic plan measures and use multiple metrics to engage employees," White said.

Diversified found in its research that 67 percent of plan sponsors still offer employees a defined benefit plan, compared to 72 percent two years ago, and 36 percent offer a cash balance plan, compared to 43 percent in 2009. Most sponsors of defined benefit plans say their main goal in offering defined benefit plans is to recruit the best employees, not to make sure they have enough money to fund their retirement.

The survey also found that 43 percent of defined benefit plan sponsors expect to offer the plan for the next five years, 35 percent said they won’t offer the plan to new employees and 22 percent said they expect to freeze or terminate the plan. Just 34 percent of smaller companies with 1,000 to 2,499 employees expect to continue to offer defined benefit plans, while 49 percent of companies with 10,000 or more employees are likely to continue to offer these plans in the next five years.

For this survey, Diversified surveyed 272 individuals responsible for the administration of retirement benefits in their companies. The survey contains data based on the 2011 plan year and focuses specifically on the defined benefit and defined contribution plans of U.S. companies with more than 1,000 employees. Diversified provides customized retirement plan administration, participant communication and open architecture investment solutions for mid- to large-sized organizations.

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