A new survey by Hewitt Associates suggests that companies are becoming more active in managing their retirement plans and are gradually shifting risk from employer to employee.
The survey found that changes to the retirement landscape such as new legislation and tighter reporting and funding rules have prompted companies attempt to reduce retirement plan risk and ensure that employees take advantage of their retirement plans.
Of the companies offering pension plans, 63% said they are very likely to perform funding and accounting projections, 30% expect to execute an asset liability study, and 29% plan to assess the risks their pension plans are running based on current strategies.
With regard to employees, 56% of companies still rank employees’ taking accountability for retirement as a high priority, and half of respondents said they will put an emphasis on helping employees to better understand their retirement benefits.
Communications initiatives are seen as a likely route to achieve the states goals, as 66% of respondents planning on speaking to employees about 401(k) participation, and 64% doing the same with regard to diversification and fund usage.
Alison Borland, defined contribution consulting practice leader at Hewitt explains the trend: “Recent legislation, regulations from the IRS and Department of Labor, increasing postretirement needs and current litigation are putting employers under more pressure than ever to effectively manage two sides of the retirement equation—minimizing risks and unnecessary costs, while optimizing the benefit that employees will get from their retirement programs.”
The survey also found that, despite increases in the potential costs and cost volatility of pension plans, the rate at which employers are modifying their defined benefit (DB) plan design will slow markedly this year. Seventy-two percent of companies that offer a pension plan say they will make no changes to those plans in 2008, up from 41% last year. A small minority of companies (3%) intends to close their plans, and 2% intend to freeze their plan, down from 6% and 4%, respectively.
As an alternative, companies are looking at ways to manage risk within their plans more effectively, as per the Pension Protection Act. Twenty-nine percent of companies plan to assess the risks to their pension plans based on current strategies.
“Over the past several years, we’ve seen a significant number of companies make plan design changes—including freezing or closing their defined benefit plans—which is due, in part, to stricter funding rules and increased costs and cost volatility,” says Borland. “This year, we see companies investigating alternate methods of improving pension plan management, which mitigates financial and other risks that can be created by these benefits.”
Automated tools are becoming standard features as a way to ensure employees take appropriate advantage of their retirement plan options. Currently, 44% of companies offer automatic enrolment to their staff, up from 36% last year. Of those who do not currently offer it, 30% plan to do so this year. More than one-fifth currently enroll both existing and new participants in their 401(k) plans, a 7% increase from 2007, and 27% are very likely to do so in 2008.
Automatic enrolment certainly results in high participation rates in pension plans, but companies would like to see employees take more of an interest in the management of their plans.
While automatic enrollment has a very positive impact on employee participation rates, it doesn’t necessarily encourage employees to take an active role in managing their 401(k) plans once they’re enrolled, says Pamela Hess, director of retirement research at Hewitt.
“As automation quickly becomes the norm, an increasing number of companies realize that they have to take more aggressive steps to help employees do more to accumulate adequate levels of retirement savings,” she explains. “This is why we’re continuing to see a steady increase in the number of companies not only adding automatic enrollment to their 401(k) plans, but also defaulting workers into diversified investment options, choosing higher default contribution rates, and coupling automatic enrollment with contribution escalation features.”
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