Press Article

401(k) Advice Rising, Contributions Level Off
By Marc Hogan

Ignites.com - The 401(k) industry held steady in 2003, after rebounding in 2002 from a few tough years. While participation rates and company contributions remained relatively constant, plans did see an uptick in investment advice and professionally managed accounts.

That’s the conclusion of a recent survey by the Profit Sharing/401(k) Council of America. The 401(k) advocacy group’s 47th annual report measures the plan activity of more than 3.4 million participants in 1,161 plans representing $412 billion in assets.

Features like advice and managed accounts can help 401(k) providers reel in more assets, PSCA president David Wray says.

Advice was available in 54.1% of plans, according to the survey. That’s up from 51.9% in 2002 and 41.4% in 2001. Nearly a third of participants, or 30.6%, used the advice when it was offered. That remains about the same as in previous years, with 31.1% using advice in 2002 and 2001. Participants in smaller plans tend to use advice most, PSCA reports.

Meanwhile, the number of plans offering managed accounts increased from 13% to 20% last year, the survey found. These programs allocate assets among different mutual funds based on an individual participant's risk tolerance, time horizon and other factors. Fund firms often offer managed accounts through a third-party advice provider, such as GuidedChoice, Financial Engines, Ibbotson or Morningstar.

Fidelity, Principal, Vanguard and a host of others have rolled out managed account offerings. These services are particularly effective in getting young employees to participate, Wray notes.

“Young people are looking for reasons not to save,” he says. “You want to make it absolutely as easy as possible.” That’s exactly what managed accounts do, according to Wray.

But they’re also expensive, charging additional fees on top of the underlying fund costs, observes Sean Waters, president of 401(k) consultancy Waters Associates.

“We haven’t seen a marked increase in the managed account features,” he says. “They could be a good answer, but a costly answer.”

The survey actually shows a decline in 401(k) participation rates in 2003, from 80% to 76%, but Wray attributes this to a change in PSCA’s methodology. The group tightened up how it defined 401(k) plans, he says, and the companies it excluded typically had higher participation rates.

Methodology aside, participation has leveled off, Wray says.

Other surveys tell a similar, if slightly different, story. Fidelity recently revealed that 66% of eligible workers participated in 401(k) plans it serviced last year, down from 68% in 2002. According to the Society of Professional Administrators and Recordkeepers, the participation rate last year was 78% in plans with more than $5 million in assets and 75% in smaller plans. That follows an overall participation rate of 76% in 2002.

At the same time, company matching contributions went up slightly last year as profits improved, Wray says. Contribution rates reached 3% of the payroll last year from 2.8% a year earlier. That’s up from 2.5% in 2001 and 2000.

“Matching contributions across companies do reflect the economic situation,” Wray explains.

Company contributions represent just a small portion of total flows, but they help firms capture assets in other ways, according to Cerulli senior analyst Luis Fleites.

“It’s always a positive and reassuring sign [when company contributions go up],” Fleites says, “and something that all the education and advice efforts that are ongoing out there will be happy to have on their side to encourage participation and deferral rates.”

Participants in 95.3% of plans are now able to make catch-up contributions after they reach age 50. Nearly a quarter of employers offer a match on catch-up contributions, and roughly the same percentage of participants who were eligible to make catch-up contributions in 2003 did so. As the population ages, catch-up contributions could become a growing source of assets, Wray observes.

The use of automatic enrollment hasn’t changed much for a couple of years, Wray says. In 2003, 8.4% of plans had used automatic enrollments, according to the survey, versus 7.4% in 2002 and 9.1% in 2001.

Employers began to see that many automatically enrolled participants leave their contribution rates at the default percentage, Wray explains. To make automatic enrollment more appealing, firms such as Vanguard, Putnam and Invesmart have recently begun offering programs with automatic contribution rate increases.

The survey also found that the number of funds offered to plan participants has risen steadily. In 2003, 87.3% of plans offered 10 or more funds, up from 80.8% in 2002 and 69.8% in 2001. On average, plans offer 17 funds for participants to choose from.

Those numbers seem high, according to Waters.

“I’m not sure why they would be so high,” he says. “The trend is actually to lower the number of investment choices for participants.”

This article is from Ignites. If you don't get Ignites and want to, email access@ignites.com or call Jon Abelack at (212) 949-4288, ext 133.