While companies and 401(k) plan providers are targeting participants with educational materials, more options and new features aimed at increasing participation rates, contribution levels and plan diversification, participants do not appear to be catching on to that message.

A new report issued by Hewitt Associates, a Lincolnshire, Ill.-based retirement consultant, highlights areas in which plan sponsors' and providers' communication and education efforts are falling short in informing participants about important retirement savings issues.

The report found three primary points of static in the chain of communication between sponsors and participants: The lessons that sponsors are preaching about diversification, contribution rates and participation levels seem to be falling on deaf ears.

While most sponsors are actively working to improve those areas, it's not sinking in with employees and "in some cases...may be missing the mark," said Lori Lucas, a defined contribution consultant with Hewitt.

The report is based on the findings of two Hewitt surveys, 2001 Trends and Experience 401(k) Plans, which surveyed some 400 U.S. employers and the 2000 Hewitt Universe Benchmarks, which examined the investment behaviors of 730,000 eligible employees and 500,00 active participants.

While 45% of 400 employers surveyed in Hewitt's survey indicated that "increasing plan participation" was the most important goal of their education efforts, those good intentions are not impacting a large percentage of their employees. The participation rate for new employees with less than two years tenure is about 45.8%, well below the overall average participation rate of 74%, Lucas said.

Signing Up New Employees

In order to improve participation rates, employers should improve their communication efforts by stressing to newly eligible employees the importance of saving for retirement.

Another effective tool in improving participation rates is automatic enrollment, according to Lucas. Nearly 14% of sponsors currently offer automatic enrollment features that defer a percentage of an eligible employees pay into a fund, Lucas said.

While that is an improvement over past years, some sponsors are hesitant to offer such features because of concerns that some employees might react negatively to being automatically enrolled in a plan even though they have an option to not participate, she said. And the issue also poses some legal issues which has raised red flags for some sponsors. For example, Lucas said, some sponsors do not want to be held responsible for automatically deferring an employees' contributions into a fund if the employee does not choose their own option. "It's a great example of the tension plan sponsors face in solving one issue and causing another," she said.

The Diversification Challenge

Improving retirement savings diversification is the one issue with the most significant gap in communication between sponsor and employee, Lucas said. Although employers know that it is an important issue, they have not had a lot of success in encouraging their employees to diversify their savings, she said.

Indeed, about 46% of participants are invested in one or two funds, according to the Benchmarks study. The average number of funds held by 401(k) participants is 3.3; and 75% of participants assets are spread among three asset classes: employer stock, large U.S. equity and stable value investments. Meanwhile, the average 401(k) plan holds 12 funds, Lucas said.

The problem is, too much choice has confused participants, Lucas said. "I think participants like choice, but I think it also confuses them and they feel overwhelmed," she said.

Instead, sponsors need to encourage diversification with a smaller line up of funds, but also offer more complex vehicle like self-directed brokerage accounts for more sophisticated investors, she said.

Improving Contribution Levels

Lower paid and younger employees' low contribution levels is another area that employers need to improve, according to Hewitt. Twenty-four percent of employers surveyed in the Trends study listed low contribution levels as the second most common employee investment mistake. While the average contribution rate is 7.7% of pay, lower salary and younger employees contribution rates are much lower, Lucas said.

More than simply telling employees that they need to contribute more, sponsors need to realize that younger employees may not have experience in managing their personal finances and lower income employees may not be able to significantly cut into their take home pay. In response, employers should develop plan provisions that automatically step up employees contribution levels with minimum annual salary raises.

Providing education materials on basic personal money management can also help eliminate some of the behavioral barriers to improving contribution levels, she said.

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