While companies are dedicating resources toward increasing employee participation rates and encouraging them to diversify their contributions among a variety of funds, plan participants do not appear to be catching on to that message, according to Hewitt Associates.
A new report issued today by the Lincolnshire, Ill.-based retirement consultant compares the results from one of its studies that examined where plan sponsors and administrators were focusing their energy and resources and another that studied employees investment behaviors. The results: Employees are not catching on to the message.
While most companies are actively working to increase participation rates and encourage greater diversification, its not sinking in with employees and "in some cases may be missing the mark," said Lori Lucas, a defined contribution consultant with Hewitt, in a statement.
While 45% of 400 employers surveyed in Hewitts survey, 2001 Trends and Experience 401(k) Plans, 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, according to the results from another Hewitt study. In its study, 2000 Hewitt Universe Benchmarks, Hewitt found that the participation rate for new employees with less than two years tenure is about 45.8%, well below the average participation rate of 74%. The Benchmarks study examined the investment behaviors of 730,000 eligible employees and 500,00 active participants.
In order to improve participation rates, employers should improve their efforts at targeting newly eligible employees and implement automatic enrollment, according to Lucas.
Fifty-seven percent of employers identified inadequate diversification as the third most common mistake, according to the Trends study and that appears to be the case: 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.
While many employers are adding "esoteric asset classes" employees are not spreading their assets among a variety of funds because many participants are overwhelmed by too many choices and do not know how such options fit into their portfolios, Lucas said.
One answer to that problem may be in providing different saving vehicles like self-directed brokerage, as opposed to strictly funds, she said. "What may need to acknowledge is that the key to keep the plan structure simple," she said. With that, however, sponsors must offer information, guidance and third-party investment advice, she said.
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.
Employers should develop plan provisions that allow participants to automatically step up their contribution levels on an annual basis, she said.