It’s become a well-worn story: Baby Boomers reaching retirement age with insufficient financial resources to see them through the rest of life, and younger workers not socking away cash at a rate that would help them avoid that fate themselves.
Those sad realities are making retirement benefits a more visible element of overall employee rewards than ever. Employers that opt to contribute more money to their 401(k) plans or otherwise do more to help employees prepare for retirement are responding to a clear, strong demand.
Companies’ increasing interest in doing that is manifesting in several ways. For one, they’re getting more aggressive with employer-matching contributions. According to the latest biannual research on defined-contribution plans by consulting firm Aon Hewitt, matching employee contributions dollar for dollar up to 6 percent of an employee’s wages was the single-most-used formula in 2013. For each of the six previous periods addressed in earlier surveys, matching only 50 cents per dollar up to 6 percent of wages was the most-employed formula and always significantly beat the dollar-for-dollar approach.
To some degree, the surge in employer matches reflects the continued trend of large companies opting to freeze defined-benefit pension plans and, as partial recompense, juicing up their 401(k) plans. (The survey was heavily weighted toward larger companies; 93 percent of the 407 participants were from firms with more than 1,000 employees, and 25 percent had more than 25,000 workers.)
But, says Rob Austin, director of retirement research at Aon Hewitt, “Certainly there is a cohort of employers that are very focused on maximizing individuals’ plan balances at retirement. Today that’s one of the strongest incentives they can offer to employees. Ultimately it will benefit not only the employees but the employer as well.”
Companies have a clear interest in influencing workers to retire when the time comes. If older employees can’t do so for financial reasons, they may lack the physical strength to perform some types of work, be less engaged than younger employees, have a higher incidence of disability, and cause a hike in the company’s health-insurance premiums, Austin notes.
That company interest is so great that among 13 measures employers might view as the most important in evaluating a 401(k) plan’s success, the top pick was the plan’s ability to facilitate retirement income. Trailing well behind was the plan’s contribution to attracting and retaining employees, which historically has been considered the primary reason for offering any type of employee benefit.
Still, the survey portrays a great dispersion in what’s considered to best indicate a plan’s degree of success. That’s because companies have different motivations and expectations of employees. At one end of the spectrum might be a retail chain, where turnover is high and hardly anyone sticks around for decades. A 401(k) plan is relatively unimportant to that employer, Austin notes. One the other end of the spectrum might be an energy or mining company, which badly needs long-term employees endowed with a wealth of technical and institutional knowledge.
Another strong trend benefiting plan participants is a de-emphasis on mutual funds in the mix of investment options in favor of institutional funds like collective trusts and separate accounts. Ninety percent of survey respondents said their companies now offer such funds in at least one asset class (up from 59 percent in 2007), and 44 percent said they comprise more than half of all the funds that participants can choose from (compared with 19 percent in 2007).
The financial advantages of that shift, says Austin, are twofold: access to fund managers who typically get better returns than mutual-fund managers, and decreased fees. “Fees are a hidden part of 401(k) plans that can really compound over time,” he says. “Decreasing fees is another way of effectively increasing retirement income.”
Companies are also continuing to relax eligibility requirements for participating in plans. In 2013, 76 percent of respondents said new employees are eligible immediately upon commencing work. That was up from 71 percent in 2011 and a big leap from 45 percent in 2001. Another tack is permitting Roth contributions. This year 50 percent of companies allowed them, compared with just 11 percent four years earlier.
Despite all the 401(k) plan improvements, there remains much that could be done. For example, among the 59 percent of survey respondents that automatically enroll new employees in the plan, a majority (58 percent) set a default employee contribution rate that doesn’t take full advantage of employer matching contributions. In other words, if an employer offers a match up to 6 percent of an employee’s wages but the default rate for automatic enrollments is 3 percent, employees will leave money on the table unless they proactively select the higher contribution amount.
The onus for maximizing plan performance is not only on the plan sponsor, of course. Among all the dollars invested by employees of companies that responded to the Aon Hewitt survey, 14 percent was allocated to company stock. That may be excessively risky.
“I don’t want to pretend like I’m giving any sort of investment advice, but I think having 14 percent of your assets tied up in any one investment, let alone your employer that you also get your paycheck from, is probably above what most financial advisers would say is appropriate,” says Austin.
Meanwhile, even small growth companies that don’t provide employer-matching contributions are trying to boost their 401(k) plan’s value to participants. For example, Lookout, a 200-employee mobile-device security firm, is working hard to expand the number of investment options in its plan. “We don’t want to overwhelm the employees, but instead of one or two options in each asset class, we want to have three or four,” says CFO Adriel Lares. “That’s one way of increasing the attractiveness of investing through the plan.” Lookout also offers quarterly educational meetings on personal investing.
Lares says the company “absolutely” will offer matching contributions once it grows to a certain size and is sustainably profitable. Right now, every available dollar is being reinvested with an eye on growth.
In the San Francisco area, where Lookout is based, “It is incredibly difficult to hold onto employees. That would suggest, you might argue, that we should do matching. But at the same time, we’re competing for employees with a lot of other young, high-flying companies” that are also fixated on growth and not ready to offer employer matches. “What we can say to employees is that not only can we offer you, say, free lunch on Fridays, at the same time we have a comprehensive 401(k) program that’s got 40 to 50 investment options and we offer education about investing for your future.”
Image courtesy of flickr account 401 (K) 2013, CC BY-SA 2.0