Good news all around for 401k plans. No less authorities than BrightScope and the Investment Company Institute teamed to release a report that finds, among other things, the great majority of employers that offer a 401k plan — more than three-quarters—make matching contributions. The report also reveals that plans offer a wide variety of investment choices and that mutual fund fees in 401(k) plans have trended down.
The study, “The BrightScope/ICI Defined Contribution Plan Profile: A Close Look at 401k Plans, 2014,” analyzes the most recent detailed data available from the Department of Labor on private-sector 401k plans.
Key Facts on Employer Contributions Based on the Study:
- Looking across the universe of the 401k plan, the analysis finds that employers made one-third ($115 billion) of total 401k plan contributions in 2014.
- In nearly all (95 percent) of the large plans with 5,000 participants or more, the employer contributed in 2014, and more than three-quarters of small 401k plans with fewer than 100 participants featured employer contributions.
- Focusing on a sample of large 401k plans reveals that in 25 percent of 401k plans in the BrightScope database, employers contributed to the plan without regard to how much the employee contributed.
- Simple matching formulas are the most common type of employer contribution—found in 45 percent of 401k plans in the BrightScope database. Under the formula, an employer matches an employee contributions up to a fixed percentage of the employee’s salary (for example, 50 cents on the dollar on employee contributions up to 6 percent of pay).
- Fourteen percent of 401k plans in the BrightScope database had a tiered formula, with employers matching different levels of employee contributions at different rates, and 2 percent of employers matching up to a maximum dollar amount.
Employers Design 401k Plans to Include Features That Employees Value
- Nearly all (97 percent) of the sample of more than 50,000 large 401k plans with 100 participants or more and at least $1 million in plan assets included at least one of the three activities explored in this research—automatic enrollment, employer contributions, and participant loans.
- Twenty-one percent of the 401k plans in the sample reported evidence of all three activities. Larger plans were more likely to have all three activities in their plans. The most prevalent combination of plan activities was employer contributions in plans that also had participant loans outstanding—observed in 47 percent of 401k plans in the sample.
Mutual Fund Fees, Total Plan Costs Continue Trending Down
Based on the data from the BrightScope database, the study found that mutual fund fees in 401k plans trended downward between 2009 and 2014.
The study also found that fund expenses are typically lower in larger plans. For instance, the average asset-weighted expense ratio for domestic equity mutual funds was 0.82 percent for 401k plans with $1 million to $10 million in plan assets, compared with 0.39 percent for 401k plans holding more than $1 billion in plan assets.
“Fees in 401k plans continue to trend downward over time,” said Brooks Herman, head of data and research at BrightScope, a unit of Strategic Insight. “Increased transparency in the form of public disclosure have allowed plan participants and plan sponsors to judge the impact of fees on 401k savings.”
Key Findings on Investment Choices Offered Through 401k Plans:
- Mutual funds were the most common 401k investment vehicle, holding 46 percent of 401k plan assets in the sample in 2014. Collective investment trusts (CITs) held 26 percent of plan assets; guaranteed investment contracts (GICs) held 9 percent; separate accounts held 4 percent; and the remaining 16 percent was invested in individual stocks, bonds, brokerage, and other investments.
- Target date funds have become more common in 401k plans. In 2014, 76 percent of 401k plans in the sample offered target date funds, compared with 32 percent in 2006. During the same period, the share of participants who were offered target date funds rose from 42 percent to 77 percent.
- Index fund use in 401k plans also has increased. The share of 401k plans in the BrightScope database offering index funds rose from 79 percent to 89 percent from 2006 to 2014, and the percentage of plan assets invested in index funds rose from 17 percent to 29 percent during that period.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
