It’s all about the plan design, and 401(k) advisors’ persistence in getting sponsors to understand that fact is paying off.
401(k) plan sponsors typically offer employer contributions, often in combination with the availability of plan loans, to encourage worker participation, a new report from BrightScope and the Investment Company Institute finds.
It adds that employer contributions are widespread in these large 401(k) plans: 86% of large 401(k) plans, covering 92% of large 401(k) plan participants, had employer contributions in 2017.
Seventy-eight percent of large 401(k) plans had participants with plan loans; employer contributions and plan loans were the most common combination of plan design features, offered by 46% of 401(k) plans.
A third feature, automatic enrollment of workers, was offered by 29% of large 401(k) plans. More than one-fifth (22%) of large 401(k) plans had all three plan design features.
“One of the strengths of the 401(k) system is that it allows employers to customize plans in order to meet the needs of their workforces and encourage employee participation,” ICI Senior Director of Retirement and Investor Research Sarah Holden said in a statement. “The flexibility of the plan design allows employers to offer features such as employer contributions, plan loans, auto-enrollment, and diverse investment options, making it easier for participants to plan and save for their futures.”
401(k) Plans Offer Wide Investment Options
The study found that 401(k) plan sponsors offer a wide and diverse range of investment options to encourage their employees to contribute toward their retirement savings.
In 2017, the average large 401(k) plan offered 28 investment options, including a mix of equity funds, bond funds, and target-date funds. Nearly all large 401(k) plans offered domestic and international equity funds, and domestic bond funds; 82% of large 401(k) plans offered target-date funds; 70% offered guaranteed investment contracts (GICs); 64% offered other types of balanced funds; 45% offered money funds, and 21% offered international bond funds.
“Plan sponsors offer participants more than 20 investment options, on average, covering a range of risk and return,” added Brooks Herman, vice president of data and research at BrightScope, an Institutional Shareholder Services Inc. business. “This array of investment choices helps 401(k) participants—whether young and more focused on growth, or older, nearing retirement, and more focused on income—reach their financial goals.”
401(k) plan fees trended downward
BrightScope’s total plan cost measure—including all fees on the audited DOL Form 5500 reports, as well as fees paid through investment expense ratios—was 0.92% in 2017, down from 1.02% in 2009. The study also found that mutual fund expense ratios in 401(k) plans tend to be lower in larger plans and have also trended down over time.
Employers use matches to encourage employee contributions
In 2017, simple matching formulas were the most common type of employer contribution, as more than half of large 401(k) plans with employer contributions had simple matching formulas.
Target date fund use has risen over time
In 2017, 82% of large 401(k) plans had target-date funds in their investment lineups, compared with 32% in 2006. Nearly one-quarter of large 401(k) plan assets were invested in target-date funds in 2017, compared with 3% in 2006.