Survey Examines Design Features, Investment Experience Of Defined Contribution Plans In 2008

CCH® PENSION — 08/31/09

From Spencer’s Benefits Reports: In How America Saves 2009, Vanguard examines the plan design features and investment experience of more than 2,200 defined contribution plans for which the company provides recordkeeping services. Ninety percent of these plans have a 401(k) or 403(b) employee contribution feature, while the remaining 10% are plans such as profit-sharing plans to which only the employer contributes.

In the survey report, Vanguard initially notes, “2008 was an exceptional and, indeed, historic year, with the U.S. stock market experiencing its largest single-year decline since the 1930s. Despite the exceptional volatility that marked the period, the saving and investment behavior of defined contribution plan participants changed only marginally. In many ways, defined contribution plan participants’ lack of response to 2008’s volatility is striking and reflects the inertia that dominates much retirement savings behavior.”

The survey found that the Pension Protection Act of 2006 (PPA), which introduced fiduciary and tax incentives to encourage broader adoption of automatic enrollment, has boosted automatic savings features. About 20% of Vanguard plans had adopted automatic enrollment by year-end 2008, quadruple the number that used the feature at the end of 2005. Large plans have been more likely to implement automatic enrollment designs; in 2008, 43% of large plans had an automatic enrollment feature.

As a result of the PPA, more than three-fourths of automatic enrollment plans have implemented automatic annual deferral rate increases, up from one-third in 2005. Nearly all plans with automatic enrollment (98%) default participants to a balanced investment strategy—with 90% choosing a target-date fund as the default investment. At the same time, 40% of plan sponsors with automatic enrollment target a total contribution rate (employee elective deferrals plus any employer contributions) of less than 9%.

The survey further found that the use of target-date funds continues to increase. Seventy percent of plan sponsors offered target-date funds at year-end 2008, up from 30% at year-end 2005. Thirty-seven percent of participants who were offered target-date funds used them, while 46% of participants owning target-date funds have 100% of their account in a single target-date fund. According to Vanguard, the qualified default investment alternative (QDIA) provisions of the PPA have driven adoption of target-date funds; of plans choosing a QDIA, 85% have selected a target-date fund, while 15% have selected a balanced fund as their QDIA.

Other Findings

Vanguard’s survey also included the following findings:

Roth 401(k) feature. At year-end 2008, the Roth feature had been adopted by one-third of Vanguard plans, and 7% of participants within these plans had elected the option.

Participant trading. During 2008, only 16% of plan participants traded in their accounts. The level of trading by plan participants increased modestly compared with 2007, when 15% of plan participants traded. On a net basis, traders shifted 4% of assets to fixed income in 2008, with most traders making small changes to their portfolios. Only 2% of all participants actually abandoned equities.

Account balances. Both median and average account balances declined in 2008 by about 30% from their 2007 levels. However, among continuous participants—those with a balance at both the beginning and the end of 2008—the median account balance fell by 14%.

Participation rates. The participation rate for all eligible employees across all plans rose to 69% in 2008; the rate had remained largely unchanged at 65% to 66% for several years. The survey notes that the increase likely is related to the growing use of automatic enrollment.

Investment allocations. As a result of the market decline and participant trading activity, the percentage of plan assets invested in equities declined from 73% in 2007 to 61% in 2008. However, while account holdings of equities fell in 2008, participant contributions to equities remained essentially unchanged from 2007 at 73% of contributions.

Company stock. The shift away from company stock holdings continued into 2008. Among plans offering company stock, the number of participants holding a concentrated position of more than 20% of their account balance in company stock fell from 42% in 2005 to 30% in 2008.

Loan activity. In 2008, 16% of participants had a loan outstanding, and the average loan balance was $8,600; both figures were essentially unchanged over recent years. During 2008, 4% of participants took an in-service withdrawal, taking about one-fourth of their account balances. Hardship withdrawals were up over prior years, but were taken by less than 2% of participants.

Internet use. Sixty percent of participants in the Vanguard plans were registered for Internet account access for their plan accounts at the end of 2008. The Internet continues to be the preferred channel for conducting transactions, with participants completing 72% of all transactions online in 2008. Most other transactions were completed through telephone associates.

For more information, visit https://institutional.vanguard.com.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer’s Benefits Reports.