The State of Defined Contribution Retirement Plans

The number of organizations offering defined contribution (DC) retirement plans has held steady over the past two years (68.1%), making them the primary retirement vehicle for an increasing share of the U.S. workforce.

From a worker perspective, DC plans have a number of attractive attributes, giving workers control over their plan assets through individual accounts. In addition, these accounts have balances that are easy to quantify and are portable between employers. However, DC plans are subject to longevity risk as well as an increased chance of leakage, and they lack cost-of-living increases after retirement. Personal control of account balances means that individuals must be educated on basic investment concepts, including recognition of their own organization’s DC plan offerings.

The State of Defined Contribution Retirement Plans

The Employee Benefits Survey report captured benchmarking data on these DC plans. Here are some key findings from the report.

DC Plan Offerings

  • The most commonly available plan types of DC plans are 401(k) plans (68.8%), followed by Roth 401(k) plans (35.2%). The same proportion of plans (15.7%) offer Section 457 plans and profit-sharing plans, followed by 403(b) plans, offered by 15.2% of organizations, and money purchase plans, offered by 14.7%.

Loan Provisions

  • More than two in three organizations (68.2%) allow loans through their 401(k) plans, while 13.0% allow them through a 403(b) plan. More than one in five (21.1%) do not allow loans.
  • Responding organizations estimate that 13% of their 401(k) plan participants have used the loan provision, while a smaller proportion (6%) have used the loan provisions in applicable 403(b) plans.

[Free Member Webcast: Improving Employee Financial Wellness Strategies | October 3, 2019]

Hardship Withdrawals

  • More than seven in ten (72.9%) respondents who offer a DC plan allow hardship withdrawals from their 401(k) plans, while 15.1% who offer 403(b) plans allow them. In 401(k) plans, organizations most often allow hardship withdrawals for medical (75.5%), disaster/repair (67.9%), real estate (66.7%), educational (62.7%) or funeral-related (54.2%) expenses.
  • Responding organizations that allow hardship withdrawals estimate that about 3% of their plan participants, on average, have used the provision for their 401(k) and 403(b) plans.

Matching Contributions

  • More than three in five survey respondents (61.7%) provide matching contributions in their DC plans. These contributions are typically made on a fixed basis (41.1%) but are often graded (13.1%). In graded arrangements, employees are vested in a higher percentage of the match with each year they work, until becoming fully vested. Less often, organizations make matching contributions on a discretionary basis (7.5%).

Automatic Features

  • Five in nine plans (55.1%) use automatic enrollment, in which the employer signs up every eligible employee for a plan unless the employee opts out during the enrollment period. Plans that employ automatic enrollment set a default income deferral rate for participants. The most typically used rates are 3% of pay (33.0%), followed by 1% (15.5%) and 6% (15.0%). Organizations use different frequencies in automatically enrolling their participants. Seven in eight respondents (87.9%) enroll participants when first eligible, while 11.7% do so on an annual basis.
  • Once enrolled, 22.6% of organizations are using automatic escalation to overcome a participant’s tendency to remain at a default contribution level. Organizations employing automatic escalation overwhelmingly use a 1% default increase per period. To limit automatic escalation levels, responding organizations set caps, most commonly 10% (37.3%), 6% (20.5%) and 15% (12.0%) of pay.

[Related Reading: Three Steps to Reduce Plan Costs and Improve Retirement Security]

Simplified Investment Features

  • Once funds are deposited into accounts, organizations make available a number of simplified features to assist participants in meeting their investment goals. Target-retirement-date/lifestyle funds are offered by more than seven in ten (72.8%) responding organizations.
  • Managed accounts are also common, offered by 43.8% of responding DC plans.
  • More than one in three (36.9%) responding organizations use automatic portfolio rebalancing. This feature redistributes portfolio assets to realign with original asset allocations—a realignment that corrects fluctuations that occur from changes in market price.

Final Distribution Options

  • Most plans provide a variety of options for the final distribution of assets to participants. More than nine in ten (92.3%) have a lump-sum distribution option, while more than two in three (67.6%) offer installment payments, followed by an annuity option (42.8%) of responding organizations.

Financial/Retirement Planning Benefits

  • Three in five (60.0%) have education initiatives to enhance worker understanding of retirement and financial issues. More than one-half (55.4%) offer retirement calculators and offer communication initiatives geared toward increasing worker participation in plans (54.4%).
  • Less than half of responding organizations make formal retirement planning/counseling services available. A smaller proportion (36.9%) provides financial planning/counseling services. In addition, about three in ten responding organizations (29.0%) engage in targeted communication about retirement/finances to different generations in the workforce.

[Relteed Reading: Financial Education Goes Beyond 401(k)]

DC Plans Participation/Contribution Rates

  • Respondents reported on the approximate activity levels of individuals within their DC plans. On average, 82.5% of responding organizations’ eligible participants participate in their DC plans, with addition, respondents estimate an average deferral/contribution rate of 7%.

To learn even more about how DC plans are commonly structured, check out the Employee Benefits Survey: 2018 Survey Results.

Justin Held, CEBS

Justin Held, CEBS
Senior Research Analyst at the International Foundation 

HBCE

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