Employers have already largely shifted from providing workers with traditional pensions to 401(k)s. But now, even 401(k)s are proving too costly for some employers to sponsor and manage. “The continued bleak economic outlook is forcing many companies to make difficult decisions with respect to their retirement benefits,” says Pamela Hess, director of retirement research at Hewitt Associates. “Companies are increasingly focusing on less expensive initiatives to encourage their employees to stay in the plan and contribute in a way that minimizes future risks.”
Here is a look at how your employer is likely to alter your 401(k) this year.
Automatic saving. Employees are more likely to participate in 401(k) plans when they are automatically enrolled. But the number of companies automatically enrolling workers in their retirement plan may have reached a plateau. About 51 percent of middle and large sized employers now automatically enroll workers in their plan, according to a survey of 150 companies by human resources consulting firm Hewitt Associates, up from 44 percent in 2008. Some firms (53 percent) also automatically up the ante by having employees commit in advance to increasing the percentage of their salary deferred into a 401(k). But only one-quarter of employers without automatic enrollment are likely to add it for new hires, and just 15 percent are likely to adopt it for existing employees in 2009. The reason: When companies automatically enroll workers in 401(k) plans they pay out more in company matches than if they don’t actively promote employee involvement. Some 55 percent of companies cited the increased cost of the employer match as the primary reason why they did not plan to offer it.
Going matchless. A few high profile companies like FedEx and Motorola have already suspended their 401(k) match. Hewitt’s survey shows that just 2 percent of employers have cut or temporarily suspended their 401(k) company match since the markets tumbled, and 5 percent are expected to do so in 2009. However, Hewitt believes it is possible that upwards of 10 percent of companies could potentially suspend or reduce their match in the coming 12 to 18 months. “Automatic enrollment and matching employer contributions can be two of the costliest discretionary expenditures companies incur in a given year,” says Hess. “In an effort to avoid taking more drastic measures such as cutting jobs or salaries, employers are opting not to add new features and/or they are temporarily suspending these initiatives in order to stay solvent in the flagging economy.”
Instant diversification. Employers are struggling to make sure that employees who have little knowledge or interest in investing have an asset allocation that balances safety with the need to create enough wealth for a secure retirement. “Tools like automatic rebalancing and target-date portfolios can have a significant impact on long-term savings behavior and ultimately lead to more accumulated wealth in retirement,” says Hess. Some 53 percent of employers who don’t already have target-date funds plan to offer them this year, according to Hewitt. Target date funds automatically choose an age appropriate asset allocation for a participant given an estimated retirement date the account holder selects. Some companies also plan to roll out professionally managed accounts (19 percent) and automatic rebalancing (20 percent), a tool that helps employees regularly balance their portfolios with their target asset allocations, in 2009.
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More tax choices. In addition to a traditional 401(k) where you defer taxes on your contributions until withdrawals are made in retirement, some companies will offer a Roth option. With a Roth 401(k), you pay the taxes now and get tax free withdrawals in retirement. Approximately 29 percent of companies currently offer a Roth 401(k) to their employees, up from 19 percent in 2008. Another 12 percent of companies say they are very likely to add one in 2009.
Cheaper education options. If you’ve been meaning to sign up for a 401(k) investing class your employer offers, you’d better take it soon. Companies with an eye on their bottom line are changing the ways they educate workers about 401(k)s. The number of employers planning to provide in-person investment education seminars or classes in the coming year dropped from 72 percent in 2008 to 60 percent in 2009. Instead, some employers are turning to less expensive means of outreach like an intranet site (75 percent), e-mail (60 percent), and webinars (49 percent). The top messages employers would like to convey to their workers are weathering the markets by staying properly diversified (91 percent), staying the course and investing for the long term (87 percent), and rebalancing on a regular basis (50 percent).
Tell us, what features would you like added to your 401(k) in 2009?