Wells Fargo Survey Finds Sharp Increase In Automatic 401(K) Plans And Diversified Default Funds

A new national survey from Wells Fargo & Company’s (NYSE:WFC) employee benefits consulting group, BPS&M, reports that two-thirds (66 percent) of employers already use automatic enrollment in their 401(k) plans or intend to implement it within the next 18 months. The survey also shows a dramatic shift over the last year in the investments into which employees are automatically enrolled. More than half (56 percent) now use a diversified investment.
The 2007 Strategic Initiatives in Retirement Plans Survey, which includes responses from over 350 employers nationwide, reports a nearly 70 percent increase over the last year in the percentage of plans that automatically enroll new employees in the organization’s 401(k) or other defined contribution plan (44 percent in 2007 versus 26 percent in 2006). One-fifth (21 percent) of these plans also automatically increase the employee’s contribution rate over time.
Many companies appear to be following proposed guidance from the Department of Labor that encourages employers to select investments with a blend of stocks and bonds for the default investment into which employees are automatically enrolled. In the last year, the percentage of plans using automatic enrollment with a conservative default fund (stable value or money market) fell from 61 percent to 39 percent. These conservative investments are typically replaced by target date or target risk funds, which are diversified investment options managed to a particular retirement date or risk tolerance. Thirty-nine percent of plans used these targeted funds in 2007, up from 14 percent in 2006. Including plans with standard enrollment, two out of five (42 percent) employers plan to change their default investments in the next 18 months, most of these (71 percent) will shift from conservative funds to target date funds (66 percent) or target risk funds (20 percent).
“The retirement landscape is changing rapidly and America’s 401(k) plans are going through a dramatic transformation that will result in significantly greater retirement savings for millions of workers,” said Laurie Nordquist, head of Wells Fargo Institutional Trust Services. “Automatic enrollment, especially when combined with a diversified default investment and a contribution rate that increases over time, finally will make employee inertia a good thing. We’re very encouraged by the findings of this survey.”
Like last year’s survey respondents, employers continue to cite active employee participation (28 percent) and investment knowledge (22 percent) as their greatest challenges for 401(k) plans. Retirement planning workshops and meetings were identified as the most effective communication technique by 41 percent of respondents.
“While in-person meetings are viewed as the most effective way to communicate with employees, only one in five (22 percent) make the meetings mandatory,” said Kathie TangeduPré, director of surveys and publications for Wells Fargo’s benefits consulting group, BPS&M, which conducted and analyzed the survey.