WASHINGTON - Even as traditional pension plans decline in importance, 401(k) programs are taking on many of the automatic features that are typical of defined benefit plans, especially as a means of dealing with low participation rates.
For years experts have warned that, though companies offered their employees the defined contribution tools to prepare for retirement, few chose to use them, making for a generation of workers with uncertain futures.
Correcting that is simple, James Cornell, a senior vice president of Fidelity Investments' FIRSCo Plan Sponsor Strategy, told the Investment Company Institute general membership meeting here last month. Enrolling employees, picking their portfolios, and even investing in annuities are being done automatically in a rising number of defined contribution plans.
"We just had it backward," Mr. Cornell said. "We use the power of inertia to our advantage."
BlueCross BlueShield of South Carolina has done just that, according to Barbara A. Kelly, its vice president for human resources. Until recently, low participation had plagued the insurer's 401(k) plan. Started in 1983, it suffered when the company stopped matching employees' pretax savings. In 1989, the staff doubled, and by the mid-1990s, poor participation among rank-and-file workers had caused the company's plan consistently to flunk Internal Revenue Service nondiscrimination requirements.
In an effort to comply, automatic enrollment was adopted in 2000. Any employee who did not opt out had 2% of his or her salary deducted for deposit in the company plan.
But because many employees never allocated their contributions, most of their savings sat in money market funds. With low balances and small returns, the plan ran afoul of IRS regulations that restrict 401(k) programs whose benefits go disproportionately to highly paid employees, and the maximum contribution was capped at $8,100 per year. "In 2003, we hit rock bottom," Ms. Kelly said.
That's when the company increased the automatic enrollment to 6%, reinstated a company match, and moved the default investment from money market funds to life-cycle accounts. In 2005, the employee contribution rate automatically rose by one percentage point. About 2.4% of the staff, 169 people, opted out.
From 2003 to 2005, participation surged by 37 percentage points, to 94% of the company's 12,800 employees.
Ignorance of investing and the intimidating responsibility to make life-shaping decisions also have kept many U.S. workers from saving for retirement, said Warren Cormier, the president and founder of Boston Research Group.
Mr. Cormier's firm surveyed a group of plan participants who were "very satisfied" with their plans. But when plan features were rated individually, education fared worst. "The lowest level of satisfaction is the ability of the educational program to help them make decisions and learn the principles of investing," he said.
As a result, predicted Fidelity's Mr. Cornell, "auto[matic] features are going to become plan-standard design."
Despite initial concerns that automatic enrollment might roil employees uninterested in participating, neither Mr. Cornell nor Ms. Kelly could recall any serious complaint about the process. Notifying employees up-front that they can opt out at any time protects companies from legal liability.
Choosing which fund an employee's savings are channeled into, however, is trickier. "We went to outside counsel for an opinion," Mr. Cornell told the ICI meeting. "They said we're doing it in the best interest of our employees as a fiduciary" and produced a letter that FIRSCo makes available to plan sponsors and their employees.
Because workers of different ages and incomes may have different needs or feelings about investing, providers that want to compete should consider offering plans tailored to specific employees, said Barry Schub of New York Life Investment Management. "Our belief is [in] crafting a plan with the participant that is better than the default" allocation, he said.
In general, investors fall into a few categories: those who want to manage their own retirement account holdings but also want feedback on their choices, those who don't know how to assemble a portfolio but want to watch its progress, and those who only have a retirement account because they have a job and are otherwise naïve when it comes to the markets.
"You have to learn the pattern through their behavior and tailor the message to those patterns," Mr. Schub said. This means different educational and marketing materials for each group, he said. In the past, tailored programs might have been prohibitively costly, but electronic document delivery and on-demand-publishing erode such barriers.
Not all workers are confident, however, that the investment decisions they make now will serve them well in the future, especially given the rising cost of health care and more general inflation, said Tom Johnson, a senior vice president in the MassMutual Financial unit of Massachusetts Mutual Life Insurance Co.
"Investors want predictabilities and guarantees," Mr. Schub said. Adding annuities to a qualified plan can provide just that, he said.
Annuities turn off many advisers because, once a client agrees to buy one, there are no real fee opportunities for advisers. But annuity providers, struggling to maintain their business as employers bail out of the defined benefit space, are focused on ways to push their products through defined contribution sales channels.
One tactic is to let the earnings in a qualified plan be reinvested in an annuity. For the plan beneficiary, buying an annuity offers a retirement income guarantee to complement what amounts they can draw down from their 401(k) balances. "It's a baseline guarantee of a lot more money for a longer period of time," Mr. Johnson said.
