401(K) Participation On The Rise, But Will Employees Be Financially Ready For Retirement?

NEW YORK – Despite increases in 401(k) plan participation, many employees are financially unprepared for retirement, according to the 2005-2006 Annual 401(k) Benchmarking Survey, conducted by Deloitte Consulting LLP (Deloitte Consulting), the International Foundation of Employee Benefit Plans and the International Society of Certified Employee Benefit Specialists. The survey also uncovered notable spikes in time-based lifestyle funds, auto-enrollment and step-up programs as respondents reveal numerous changes in plan design to help improve ease of use, flexibility and versatility for employees.

The survey of 830 plan sponsors nationwide revealed that plans with more than 70 percent participation by eligible employees rose to 67 percent versus 63 percent from last year’s survey.  Similarly, the percentage of plans with participation rates exceeding 90 percent increased to 24 percent from 19 percent. 

Despite these increases, respondents believe the majority of employees are not taking advantage of their 401(k) plans to effectively fund their retirement.  A surprising one-fifth of respondents believe that “very few” of their employees either are, or will be financially prepared for retirement, with 65 percent agreeing that only “some” employees will be prepared.  Only 13 percent of survey respondents agree with the statement that “most employees are/will be financially prepared for retirement.”

“While the increases in participation are promising, the lack of employee preparedness for retirement is alarming and suggests that there’s still plenty of room for improvement in 401(k) plan design and communication, to the extent that employers have made employee retirement security a priority goal,” says Leslie V. Smith, a director in Deloitte Consulting’s Human Capital practice and the survey’s director.   “Employers should continue to explore a variety of options that will encourage employees to become better consumers of their 401(k) plans and, therefore, make retirement security a priority goal.”

One of the most rapidly growing new 401(k) investment options for respondents is the “time-based lifestyle fund,” which targets plan participants according to their expected retirement date and gradually shifts the fund’s asset allocation from stocks to bonds as the target retirement date approaches.  Approximately 44 percent of respondents reported offering this type of investment option now, up sharply from 28 percent the prior year.

“Time-based lifestyle funds are gaining in popularity because they largely take care of themselves,” explains Smith. ”This does not mean, however, that employers can walk away from educating their employees on wise investment choices.  It indicates that many employers are increasing the options they provide and are moving away from steering participants to any particular investment choices.”

Overall, respondents provided 17 investment choices to the average participant versus 15 in the last survey.