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Focus on Funds: ICI/BrightScope Analysis Underscores Role of Employers in 401(k) Plans

Focus on Funds

ICI/BrightScope Analysis Underscores Role of Employers in 401(k) Plans

The February 27, 2015, edition of Focus on Funds examines the investment choices that employees typically have within 401(k) plans, and discusses the trend toward lower fund costs.

Transcript

Stephanie Ortbals-Tibbs, ICI Director, Media Relations: Welcome to Focus on Funds, the Investment Company Institute’s weekly roundup of industry news, ICI activities, and research findings.

When it comes to workplace retirement plans like 401(k)s, employer support and engagement is crucial. And new data show it’s also quite strong. The data is inside a newly released report from ICI and BrightScope, and I spoke further about this particular issue with ICI Senior Economist Sarah Holden.

Sarah Holden, ICI Senior Director, Retirement and Investor Research: So, BrightScope and ICI analyzed more than 35,000 401(k) plans and we see that employers design these plans to attract and retain quality workers. And they also want their workers to participate in the plan. And one of the things they do to encourage participation is the employer contributes money to the plan. We see in our database that 83 percent, or more than four out of five employers, make employer contributions to the 401(k) plan.

Ortbals-Tibbs: That’s a big number. And how do they do that? What’s the most common approach?

Holden: So, the most common way to do that is they do what’s called a “simple match.” So 40 percent of the plans had a simple match, but in 37 percent of the plans the employer just puts money into the accounts, whether the employee contributes or not.

Ortbals-Tibbs: And then how does that break out once the employer makes a choice as to how they’re going to do it? What are the most common formulas they use?

Holden: So, with a simple match, what happens there is that the employer puts in a percentage match against what the employee puts in up to a certain percentage of salary. So, for example, the most common formula is 50 percent of employee contribution up to 6 percent of salary. So, what this means is if you put in 6 percent, your company puts in 3 percent—and this is offered by 17 percent of the plans that have simple matches. The other way that’s very common is the employer will actually match dollar for dollar, up to 6 percent of salary. So, this means that if you put in 6 percent of pay, your company puts in another 6 percent—and this is offered by 15 percent of the plans with simple matches. So, encouraging workers to contribute at least 6 percent of pay occurs in 41 percent of the plans with simple match formulas overall. Another common match level is 4 percent of pay.

Ortbals-Tibbs: And Sarah, another issue we’ll look at then, coming up, is the issue of what choice employees have in their plans, and it’s pretty wide-ranging.

Holden: Yeah, so after we get the contributions coming in, the next step is, how are you going to invest that money, and you want to be sure that your participants have a good range of investment options.

Ortbals-Tibbs: Well, we’ll take a look at that in the week ahead. That’s this week in funds. See you next week.

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