Human Capital & Careers

401(k) Enrollment Declined in 2003

One response by an increasing number of companies: automatic enrollment.
Stephen TaubOctober 12, 2004

Despite a turnaround by the stock market after several years of losses, employees seem to be cooling toward 401(k) retirement plans.

Last year, 76 percent of eligible employees participated in their 401(k) plans, down from 80 percent the year before, according to an annual survey by the Profit Sharing/401(k) Council of America. The 2003 survey was based on 1,161 profit-sharing and 401(k) plans holding more than $412 billion in plan assets and include more than 3.4 million participants.

PSCA president David Wray attributed this development, in part, to the market’s recent falloff and news of the mutual-fund trading scandal, according Dow Jones Newswires. “Young people who don’t understand the system and are looking for a reason not to save are finding a lot of reasons,” he added. Wray told the wire service that another possible reason for the falloff might be a change in survey methodology this year, to differentiate between pure 401(k) plans and those with a profit-sharing component.

Whatever the reasons, a decline in overall employee participation could have widespread ramifications for companies and for their more-highly-compensated employees.

Many businesses believe that a high 401(k) participation rate among young, lower-paid employees helps foster loyalty to the organization, observed Dow Jones. And as more and more companies shun defined-benefit plans, they need a viable retirement-savings option to offer to the rank and file.

It’s also in interest of top management, personally, to convince lower-paid employees to participate, thanks to the so-called one-third/two-third (“top-heavy”) rule. The standard requires that if 60 percent of a 401(k) plan’s assets are in the accounts of highly compensated or key-employee participants, then the company must make a 3 percent contribution to all eligible employees in addition to the 401(k) match. The standard is more likely to be triggered at smaller companies because of turnover among lower-paid employees.

So, to encourage younger workers to participate, many companies are pruning the legalese from their plan materials and stepping up their education campaigns, noted Dow Jones. In addition, last year companies increased the amount of employee contributions they match, to an average of 3 percent, though this is still slightly down from the recent high of 3.3 percent in 1999.

An even more effective practice might be automatic enrollment, in which all eligible employees are included in a plan unless they opt out. Last year 8 percent of the companies surveyed by the PSCA took this route, compared with 7 percent in 2002. About 25 percent of the surveyed companies with 5,000 or more participants have automatic enrollment.