Working Americans who participate in 401(k) and similar self-directed savings plans now can choose among more investments than ever before. According to a new national study by William M. Mercer Incorporated, the average number of such choices rose to 8.2 in 1997, up from 7.7 in 1996, and more than double the number of choices available in 1990.
Mercer's 1997 Survey on Employee Savings Plans covered 455 employers with aggregate savings-plan assets of $324 billion. Within the last two years, more than half (59 percent) of these plan sponsors have added new investment options to their broad categories of available investment funds.
The study also shows that about three-fourths (76 percent) of eligible employees choose to participate in their employers' savings plans. Not surprisingly, 90 percent of highly compensated employees who are likely to have more assets available for investment participate in the plans, compared with 75 percent of non-highly compensated employees.
"The appeal of 401(k) and similar savings arrangements remains very strong with employers and employees," said Alisa Ford, an associate and client manager in Mercer's Kansas City office. "As a key part of a benefits package, these plans effectively support the strategic goals of the company and meet the needs of the work force."
Ford said the survey's findings indicate employees are becoming more comfortable with stock-based investing: Among plans that offer some type of equity fund, 46 percent of participants' assets were invested in equities at the start of 1997, up from 40 percent a year earlier.
Conversely, plan participants continue to move away from conservative fixed-income investments, such as funds based on guaranteed investment contracts (GICs). Such fixed-income funds accounted for an average of only 29 percent of total plan assets at the start of 1997, down from 33 percent at the start of 1996 and 42 percent in 1995.
"Employee education and the sustained bull market of recent years appear to have whetted appetites for equities," Ford said.
Other key survey findings indicate:
?Life-cycle funds are gaining popularity. These funds offer a pre-selected mix of investments appropriate to a participant's age group and risk-tolerance. The number of employers offering life-cycle funds grew from 7 percent in 1996 to 11 percent in 1997.
?Most employers offer matching funds. Most savings-plan sponsors (85 percent) match employee contributions to the plan. Typically, the limit on employee contributions eligible for the match is defined as a percentage of pay on average, 5.2 percent of pay.
The most common match is 50 percent of the employee contribution (52 percent of the surveyed plan sponsors offer this match). Nearly a quarter of plan sponsors (23 percent) match 100 percent or more. At the other end of the spectrum, 12 percent match only 25 percent or less.
?Employees control their investments. Most savings plan sponsors (84 percent) give employees investment control of all contributory defined contribution plan funds. In 14 percent of plans, employees may choose investments for only a portion of the money (usually their own contributions, as opposed to employer matching funds or profit-sharing contributions). In 3 percent of plans, the employer invests all funds.
?Employees typically pay investment management fees. Sixty percent of plan sponsors net the cost of investment management from investment returns; 34 percent absorb the cost; and 6 percent deduct it directly from employee accounts.
?Large employers provide double retirement coverage. Three-fourths of employers with total savings-plan assets of $250 million or more sponsor both a 401(k) or similar plan, and a defined-benefit pension plan. Only 42 percent of those with assets of less than $10 million sponsor both types of plans.
?Employee contributions are rising. The average pre-tax contribution to savings plans was 6.4 percent of pay in 1997, up from 6.1 percent in 1996. Highly compensated employees contributed a greater portion of their before-tax compensation (6.9 percent) than non-highly compensated employees (6 percent).
?Few brokerage windows are open. A scant 3 percent of savings plans have windows giving participants access to virtually any mutual fund or individual security (stock or bond) available through a broker. Difficulty in communicating such arrangements to employees may have inhibited their use, the survey notes.
(The preceding article was provided by the Kansas City office of William M. Mercer Incorporated, an international human resource management consulting firm with headquarters in New York.)
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