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Guest Article

Deloitte logo

(From the November 18, 2002 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits. Hyperlinks within the article have been added by BenefitsLink.)

Deloitte 401(k) Survey Sheds New Light on 401(k) Reform Debate

The past year has been a tumultuous one for 401(k) plans. Against a backdrop of diminishing account balances precipitated by falling stock prices and a series of corporate governance scandals, lawmakers have been busy calling for 401(k) reform, and trial lawyers have been busy filing lawsuits against 401(k) plan sponsors and fiduciaries. Nonetheless, Deloitte's just-released 2002 Annual 401(k) Benchmarking Survey indicates many plans already are designed and operated to avoid the types of problems associated with this controversy.

The Survey was conducted by Human Capital Advisory Services and Pensions and Investments magazine in June and July 2002. A total of 823 employers, with an average of 9,169 employees, responded to the Survey.


President Bush and various Members of Congress have introduced reform proposals intended to encourage diversification of 401(k) accounts in general, and to discourage participants from holding excessive amounts of employer stock in particular. However, the Survey indicates less than one-fourth (24 percent) of all plans even offer employer stock as an investment option, and most plans (including those that allow participants to invest in employer stock) are designed to help participants develop and maintain a diversified investment portfolio.

According to the Survey, 401(k) plans offer an average of 13 investment options, including--

  • domestic equity funds (70 percent)
  • international equity funds (70 percent)
  • general bond funds (61 percent)
  • balanced funds (59 percent)
  • stable value funds (58 percent)
  • money market funds (41 percent)
  • lifestyle funds (29 percent)

Among the 24 percent of plans that allow participants to invest in employer stock, 26 percent impose limits on the percentage of employer stock participants can hold in their 401(k) accounts. Another 15 percent of these plans indicated they are considering imposing such a limit. [Senator Barbara Boxer (D-CA) introduced legislation to impose a statutory limit on the amount of employer stock participants could hold in their 401(k) accounts. It does not appear Congress will enact such a proposal.]

Matching Contributions in Employer Stock

A related issue is the extent to which plans allow participants to divest employer stock they acquire from employer matching contributions. Current law generally does not require 401(k) plans to allow participants to diversify employer stock holdings acquired in this manner. However, if the employer matching contributions are made to an ESOP, participants generally must be allowed to begin diversifying some of their holdings when they reach age 55 and complete 10 years of service.

The Survey indicates that the vast majority (86 percent) of plans allow participants to divest employer stock acquired through matching contributions, but usually only after meeting certain age and/or service requirements. In spite of the recent controversy, only 4 percent of plans surveyed indicated they were thinking of eliminating or reducing these restrictions. [If Congress enacts 401(k) reform legislation, it almost certainly will include a provision to require plans to allow participants to divest employer stock acquired through matching contributions after completing a minimum service requirement.]

Investment Advice

Another issue that has emerged during the 401(k) reform debate is that of investment advice for 401(k) plan participants. Rep. John Boehner (R-OH) and Senator Jeff Bingaman (D-NM) have introduced competing proposals to encourage plan sponsors to make professional advice available to their participants.

Only 35 percent of Survey respondents said they make individual investment advice available to all participants, and another 4 percent said they make such advice available to some participants. Of those that make advice available, 34 percent provide telephone access to financial counselors, and 31 percent provide in person access to financial counselors. Another 31 percent make Web-based investment advice available through either a vendor's proprietary system (43 percent) or a commercial service such as Financial Engines (26 percent) or Morningstar (13 percent).

It is not clear whether either the Boehner or Bingaman proposals would make 401(k) plan sponsors more interested in offering investment advice to participants. The real barrier to more sponsors offering advice may be a lack of employee interest. According to the Survey, a solid majority (81 percent) of sponsors offering investment advice report that less than 25 percent of participants actually take advantage of it. (This is particularly surprising in light of the fact that only 21 percent of those surveyed indicated that participants pay for this advice.)

Selecting and Monitoring Plan Investment Options

Litigation relating to 401(k) plans often involves claims that plan sponsors and administrators have not satisfied their ERISA fiduciary duties with respect to selecting and monitoring investment options. The Survey suggests most plan fiduciaries take these responsibilities very seriously.

According to the Survey, 84 percent of plans have a formal procedure for selecting investment funds. Additionally, the percentage of plans with a formal written investment policy has increased from 60 percent in 2000 to 72 percent in 2002.

Almost half (47 percent) of plans surveyed indicated that they evaluate and benchmark the performance of their investment options on a quarterly basis, up from 43 percent in 2001. Another 16 percent review their investments semi-annually, and 26 percent do so annually. Only 9 percent of surveyed plans said they have no formal schedule for reviewing investment options.

When a review identifies an underperforming fund, most (59 percent) plans surveyed said they replace it. [Other options include phasing out the underperforming fund over time (14 percent) and not allowing new investments in the fund (7 percent).] According to the Survey, 28 percent of plans have replaced an underperforming fund during the past year, and another 32 percent have done so during the last 5 years. Another 34 percent indicated they have never replaced a fund due to poor performance.

If you need more information about the Survey, please contact your Deloitte advisor.

Deloitte logoThe information in this Washington Bulletin is general information only and not intended to provide advice or guidance for specific situations. Contact your Deloitte advisor for information regarding your specific circumstances.

If you have questions or need additional information about this article and you do not have a Deloitte advisor, please contact Martha Priddy Patterson (202.879.5634) or Robert B. Davis (202.879.3094).

Human Capital Advisory Services, Deloitte LLP, 555 12th Street NW, Suite 500, Washington, DC 20004-1207.

Copyright 2002, Deloitte.

BenefitsLink is an independent national employee benefits information provider, not formally affiliated with the firms and companies who kindly provide much of the content and advertisements published on this Web site, including the article shown above.
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