The EBRI research is the first using actual plan information on both actual auto enrollment and actual match rate information both before and after adoption of auto enrollment. The new EBRI analysis uses plan-specific data for large employers from Hewitt Associates, and finds that employers instituted more generous contribution rates after adopting automatic enrollment, and did so when measured by several different standards.

This release provides preliminary results from the research. Full results of the simulated impact of the changes on worker’s retirement wealth will be available next month in the February 2010 EBRI Issue Brief, and will be posted online at www.ebri.org

“Our recent analysis of plan-specific data shows that, at least among large 401(k) plans, plan sponsors actually increased the generosity of their contribution rates,” said Jack VanDerhei, EBRI research director and author of the analysis. He noted that EBRI has published three separate simulation studies since 2005 showing the potential importance of automatic enrollment for future retirement account accumulation, even under the assumption that employer contribution rates would not change when the 401(k) plan was modified.

“The modifications to 401(k) plans made by sponsors in response to the Pension Protection Act of 2006 will be very important for retirement income adequacy in this country. Adding these more realistic assumptions to our simulation model will allow us to more accurately demonstrate the relative improvements in retirement accounts, especially for young and low-income workers,” he added.

The EBRI results contradict an earlier publication of the Center for Retirement Research (CRR) at Boston College and by the Urban Institute, which concluded that among a sample of large 401(k) plans, match rates are lower among firms with automatic enrollment than among those without automatic enrollment after controlling for firm characteristics.

However, there were two major limitations with the CRR/Urban published analysis:

• The study was based on U.S. Department of Labor Form 5500 data that does not include specific information on 401(k) match rates. Instead, the authors constructed an estimate for the match rate as the ratio of employer-to-employee contributions for each 401(k) plan.

• They merged the Form 5500 data with information on automatic enrollment from the Pensions &Investments database of the top 1,000 pension funds, which includes a flag indicating whether plan administrators reported offering automatic enrollment in their defined contribution (401(k)-type) plans.

However, this database does not report the year that the automatic enrollment provision was adopted, so there is no way to tell from this data source how long auto-enrollment had been implemented in a planThe authors of the CRR/Urban published study present a regression analysis on this database and produced a finding that: suggests a negative relationship between automatic enrollment and match rates and is statistically significant at the firm-level. In particular, match rates are about 7 percentage points lower among firms with automatic enrollment than among those without automatic enrollment, after controlling for firm characteristics.

While the authors correctly point out that although the regressions suggest a relationship between automatic enrollment and match rates, they do not necessarily imply that auto enrollment causes lower match rates; however, this crucial qualification has been generally ignored in recent press accounts of the study.

Earlier EBRI Research

The CRR/Urban published study conflicts with previous EBRI research published in 2007,2 which surveyed Mercer Human Resource Consulting defined benefit sponsors to gauge their recent activity and planned modifications to their defined benefit (pension) and defined contribution (401(k)-type) plans. The EBRI survey also was able to determine what, if any, increases in employer contributions to defined contribution plans were provided in conjunction with reductions to their defined benefit plans.

Although the association between the adoption of automatic enrollment and employer contributions to 401(k) plans was not the focus of the EBRI study, one-third of the defined benefit sponsors surveyed indicated that they had already increased or planned to increase their employer match to a defined contribution plan, and 20.9 percent indicated that that they had already increased or planned to increase their nonmatching employer contributions to a defined contribution plan. There was some overlap between the two groups, but overall, 42.5 percent of the defined benefit sponsors surveyed indicated that they had already increased or planned to increase their employer match and/or nonmatching employer contribution to a defined contribution plan. This was particularly true of defined benefit sponsors that had either closed a defined benefit plan to new hires or frozen the plan to all members in the last two years or planned to do so in the next two years.

Moreover, the 2007 EBRI study found an extremely large correlation between the adoption of automatic enrollment for a 401(k) plan and the freezing or closing of the defined benefit plan.4 Of those defined benefit sponsors that had closed their defined benefit plans in the last two years, 80.5 percent had either already adopted or were currently considering adopting automatic enrollment features for their 401(k) plans. Of those defined benefit sponsors that had closed their defined benefit plans in the last two years, 76.1 percent had either already adopted or were currently considering adopting automatic enrollment features for their 401(k) plans.

EBRI’s New Research and Methodology

The new EBRI study analyzes in detail 225 large defined contribution plans6 that had adopted automatic enrollment 401(k) plans by 2009, but did not have them in 2005 (the last observation that was not influenced by PPA). The following information was coded for each plan:

• The default contribution rate for the automatic enrollment (AE) plan in 2009.

• The entire match rate contribution formulae for both years.

• All nonelective contributions paid to the defined contribution participants by the employer.

Whether plan sponsors were more or less generous after adopting AE was measured with three different metrics:

1. The average 2009 first-tier match rate was 87.78 percent, while the average 2005 first-tier match rate was 81.26 percent. The difference of 6.52 percentage points suggests that, to the extent that this sample is representative of the universe of large 401(k) sponsors, those sponsors adopting AE were more generous to the 401(k) participants when measured by this variable after automatic enrollment was implemented than they were before.

2. The average effective match rate8 for 2009 was 4.32 percent of compensation, but only 4.00 percent of compensation in 2005. The increase of 0.32 percentage points again suggests that large 401(k) sponsors adopting AE were more generous to the 401(k) participants when measured by this variable after the adoption of automatic enrollment than they were before3. The average total employer contribution rate9 for 2009 was 6.35 percent of compensation and 5.46 percent of compensation in 2005. The increase of 0.89 percentage points once more suggests that those large 401(k) sponsors adopting AE were more generous to the 401(k) participants when measured by this variable than before.

Influence of Defined Benefit Plan Activity

This information was then combined with the defined benefit information for the same sponsor in an attempt to analyze whether EBRI’s 2007 findings of the association between defined benefit freezing/closing and enhanced 401(k) contributions were corroborated. The average improvements for all three metrics were much higher for sponsors that had frozen/closed their defined benefit plans than for the overall average. For example, the change in the total employer contribution rate for all frozen plans was 1.64 percent of compensation versus 0.89 percent for the overall average. Employers that had closed their defined benefit plans to new employees had an even larger average improvement: 2.82 percent of compensation.

What options are available for them? Are the costs affordable?

For many retirees and near-retirees, annuities have been the investments of choice when the decision to park investment dollars not needed for current expenses has been made. No taxes to pay now--that is a great feature. With variable insurance products, they can reallocate funds among attractive funds without a tax consequence. That is attractive too.

Those are just two of several factors accounting for the annuity’s popularity.

Yet, except for the very wealthy, investment dollars during the retirement years, including dollars inside of annuities, do need to be viewed as a source of funds when expenses are incurred, and especially when expenses increase significantly over what had been normal levels. Market researchers confirm that one of the major concerns people have is how to cover expenses if a family member, such as a spouse, needs to receive LTC services.

The insurance industry has largely focused its attempts to address such LTC needs via the stand-alone LTC policy; this generally attempts to cover all or most of the LTC costs an individual will incur.

Let’s be clear on what that means. It means that, in event of chronic illness, the insured will not have to pay any out-of-pocket expenses, except possibly to cover costs for an initial care period of typically 90 days. Said another way, the insured would only modestly need to cover LTC expenses with funds from sources other than the LTC policy.

There is much to like to like about stand-alone LTC policies. Since they in effect prepay one’s LTC costs through coverage paid for by premiums, the insured doesn’t have to draw on personal assets should care for chronic illness be needed.

This benefit comes at a significant premium cost, however. What does the target market of retirees and near retirees say about this kind of policy? They have clearly spoken over recent years with their wallets, so to speak. That is, sales of individual stand-alone LTC policies have plummeted over the past several years, according to sales figures from research organizations such as LIMRA, Windsor, Conn.

Given that assets for many have fallen greatly in the past two years, one finds it hard to imagine that such products will satisfactorily address the LTC need in the future.

Now 2010 has arrived, however. With it comes a change to federal tax law that allows extremely favorable treatment of so-called combination annuities. These annuities combine a LTC rider (that is tax-qualified under prescribed standards of federal law) with an annuity.

Under most of these designs, the insured’s annuity account value is paid out first, to be followed by a stream of LTC payments guaranteed by the insurer. Just as with stand-alone LTC designs, payments are subject to a maximum monthly amount and payable for similar benefit periods.

Under the combination annuity, the insured covers a material percentage, varying from 20% to 33%, of the LTC benefit via the annuity values. Under the new tax law, however, such payments are exempt from income tax.

In other words, the combination annuity provides a mechanism for the accumulated earnings of an annuity to be paid out income tax free. That of course is not otherwise possible with an annuity.

A significant cost reduction results from this design, somewhere on the order of 70% compared to stand-alone products. For example, at age 65, for a comparable set of benefits provided by a typical insurance company, a stand-alone LTC policy might cost $2,500 a year while the combination annuity’s LTC coverage would probably cost $700 a year.

Furthermore, should the insured die without becoming chronically ill, the heirs will receive the valuable and sizable annuity contract’s proceeds. Contrast this to the standalone policy where, if the insured dies, no benefits are payable. The stand-alone LTC creates a use-it-or-lose-it situation. If there’s no claim, there’s no payment.

The combination annuity thus provides an eminently affordable tax-favored solution to covering costly later-in-life LTC costs. Consequently, it can provide major demand-driven sales to an insurer’s and advisor’s annuity portfolio.

-National Underwriter Company

But once that decision is made, your work is only half done. An equally important task is to monitor your selections and the portfolio as a whole to make sure your original plan is still on track.

What does monitoring consist of?

Most 401(k) plans are composed of mutual funds, where daily scrutiny isn't necessary or even desirable. Quarterly check-ups—a review every three months or so—is more in order.

First, you should review the performance of your individual fund holdings to determine how well the professional expertise you have hired is doing. This includes examining the performance of each fund against its peers (other funds with similar objectives) and an appropriate index. For example, if you are invested in large-company stocks, a good comparison index would be the Standard & Poor's 500.

If your funds' performance figures are good relative to the benchmarks, no problem.

However, if the figures are unsatisfactory, you need to take a closer look at the fund's manager to try to determine why the performance is off. If the unsatisfactory performance is likely to be short-term—for instance, perhaps the manager's investment style is temporarily out of favor—you should hold on to the fund and give the manager a chance to improve over time. However, if the underperformance is long-term in nature—for instance, you have been monitoring the fund for a year and the poor performance relative to similar funds is persistent—you may want to sell the fund and find a better replacement.

Second, you should take a look at the quarterly and annual reports that funds send to all shareholders. These periodic reports detail the fund holdings, and they often discuss fund performance as well as any changes that fund management may be making in light of their investment outlook. These reports should be examined to make sure that the fund continues to follow the approach that you hired it to do.

In addition to monitoring the individual components of your portfolio, you need to step back and take a look at your portfolio as a whole. Once a year, you should compare your current asset allocation with your desired asset allocation and rebalance if things are out of whack. Determining your current asset allocation is relatively easy—you simply total up your investments in any particular asset category and divide by your total investment portfolio.

If your allocation starts to stray significantly—by five percentage points or more—from your desired plan, you need to rebalance to bring your holdings back in line with your original plan.

Monitoring your portfolio of mutual funds requires only a little bit of time and a small amount of effort to ensure that your plan is on track. Ignore your portfolio—and it may just go away.

© 2010 AAII Journal

• Traditional plan enrollees were more likely than CDHP and HDHP enrollees to be extremely or very satisfied with the overall health plan in all years of the survey.

• In 2009, 66 percent of traditional plan enrollees were extremely or very satisfied with the plan, compared with 52 percent among CDHP enrollees and 40 percent among HDHP enrollees.

• The overall satisfaction levels among CHDP enrollees increased from 37 percent to 47 percent between 2006 and 2007 and were 52 percent in 2009, while the overall satisfaction rates for traditional enrollees were unchanged.

• Differences in out-of-pocket costs may explain a significant portion of the difference in overall satisfaction rates between traditional plan, HDHP, and CDHP enrollees.

Traditional = Health plan with no deductible or less than $1,000 deductible for an individual and less than $2,000 for a family.

HDHP = Health plan with deductible of $1,000 or more for an individual and $2,000 or more for a family, and no health reimbursement account (HRA) or health savings account ( HSA).

CDHP = Consumer-driven health plan with deductible of $1,000 or more for an individual and $2,000 or more for a family, with a HRA or HSA.

More details of the 2005–2007 EBRI/Commonwealth Fund Consumerism in Health Care Surveys, and the 2008–2009 EBRI/MGA Consumer Engagement in Health Care Surveys, including more information about consumer satisfaction levels, appear in the December 2009 EBRI Issue Brief, available at www.ebri.org