Several surveys released this past quarter provide valuable information about the concerns of plan sponsors and participants, and industry professionals would be well advised to pay attention to what they are saying.  In particular, recent research provides new information on cost pressures and fees, the pros and cons of outsourcing, automation of plan features, and other factors that affect plan satisfaction and participation.
 
Let’s examine the latest investment-based benefits findings and their implications for the health and direction of the retirement industry.
 
Cost Pressures and Fees
 
Plan sponsors are focusing much more attention on retirement plan costs and fee structures.  When Hewitt recently asked financial executives about the most pressing retirement plan challenges, 65% of 200 respondents reported that their top priority for the next two years will be to identify ways to control the growth in retirement costs. In addition, almost half (49%) of the financial executives will focus on reducing pension cost volatility.[1]
 
A Hewitt survey of 450 large companies found that lowering the amount of 401(k) investment management fees that employees pay will be a priority for almost half (49%) of financial executives in the next two years. Fees are finally beginning to get serious attention from plan sponsors.  More than half of the financial executives (52%) in the Hewitt study have tried to calculate the total cost of maintaining their retirement plan, up from 34% in 2003.  Fees were listed second or third in importance for investment selection by 75% of companies, after investment performance.[2]
 
A recent Deloitte survey of plan sponsors provides mixed information on the issue of fee transparency.  While 88% reported they have a clear understanding of the total plan/participant fees being charged, only 52% clearly understand what it costs the provider to administer the plan.  Further, only 57% have a solid understanding of the revenue sharing arrangements between the recordkeeper and the mutual funds included in the plan.[3]  We are likely to hear much more about fees and fee transparency moving forward.
 
Outsourcing
 
The issue of plan cost quickly gets us to outsourcing, which has become a primary strategy for cost control.  Among a sample of CEOs from 360 of the fastest growing companies, PricewaterhouseCoopers found 83% are outsourcing human resources (HR) functions and expect to continue to do so over the next five years. Defined contribution plan administration topped the list as the most frequently outsourced HR function, with 71% of respondents reporting outsourcing, followed by payroll processing at 64%.
 
While the reasons listed for outsourcing were numerous, 71% of the CEOs mentioned the need to control and reduce operating costs, and 71% also listed the desire to eliminate the cost of acquiring, updating, and maintaining systems in-house.  However, compliance with complex federal and state regulations was the most cited reason for outsourcing and was listed by 82% of the CEOs surveyed.[4]
 
The recent data on the success of outsourcing are somewhat contradictory. PricewaterhouseCoopers reports a high satisfaction rate with both quality and savings from human resources outsourcing. Overall, 81% of respondents from fast-growing companies said their experience with outsourcing has met or exceeded expectations, while only 15% reported a "mixed" experience. Eighty-seven percent of the CEOs are satisfied with cost-savings, which average 17%, and 94% are satisfied with quality levels.[5]
 
An Accenture study of 200 executives also found that 43% who have outsourced a finance function had improved their governance and compliance systems by doing so.  An additional 44% reported that outsourcing had not lowered the quality of governance and compliance at their organizations.  Further, 73% of those who had already outsourced a finance function found that outsourcing has led to better definition and documentation of business processes.  More than half (56%) reported that outsourcing providers are better able to handle frequent changes to tax codes and accounting rules, while also providing greater transparency of information.[6]
 
However, Deloitte’s recent outsourcing study urged caution in managing outsourcing expectations.  Its survey of large organizations found a more complicated situation in which some cost savings failed to materialize and outsourcing created increasing complexity.  Sixty-four percent of organizations they surveyed had brought some outsourced services back in house, and 83% had renegotiated outsourcing contracts because of changes in prices, and to the business, technology or regulatory environment.  Half of the respondents reported that hidden costs constitute the biggest problem with outsourcing.[7]
 
Cost pressures and an increasingly complex regulatory environment suggest that the outsourcing trend will continue over the next few years.  But the Deloitte study indicates that the outsourcing path may not always be smooth, and that we still have a great deal to learn about when outsourcing is most appropriate.
 
Automation
 
According to Hewitt’s survey of financial executives, only 30% are confident their workers will retire with sufficient retirement assets.[8]  Increased concern about savings outcomes are spurring greater automation in plan features.
 
The Employee Benefit Research Institute found in its Retirement Confidence Survey that automatic features would make non-participants more likely to contribute to their retirement plan. Sixty-six percent reported that they would be more like to participate if they had an investment option that automatically becomes more conservative as their retirement date approaches, while 55% indicated that a feature that automatically raises their contributions by a fixed amount or percentage when they receive a pay raise would increase the likelihood of their participation. Two-thirds (66%) of non-participants reported they would be very or somewhat likely to remain in their employer’s plan if they were automatically enrolled.[9]
 
Employers are beginning to embrace automation as a way to increase participation and savings rates.  The Deloitte survey of plan sponsors found that the number of plan sponsors offering automatic fund rebalancing increased to 35% in 2004, up 11% from 2003. Fifteen percent already offer automatic enrollment, and approximately 13% of respondents are thinking about offering this feature.[10]
 
Hewitt's survey of large companies also found increases in automatic features offered by plan sponsors. Nineteen percent automatically enrolled employees in 401(k) plans, up from 14% in 2003.  More than one quarter (26%) offer automatic rebalancing, which has more than doubled from 11% in 2003.  The number of companies that offer automatic increases in contributions over time rose to almost 20% from 3% in 2003.  Further, 63% offered pre-mixed/lifestyle funds, an increase from 55% in 2003.[11] 
 
Plan Participation and Satisfaction
 
While the effectiveness of retirement plans can be measured in a number of different ways, participation levels and employee satisfaction rank high in importance for plan sponsors.

In the recent Hewitt study, 43% of large companies reported that the plan participation rate is the best measure of plan effectiveness, while an additional 20% believe the most important measure is whether the plan is valued and appreciated by employees.[12] 
 
Deloitte found in its survey of plan sponsors that 78% consider a 401(k) plan to be an effective recruiting tool, while 70% believe it is a good retention tool.[13] However, the conviction that retirement plans are a powerful instrument for recruitment may be misplaced.  Watson Wyatt’s Retirement Attitude of approximately 8,000 employees found that the desirability of a company’s retirement plans was much more important in retaining workers than in attracting them to become employees.  Approximately twice as many defined contribution participants reported that their plan strongly affects their decision to remain with their current employer than say the plan convinced them to sign up with the employer (40% versus 18%).[14]
 
The good news from Watson Wyatt for 401(k) providers is that approximately two-thirds (68%) of all defined contribution participants surveyed are satisfied with their 401(k) plan, approximately 10 percentage points higher than satisfaction levels with defined benefit plans.[15]
 
But if we take seriously the need to increase participation and improve employee satisfaction, the question remains: What do employees want in their retirement plan beyond automation?  The Employee Benefit Research Institute found widespread support in its Retirement Confidence Survey for a 5% matching rate.  Seventy-two percent of respondents who did not contribute to their employer-sponsored retirement plan stated that they would be much more or somewhat more likely to do so with an employer contribution of up to 5% of their salary.[16]
 
The Watson Wyatt survey of defined contribution plan participants also found that overall plan satisfaction was linked to the match rate for a sizable number of respondents (53%).  However, a number of other factors ranked higher in terms of employee satisfaction:
 
• Amount can contribute (80%)
• Information about balances (74%)
• Investment options (69%)
 
Investment education programs may play an important role in improving participation, but existing programs are not getting high marks from participants; education ranked last on the list of plan features, with 41% of participants expressing satisfaction with their employer’s education program.[17]
 
Finally, information from 401(k) plans with access to advice through managed accounts services
indicates that participants who take advantage of these services save more of their eligible
income than other participants. Schwab Corporate Services reports that the participants enrolled
in advice with managed account services save more than 10% of their eligible income in their
401(k) plans, compared to the national average of 7%. Participants have continued to increase
their savings rates since the inception of the program in 2004, with an average savings increase
of 8% in the first quarter of 2005.[18]
 
Conclusion
 
The retirement industry faces a number of regulatory, financial and strategic challenges as we approach the cusp of baby boomer retirement.  As we move increasingly away from defined benefit plans to defined contribution and hybrid models, industry professionals need to adapt to changing circumstances and respond to data about what works and what doesn’t.  Cost containment and management of regulatory complexity may play an important role in the decisions of plan sponsors, but the ultimate goal is a successful retirement outcome for employees.