As the following table shows nearly all employers have gone beyond financial education and now help participants with the allocation decision. In 2009 nearly two-thirds offered a target date fund, 60 percent made investment advice available to participants and more than 30 percent offered participants a managed account option. It is remarkable that almost 19 percent offer all three. The availability of all three types of support was higher in 2009 than in 2008.

401(k) participants increasingly benefit from plan sponsor commitment to their employees’ retirement savings success.

One of my strongest 401(k) selling points when I was a plan administrator in 1982 was that employee contributions were not subject to FICA. It also helped that workers had more disposal income from which to save as FICA taxes were lower then. Then 1983 happened. Riding to the rescue of Social Security, political leaders raised FICA tax rates and imposed FICA taxation on participant 401(k) contributions. With this decision policymakers diminished the attractiveness of 401(k) and reduced the pool of disposal income available for 401(k) savings. In essence baby boomers were told in 1983 that in exchange for giving the government trillions of dollars more than was necessary to meet its ongoing Social Security obligations baby boomers would be sure to get the system’s promised benefits when they retired.

In theory this seemed a good idea. Unfortunately, it’s not working out in practice. The government loaned the FICA surpluses to itself by investing in special US Government bonds so it cannot use the surpluses to pay benefits without imposing new taxes to redeem the bonds. In short Social Security benefits to baby boomers cannot be paid at current levels without tax increases, and as some suggest, reducing baby boomer Social Security benefits—exactly the situation the 1983 solution was imposed to avoid.

Politically, the Social Security promise is a contract that baby boomers will not allow to be broken. In the coming battle for resources to pay their Social Security benefits, baby boomers will be lead by retirees who have been political activists on both sides of the political spectrum since the 60’s and they have the money and numbers to win with pure muscle alone. Some will call them selfish. They will say they’re owed.

Fortunately, America's workers have accumulated nearly $9 trillion dollars in employer defined contribution plans and rollover funded IRAs, and this total will grow for several more years. Nearly all of this money is tax deferred. By saving in tax deferred plans, workers not only sacrifice current consumption to enrich their retirement futures they force the government to set aside immediate tax consumption as well. 401(k) is a dam storing future federal revenue.

Literally trillions of dollars of income tax will be paid from this pool as retirees consume their tax deferred savings. This 401(k) generated tax resource will help the government meet its Social Security promise to baby boomers and perhaps reduce the future tax burden on younger workers. 401(k) is about more than just individual retirement savings.

On September 27, with passage of the Small Business Jobs Act, plan sponsors were permitted to allow some participants to convert their plan accumulations from tax-deferred to Roth status within their DC plans.

PSCA and other organizations worked for this change because of a concern that plan participants, particularly participants over 59 ½ with large account balances, would withdraw their plan assets and roll them over into an IRA to take advantage of Roth conversion rules effective in 2010. That change effective January 1, 2010, permits traditional IRAs to be converted to Roth IRAs without regard to the income limits that previously restricted such conversions. Further, there is a valuable tax benefit for conversions to Roth made in 2010. The amounts converted can be divided equally with one-half taxable in 2011 and the remainder taxable in 2012. For example, if someone converts $100,000 of tax-deferred savings to Roth in 2010 he or she would pay regular tax on $50,000 in 2011 and regular tax on the other $50,000 in 2012, spreading out the tax cost of the conversion.

The provision is not all that we hoped for, its complex and its late. We wanted legislation passed early in the year to permit participants to convert any funds held in a plan just by changing their tax related designation in the plan. Under the new law DC plan conversions are limited to amounts available for in-service distribution and not subject to the hardship distribution regime. Read literally, the law requires that assets first be distributed from the plan and then rolled back into the plan’s designated Roth account. Finally, the conversion is permitted only in plans that offer a designated Roth account for salary deferrals. A “pure” profit sharing plan without a 401(k) arrangement is not able to offer Roth conversions.

The provision created a concern that some employees would take advantage of the distribution provisions put in place to permit the Roth conversion by taking a cash out distribution of their plan accumulations, increasing leakage of retirement plan assets. A summary of the provision by the Joint Committee on Taxation (JCT) confirms that a distribution must be allowed under the plan to make the conversion. The JCT then adds several twists. It provides, “However, if an employer decides to expand its distribution options beyond those currently allowed under its plan, such as by adding in-service distributions or distributions prior to normal retirement age, in order to allow employees to make the rollover contributions permitted under this provision, the plan may condition eligibility for such a new distribution option on an employee’s election to have the distribution directly rolled over to the designated Roth program within that plan.” The JCT description also states that the rollover conversion can be achieved “operationally” by transferring funds to the designated Roth account without actually processing a rollover. Finally, the JCT notes that it “is intended” that the IRS will provide for a remedial amendment period to facilitate implementing any needed changes before the plan is formally amended.

Another provision in the legislation permits Roth accounts in governmental section 457 plans. Previously, only 401(k) and 403(b) plans were permitted to include this feature. This provision is effective for taxable years beginning after 12/31/10—too late to take advantage of the special features for 2010 conversions.

The ability to make 2010 conversions to Roth in DC plans faces significant operational and systems challenges compounded by the late starting date. If you want your participants to be able to take advantage of the special tax benefits for converting assets in 2010 with an in-plan Roth conversion you better get hopping.

PSCA has released its 53rd Annual Survey of Profit Sharing and 401(k) Plans which reports 2009 data. This latest survey shows that as markets fluctuated and the 401(k) system came under pressure, plan sponsors responded proactively with an increased concentration on plan investments. Plan investments were more frequently monitored with 64.4 percent of plan sponsors reviewing investments quarterly. The majority of plans (85.8 percent) now have an investment policy statement – up from 54.3 percent ten years ago. Twenty percent of plans made changes to their investment lineup.

In addition to more closely monitoring investments, plan sponsors are working to help participants make good investment choices. 31.4 percent of plans offer a professionally managed alternative - up from 26.2 percent in 2008. 60.1 percent of plans offer investment advice to participants (a 20 percent increase from 2008), with 21.6 percent of participants using it when offered. 62.3 percent of plans now offer a target-date fund in the plan – a 40 percent increase over the last two years.

Plan sponsors stepped up to the plate to help participants through this difficult economic time and to ensure that their plan meets the needs their employees. This is one of the unique attributes of the 401(k) system – participants have an informed advocate working on their behalf in their employer.

Below are some additional highlights from the survey:

Asset Allocation
The average plan has approximately 60 percent of assets invested in equities. Assets are most frequently invested in actively managed domestic equity funds (28.9 percent of assets), target retirement date funds (10.3 percent), and stable value funds (9.7 percent).

Automatic Enrollment
38.4 percent of plans have an automatic enrollment feature. Automatic enrollment is most common in large plans – 53.7 percent of plans with 5,000 or more participants report having automatic enrollment. The most common default deferral is 3 percent of pay, present in 58.0 percent of plans. 53.1 percent of plans automatically increase the default deferral percentage over time. The most common default investment option is a target retirement date fund (57.0 percent of plans).

Company Contributions
Profit sharing plans tend to offer the most generous contributions, averaging 8.1 percent of pay. The average company contribution in 401(k) plans is 2.1 percent of pay and in combination plans it is 4.7 percent of pay.

Company Stock
13.8 percent of plans allow company stock as an investment option for participant and company contributions. 3.1 percent of plans allow company stock as an investment option for company contributions only. 26.4 percent of plans limit the amount of plan assets that can be invested in company stock. 35.8 percent of plans make matching company contributions in company stock. An average of 18.1 percent of total plan assets is invested in company stock.

Employee Eligibility and Participation
89.0 percent of U.S. employees at respondent companies are eligible to participate in an employer-sponsored defined contribution plan. On average, 87.3 percent of eligible employees have a balance in the plan. Participants who retired in 2009 participated in the plan for an average of 15.3 years. 22.4 percent of plan participants are no longer actively employed by the plan-sponsoring company.

Hardship Distributions
Hardship withdrawals are permitted in 85.6 percent of plans. The most common reasons for permitting hardship withdrawals include purchase of a primary residence or to prevent eviction or foreclosure (97.9 percent), medical expenses (97.2 percent), and post-secondary education expenses (93.5 percent). 1.9 percent of participants took a hardship withdrawal in 2009, when permitted.

Investment Options
The number of funds offered to plan participants appears to be leveling out after many years of steady increase. Plans offer an average of 18 funds for both participant contributions and for company contributions. The funds most commonly offered are actively managed domestic equity funds (87.3 percent of plans), actively managed international equity funds (86.0 percent of plans), and indexed domestic equity funds (82.4 percent of plans).

Investment Advisors
66.7 percent of companies retain an independent investment advisor to assist with fiduciary responsibility. For 54.2 percent of those companies, the fee is a fixed amount and for 36.1 percent the fee is percentage of plan assets.

Investment Advice
Advice is offered in 60.1 percent of plans, up from 51.8 in 2008. 21.6 percent of participants used advice when it was offered. Participant usage tends to be greatest in small plans.

Loans Availability
Loans are permitted in 90.2 percent of 401(k), 86.6 percent of combination, and 35.5 percent of profit sharing plans. 51.9 percent of plans with loans permit only one loan at a time. In plans with a loan feature, an average of 23.1 percent of participants have loans outstanding, with an average loan amount of $8,760. Loans account for 2.5 percent of total plan assets among plans with loans.

Roth 401(k)
Among plans that permit participant contributions, 41.3 percent allow participants to make Roth after-tax contributions (up from 36.7 percent in 2008). 13.0 percent of participants made Roth contributions when offered the opportunity.

Safe Harbor Plan Design
34.2 percent of plans have a Safe Harbor plan design. 23.4 percent of plans use a safe harbor match and 10.7 percent use a Safe Harbor non-elective contribution.

Target-Date Funds
The availability and use of target-date funds continues to grow. 62.3 percent of plans now offer them. The average allocation of plan assets has more than doubled since 2007 to 10.3 percent.

Vesting Schedules
39.5 percent of plans provide immediate vesting for matching contributions, while 23.0 percent provide immediate vesting for profit sharing contributions. Among plans that do not have immediate vesting, graduated vesting is the most common arrangement for all plan types.

Over the last 10 years, a period some suggest is a lost decade for investors, the employer-sponsored defined contribution system has helped American workers set aside an enormous amount for their retirement. In 2000 there was approximately $2.4 trillion dollars in private employer defined contribution plans. By the end of 2009 that amount had grown to approximately $3.4 trillion. But that's not the whole story. During this period over $2 trillion was distributed from these plans, most of which was rolled over into IRAs. In 2000 the total assets in all employer-sponsored defined contribution plans and individual IRAs was approximately $5.6 trillion. At the end of what some are calling a lost decade these programs held $8.3 trillion. This is enough to buy 41,500,000 homes worth $200,000.

We hear many negative comments about 401(k) and other employer sponsored plans, however, the truth is that they are working extraordinary well – in helping millions of Americans enjoy retirement benefits today – and future generations who are investing in their company’s plans. (For more information about the success of the 401(k) investors, read the article The “Lost” Decade 2000-2009 written by Douglas Prince and Deanna Harmon in the latest issue of Defined Contribution INSIGHTS.)

On National 401(k) Day we should all tip our hats to a proven retirement program that has stood the test of time and continues to be one of the most effective ways for individuals to save for retirement.

Also as part of this year’s 401(k) Day we are releasing a free educational campaign, 401(k) Day... Taking You There, which was created to help plan sponsors reinforce with plan participants how important and effective the 401(k) system is in helping them save for retirement. PSCA 401(k) Day materials can be used alone or in conjunction with materials and campaigns already in place. All of the tools can be accessed on PSCA's special 401(k) Day website, www.401kday.org.