Defined contribution (DC) programs, such as 401(k) plans, are increasingly the main retirement savings vehicles for American workers. Given what’s at stake — the retirement security of millions of Americans — coupled with reports of widespread retirement unreadiness, the design and operation of these plans warrant thorough evaluation.

This Towers Watson study1 analyzes Fortune 100 companies’ accounting reports attached to Form 5500 filings for their largest DC plan covering salaried employees for the 2012 plan year (the latest available).2 The analysis looks at eligibility and vesting rules, employee and employer contributions, plan investments and plan expenses, as well as seven-year trends in 401(k) automatic enrollment and contribution escalation, employer stock as a percentage of plan assets and investment returns.

As the data are publicly available, the sample and data are well defined and consistent, with no apparent sample bias.

Analysis highlights

  • Of Fortune 100 employers that offered only DC plans to new hires in 2012, 56% offered both matching and non-matching contributions, 41% offered matching contributions only and 3% provided non-matching contributions only. Of Fortune 100 companies with active defined benefit (DB) plans, 78% offered only matching contributions, 19% offered both matching and non-matching contributions, and 3% provided neither.
  • In 2012, employer contributions from companies that offered only DC plans to new hires averaged 6.2% of pay, while contributions from sponsors of both an active DB plan and a DC plan averaged 4.9% of pay. After freezing or closing their DB plan, many employers added a non-matching contribution to the DC plan design and contributed more to the plan (although the shift generally represents a net loss to workers).
  • The vast majority of companies allowed plan participants to invest employer contributions as they pleased. A very small minority provided employer contributions in company stock.
  • Investment returns on DC plan assets averaged 12% during 2012.
  • Forty percent of these Fortune 100 companies had automatic enrollment in 2012, and 50% of them automatically increase employee contributions over time.

Aggregate cash flow statement for 2012 Fortune 100

Among the 2012 Fortune 100, corporate net revenue ranged from $30.4 billion to $469 billion. At year-end 2012, aggregate DC plan assets for these companies totaled approximately $655 billion (Figure 1).

Figure 1. Aggregate cash flow statement of DC plans of 2012 Fortune 100 companies
Towers Watson Insider - Aggregate cash flow statement of DC plans of 2012 Fortune 100 companies

Source: Towers Watson analysis of 2012 Form 5500 filings for Fortune 100 companies

Aggregate plan assets grew by 13% in 2012 — up considerably from 6% in 2011 — with most of the growth attributable to investment income. Employers in this analysis contributed roughly $15 billion to their plans for 2012, and employees contributed about $28 billion.

Eligibility and vesting requirements for DC plan participation

Of these Fortune 100 companies, only 24% imposed an age requirement — either 18 or 21 — and 29% had a service requirement for DC plan participation in 2012 (Figures 2 and 3).

Figure 2. Age requirements for DC plan participation at Fortune 100 companies, 2012
Towers Watson Insider - Figure 2. Age requirements for DC plan participation at Fortune 100 companies, 2012

Source: Towers Watson analysis of 2012 Form 5500 filings for Fortune 100 companies

The most common service requirements were three months (10.2%) and one month (8.2%).

Figure 3. Service requirements for DC plan participation at Fortune 100 companies (employee contributions only), 2012
Towers Watson Insider - Figure 3. Service requirements for DC plan participation at Fortune 100 companies (employee contributions only), 2012

Source: Towers Watson analysis of 2012 Form 5500 filings for Fortune 100 companies

Figure 4 shows combined age and service requirements for DC plan participation in 2012.

Figure 4. Combination of age and service requirements for DC plan participation at Fortune 100 companies (employee contributions only), 2012
Towers Watson Insider - Figure 4. Combination of age and service requirements for DC plan participation at Fortune 100 companies (employee contributions only), 2012

Source: Towers Watson analysis of 2012 Form 5500 filings for Fortune 100 companies

Service requirements for receiving employer contributions

While 58% of companies contributed to workers’ 401(k) plans regardless of length of service, 23% required employees to work for a year before receiving contributions (Figure 5).

Figure 5. Service requirements for employer contributions at Fortune 100 companies, 2012
Towers Watson Insider - Figure 5. Service requirements for employer contributions at Fortune 100 companies, 2012

Source: Towers Watson analysis of 2012 Form 5500 filings for Fortune 100 companies

In 81% of companies, employees became eligible for plan participation and employer contributions at the same time. In the remaining 19%, employees had to work for some period — most often one year — before receiving employer contributions.

Employer matching contributions often vest immediately

Employer matches vested immediately in 55% of DC plans in 2012. Slightly less than one-third (30.5%) of plans used cliff vesting, and 15% used a graded vesting schedule that began during the second year of service and continued for another one to four years, typically ending with full vesting after the fifth year.

With cliff vesting, employees must meet a service requirement (usually three years) before the company contribution is fully theirs. With graded vesting, the portability percentage of employer contributions depends on how long the employee worked for the company. Figure 6 shows 2012 vesting requirements.

Figure 6. Vesting requirements for matching contributions at Fortune 100 companies, 2012
Towers Watson Insider - Figure 6. Vesting requirements for matching contributions at Fortune 100 companies, 2012

Source: Towers Watson analysis of 2012 Form 5500 filings for Fortune 100 companies

Employer non-matching contributions usually take longer to vest

There is usually some waiting period before employees fully vest in non-matching employer contributions (Figure 7). Of employers in our analysis offering non-matching contributions, 60% used cliff vesting (typically a three-year schedule), 26% vested the contributions immediately and 14% applied a graded vesting schedule.

Figure 7. Vesting requirements for non-matching contributions at Fortune 100 companies, 2012
Towers Watson Insider - Figure 7. Vesting requirements for non-matching contributions at Fortune 100 companies, 2012

Source: Towers Watson analysis of 2012 Form 5500 filings for Fortune 100 companies

Contributions and match rates

In 2012, 53% of Fortune 100 companies made only matching contributions to DC accounts, and 44% made both matching and non-matching contributions (Figure 8). Two employers made only non-matching contributions, and one employer made no contributions to employees’ 401(k) accounts.

Figure 8. Types of employer contributions for newly hired employees at Fortune 100 companies, 2012
Towers Watson Insider - Figure 8. Types of employer contributions for newly hired employees at Fortune 100 companies, 201

Source: Towers Watson analysis of 2012 Form 5500 filings for Fortune 100 companies

Employers with active DB plans are less likely to offer non-matching contributions

Sixty-eight percent of companies in this analysis offered only a DC plan to newly hired salaried employees during 2012. Of these, 56% offered both matching and non-matching contributions, 41% offered matching contributions only and 3% made only non-matching contributions. Where the company also still sponsored an active DB plan (i.e., a plan open to newly hired employees), only 19% offered both matching and non-matching contributions, 78% offered matching contributions only and 3% provided neither.

Several of these Fortune 100 companies introduced the non-matching contribution to the DC plan shortly after freezing or closing the DB plan, presumably to mitigate, at least in part, the DB pension loss.

In Figure 9, matching contributions are the maximum employer match. In 2012, the average matching contribution was approximately 4.5% of pay, while the median was roughly 4.0% of pay.

Seventy-three percent of companies that offered a match used a single-tier match formula, with the most prevalent formula being dollar-to-dollar up to 6% of pay. Twenty-seven percent offered a multi-tier match, typically dollar-for-dollar up to 3% of pay and 50 cents on the dollar for the next 2% of pay.

Figure 9. Distribution of maximum employer matching contributions at Fortune 100 companies, 2012
Towers Watson Insider - Figure 9. Distribution of maximum employer matching contributions at Fortune 100 companies, 2012

Source: Towers Watson analysis of 2012 Form 5500 filings for Fortune 100 companies

Among Fortune 100 companies providing non-matching contributions in 2012, contribution percentages were fixed in slightly more than half of them, with the average being 2.9% of pay and the median 2.0%. In the remaining companies, 2012 non-matching contributions were at the employer’s discretion, sometimes linked to corporate profits, and ranged from 0% to 15% of pay. Eighteen percent of plans whose non-matching contributions were discretionary did not make them in 2012.

Employers with only DC plans contribute more as a percentage of pay

In companies offering only a DC plan to new hires in 2012, the average matching contribution was 4.4% of pay, while the median matching contribution was 4.1% of pay. Of employers offering a non-matching contribution, the percentage was fixed in 55% of plans and discretionary in 45%. For 2012, average and median fixed non-matching contributions were 3.1% and 2.5%, respectively. Total contributions (matching plus non-matching) by DC-only companies averaged 6.2% of pay, while the median was 6.0%.3

Companies that sponsor both an active DB plan and a DC plan contributed less to the DC plan. In 2012, DB plan sponsors contributed an average (matching plus non-matching) 4.9% of pay to the DC plan (median 4.5%); the average matching contribution was 4.5% of pay (median 4.0%). 

But even though DC-only companies might provide larger employer contributions than companies that sponsor both DC and DB plans, the larger contributions do not make up for the lack of an active DB plan.

Investment of matching contributions are mostly participant directed

Employer contributions to DC accounts may be invested at the participant’s direction, in company stock or a combination of the two. As shown in Figure 10, roughly 84% of plans allowed participants to choose their investments.4 Twelve percent of the remaining sponsors made contributions in the form of employer stock, and 4% split their contributions between employer stock and participant direction.

Figure 10. How DC matching contributions were invested, 2012

Towers Watson Insider - Figure 10. How DC matching contributions were invested, 201

Source: Towers Watson analysis of 2012 Form 5500 filings for Fortune 100 companies

In all but one company with matches in company stock, employees could diversify out of the company stock immediately.

Plan investments

Most companies offer 11 to 15 investment options

In 2012, these DC plans offered four to 90 investment options, with a median of 16 funds (Figure 11).

Figure 11. Number of investment funds offered in DC plans of Fortune 100 companies, 2012*

Towers Watson Insider - Figure 11. Number of investment funds offered in DC plans of Fortune 100 companies, 201

*The analysis considers target date funds and brokerage windows as one investment option each. Eighty-five percent of companies with detailed investment information at the time of the analysis offered target date funds.

Source: Towers Watson analysis of 2012 Form 5500 filings for Fortune 100 companies

Prevalence of employer stock in DC plans declines

Between 2011 and 2012, the percentage of DC plan assets invested in employer stock declined slightly (Figure 12), in keeping with continuing trends, although 77 companies allocated some plan assets to employer stock.5 Averaged over all companies in the analysis, 15.2% of plan assets were allocated to company stock. Of companies whose plans held company stock, the holdings averaged 19.3% of plan assets, and 88% offered company stock as an investment option for new contributions.6

Figure 12. Average allocations to employer stock in Fortune 100 DC plans, 2011 versus 2012
Towers Watson Insider - Figure 12. Average allocations to employer stock in Fortune 100 DC plans, 2011 versus 2012

Source: Towers Watson analysis of 2012 Form 5500 filings for Fortune 100 companies

In DC plans with company stock at year-end 2012, the investments made up less than 10% of plan assets in 36% of plans and between 10% and 19.9% in 24% of plans (Figure 13). Roughly 83% of these plans held less than 30% of their assets in company stock. There was only one plan where company stock made up more than 70% of plan assets.

Figure 13. Allocations to employer stock in companies holding such assets, 2011 versus 2012*
Towers Watson Insider - Figure 13. Allocations to employer stock in companies holding such assets, 2011 versus 2012

*These results exclude two companies that were created midyear and one plan that acquired company stock in 2012 through a plan merger.

Source: Towers Watson analysis of 2012 Form 5500 filings for Fortune 100 companies

Of sponsors with DC assets invested in company stock, slightly less than half (49%) have an employee stock ownership plan component in their DC plan.

Investment returns improve in 2012

For calendar-year DC plans in this analysis with available data, investment returns averaged 12.0% during 2012, and the median return was 11.9% (Figure 14). Returns ranged from 10% to 14.9% in almost 60% of these plans.

Figure 14. Distribution of Fortune 100 investment returns in DC plans, 2012

Towers Watson Insider - Figure 14. Distribution of Fortune 100 investment returns in DC plans, 2012

Source: Towers Watson analysis of 2012 Form 5500 filings for Fortune 100 companies

Automatic enrollment and auto-increases

Forty percent of Fortune 100 companies automatically enrolled employees in their DC plans in 2012.7 Of these, 50% also automatically increase employees’ contribution percentages by 1% each year.

In 2012, the initial default contribution percentage ranged from 2% to 10% and was typically 3% (Figure 15). Contributions can eventually reach 20% of an employee’s salary through auto-escalation provisions.

Figure 15. Default employee contribution rates at Fortune 100 companies with automatic enrollment, 2012
Towers Watson Insider - Figure 15. Default employee contribution rates at Fortune 100 companies with automatic enrollment, 2012

Source: Towers Watson analysis of 2012 Form 5500 filings for Fortune 100 companies

Plan expenses

In the majority of companies (52%), plan expenses were shared by employers and employees. Only 19% of employers paid all plan expenses.

Seven-year trends

Towers Watson has been conducting this analysis of 401(k) plans for seven years, enough time to demonstrate trends in auto-enrollment, employer stock, investment returns, and employer contributions following DB plan closures and freezes. The following analysis is based on data for the 51 employers that have been in all seven studies. 

Automatic 401(k) enrollment becoming increasingly popular

Among the 51 Fortune 100 companies in the seven-year group, automatic enrollment jumped from 14% in 2006 to 39% in 2012 (Figure 16), with the biggest bounce between 2007 and 2009.

Figure 16. Automatic enrollment at subset of Fortune 100 companies, 2006 – 2012
Towers Watson Insider - Figure 16. Automatic enrollment at subset of Fortune 100 companies, 2006 – 2012

Source: Towers Watson analysis of 2006 – 2012 Form 5500 filings for subset of  Fortune 100 companies

Employer stock becoming less prevalent

Employer stock as a percentage of total DC plan assets has fallen every year over the 2006 – 2012 period. Figure 17 shows the steady shift away from employer stock.

Figure 17. DC plan assets held in employer stock at subset of Fortune 100 companies, 2006 – 2012
Towers Watson Media

Source: Towers Watson analysis of 2006 – 2012 Form 5500 filings for subset of Fortune 100 companies

Investment returns have fluctuated widely

Figure 18 shows returns on DC plan assets over the last seven years, which have averaged 5.8%, albeit with some wide swings.

Figure 18. Investment returns in subset of Fortune 100 DC plans, 2006 – 2012
Towers Watson Media

Source: Towers Watson analysis of 2006 – 2012 Form 5500 filings for subset of Fortune 100 companies

After freezing/closing DB plans, companies contribute more to DC plans

Of the 51 companies in the seven-year study group, 21 froze or closed their DB plans between 2007 and year-end 2012.8 To mitigate the loss, many of these employers introduced a non-matching contribution to the DC plan design. In 2006, 71% of these plans provided only matching contributions, 24% provided both matching and non-matching contributions, and 5% made no contributions. In 2012, 86% made both matching and non-matching contributions, and 14% provided matching contributions only.

Many of these employers also increased their total DC contributions as a percentage of pay. In 2006, total employer contributions to DC plans averaged 4.4% of pay. By 2012 — after many of these employers closed or froze their DB plans — total employer contributions averaged 6.7%. These higher contributions, however, are not likely to replace the overall value of the former pension formula.

Conclusion

DC plans have become increasingly central to American workers’ retirement future. All the Fortune 100 employers offer 401(k) plans, and the vast majority offer them to all employees with one month or less of service. Moreover, almost all these employers offer matching contributions, and many make non-matching contributions as well. 

To be able to afford a comfortable retirement in the future, workers need to make the most of their DC plans today. To that end, many employers are doing more than making these benefits available: They’re adopting plan designs that encourage employees to participate, to save more and to make educated investment decisions. Roughly two in five of these Fortune 100 companies automatically enroll employees in their 401(k) plan, and many also automatically increase employees’ contribution percentages over time.


1. This is the seventh such study. For last year’s analysis, see “Defined Contribution Plans of Fortune 100 Companies for the 2011 Plan Year,” Towers Watson Insider, January 2013.

2. Ninety-five percent of these Fortune 100 employers use a calendar plan year. Investment returns are reported only for calendar-year companies, but other results reflect all companies in the analysis.

3. Of filers that provided a discretionary non-match over the last year and reported the contribution amount as a range, this study used the maximum value.

4. Of companies that allow participants to choose their investments, 61% offer company stock as an investment choice.

5. Eight of the 21 Fortune 100 companies that do not maintain employer stock in their plan assets do not offer publicly traded stock.

6. A minority of plans that offer company stock as an investment option restrict how much employees can hold in their plans, and the limit is typically 20% of an employee’s assets.

7. During 2012, one plan sponsor removed the automatic enrollment feature from its DC plan.

8. At year-end 2006, 35 of the 51 companies sponsored active DB plans.