Defined contribution (DC) plans have become the primary retirement savings vehicles for many workers.1 Given what’s at stake — the retirement security of millions of Americans — the design and operation of these plans warrant thorough evaluation. This Towers Watson analysis2 is primarily based on Fortune 100 companies’ accounting reports attached to Forms 5500 (annual reports) submitted to the Department of Labor for their largest DC plan covering salaried employees for the 2013 plan year (the latest available).3 The analysis looks at eligibility and vesting rules, employee and employer contributions, plan investments and plan expenses.

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 2013, 49% provided both matching and non-matching contributions, 45% offered matching contributions only, 3% provided non-matching contributions only and 3% made no employer contribution. Of Fortune 100 companies with active defined benefit (DB) plans, 23% offered both matching and non-matching contributions, 73% offered matching contributions only and 3% provided neither.
  • In 2013, three-quarters of Fortune 100 DC plan sponsors maintained company stock in their DC plan assets. Among this group, company stock averaged roughly 20% of total plan assets.
  • The vast majority of companies allowed plan participants to direct the investment of employer contributions. A very small minority provided employer contributions in company stock.
  • Investment returns on DC plan assets averaged roughly 21% during 2013.
  • Slightly less than half (48%) of these Fortune 100 companies had automatic enrollment in 2013, and 58% of them provided for automatic increases in employee contributions over time.

Aggregate cash flow statement for 2013 Fortune 100

Among the 2013 Fortune 100, corporate net revenue ranged from $31.2 billion to $476 billion. At year-end 2013, aggregate DC plan assets for these companies totaled approximately $776 billion (Figure 1).

Figure 1. Aggregate cash flow statement of DC plans of 2013 Fortune 100 companies


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Source: Towers Watson analysis of 2013 Form 5500 filings for Fortune 100 companies

Aggregate plan assets grew by over 20% in 2013 — up considerably from 13% in 2012 — with most of the growth attributable to investment income (employer and employee contributions were less than benefit payments plus expenses). Employers in this analysis contributed roughly $17 billion to their plans for 2013, and employees contributed about $30 billion.

Eligibility and vesting requirements for DC plan participation

Only 22% of these Fortune 100 companies imposed an age requirement — either 18 or 21 — and 24% had a service requirement for DC plan participation in 2013 (Figures 2 and 3).

Figure 2. Age requirements for DC plan participation at Fortune 100 companies, 2013


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Source: Towers Watson analysis of 2013 Form 5500 filings for Fortune 100 companies

The most common service requirements were three months (8%) and one month (7%).

Figure 3. Service requirements for DC plan participation at Fortune 100 companies (employee contributions only), 2013

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Source: Towers Watson analysis of 2013 Form 5500 filings for Fortune 100 companies

Figure 4 shows combined age and service requirements for DC plan participation in 2013. Two-thirds of plan sponsors had no age or service requirements for employee participation.

Figure 4. Combination of age and service requirements for DC plan participation at Fortune 100 companies (employee contributions only), 2013



DC plan employer contributions

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Source: Towers Watson analysis of 2013 Form 5500 filings for Fortune 100 companies

Service requirements for receiving employer contributions

Sixty-one percent of companies contributed to workers’ 401(k) plans regardless of length of service, while 22% required employees to work for a year before receiving contributions
(Figure 5).

Figure 5. Service requirements for employer contributions at Fortune 100 companies, 2013


DC plan employer contributions

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Source: Towers Watson analysis of 2013 Form 5500 filings for Fortune 100 companies

In 79% of companies, employees became eligible for plan participation and employer contributions at the same time. In the remaining 21%, 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 52% of DC plans (Figure 6). Slightly less than one-third (32%) of plans used cliff vesting, and 16% 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.

Figure 6. Vesting requirements for matching contributions at Fortune 100 companies, 2013


Vesting requirements for matching contributions at Fortune 100 companies

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Source: Towers Watson analysis of 2013 Form 5500 filings for Fortune 100 companies

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 has worked for the company.

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 employer non-matching contributions at Fortune 100 companies, 2013


Vesting requirements for employer non-matching contributions at Fortune 100 companies

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Source: Towers Watson analysis of 2013 Form 5500 filings for Fortune 100 companies

Contributions and match rates

In 2013, 54% of Fortune 100 companies made only matching contributions to DC accounts, and 41% made both matching and non-matching contributions (Figure 8). Two employers made only non-matching contributions, and three employers made no contributions to employees’ 401(k) accounts.4

Figure 8. Types of employer contributions provided to newly hired employees at Fortune 100 companies, 2013



Types of employer contributions provided to newly hired employees at Fortune 100 companies

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Source: Towers Watson analysis of 2013 Form 5500 filings for Fortune 100 companies

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

Seventy percent of employers in this analysis offered only a DC plan to newly hired salaried employees during 2013. Of these, 49% provided both matching and non-matching contributions, 45% offered matching contributions only, 3% made only non-matching contributions and 3% did not provide an employer contribution. Where the company also still sponsored an active DB plan (i.e., a plan open to newly hired employees), only 23% provided both matching and non-matching contributions, 73% 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 partially offset the DB pension loss.

Figure 9 shows the maximum employer match (assuming the worker defers the amount necessary to receive the full employer match). For plan year 2013, the average matching contribution was 4.6% of pay, while the median was 4.5% of pay.

Figure 9. Distribution of maximum employer matching contributions at Fortune 100 companies, 2013


Distribution of maximum employer matching contributions at Fortune 100 companies

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Source: Towers Watson analysis of 2013 Form 5500 filings for Fortune 100 companies

Seventy-four percent of employers that offered a match used a single-tier match formula, most commonly dollar-to-dollar up to 6% of pay. Twenty-six 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.

Among Fortune 100 companies providing non-matching contributions, contribution percentages were fixed in slightly more than two-thirds of them, with the average being 2.9% of pay and the median 3.0%. In the remaining companies, non-matching contributions in 2013 were at the employer’s discretion, sometimes linked to corporate profits, and ranged from 0% to 15% of pay.5

Employer contributions for 2013

In companies that offered only a DC plan to new hires and provided employer contributions in 2013, contributions for a hypothetical new hire averaged 6.2% of pay.6 Among these employers, there is a measurable difference between those that once provided a DB plan to new hires and those that have never offered a DB plan. Companies that have always been DC only contributed an average 4.8% of pay to new hires’ DC accounts in 2013, while companies that closed or froze DB plans contributed an average 7.7% of pay.

Employers that sponsored both an active DB plan and a DC plan for new hires contributed less to the DC plan than those that used to offer a DB pension but more than those that have always been DC only. In 2013, DB plan sponsors contributed an average (matching plus non-matching) 5.7% of pay to the DC plan. Even though DC-only companies today provide larger employer contributions than companies that sponsor both DC and DB plans, the larger contributions do not generally make up for the lack of an active DB plan.

Investments of employer contributions are mostly participant directed

Employer contributions to DC accounts may be invested in the participant’s investment choice, in company stock or a combination of the two. As shown in Figure 10, roughly 84% of plans allowed participants to choose their investments in 2013. Thirteen percent made contributions in the form of employer stock, and 3% split their contributions between employer stock and participant direction.

Figure 10. How DC matching contributions were invested, 2013


How defined contribution matching contributions were invested

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Source: Towers Watson analysis of 2013 Form 5500 filings for Fortune 100 companies

In all but two companies that made employer contributions in company stock, employees could diversify out of the company stock immediately.

Plan investments

In 2013, these DC plans offered from four to more than 30 investment options, with a median of 17 funds (Figure 11). Fifty-seven percent of these employers offered between 11 and 20 investment options to their workers.

Figure 11. Number of investment funds offered in DC plans of Fortune 100 companies, 2013*


Number of investment funds offered in DC plans of Fortune 100 companies

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*The analysis considers target date funds and brokerage windows as one investment option each. 
Source: Towers Watson analysis of 2013 Form 5500 filings for Fortune 100 companies

Prevalence of employer stock in DC plans declines slightly

Between 2012 and 2013, the percentage of DC plan assets invested in employer stock remained essentially the same (Figure 12). At year-end 2013, 75 companies held some plan assets in employer stock.7 Averaged over all companies in the analysis, 15.1% of plan assets were allocated to company stock. Of companies whose plans held company stock, the holdings averaged 20.1% of plan assets.

Figure 12. Average allocations to employer stock in Fortune 100 DC plans, 2013


Average allocations to employer stock in Fortune 100 DC plans

Source: Towers Watson analysis of 2013 Form 5500 filings for Fortune 100 companies

In DC plans with company stock at year-end 2013, the investments made up less than 10% of plan assets in 28% of plans and between 10% and 19.9% in 31% of plans (Figure 13). Roughly 83% of these plans held less than 30% of their assets in company stock. One plan held more than 70% of plan assets in company stock.

Figure 13. Allocations to employer stock in companies holding such assets, 2012 versus 2013


Allocations to employer stock in companies holding such assets, 2012 versus 2013

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Source: Towers Watson analysis of 2013 Form 5500 filings for Fortune 100 companies

Slightly more than half (53) of sponsors with DC assets invested in company stock have an employee stock ownership plan component in their DC plan.

Investment returns improve in 2013

For calendar-year DC plans in this analysis with available data, investment returns averaged 20.7% during 2013, and the median return was 20.8%.8 Returns ranged from 15% to 24.9% in 77% of these plans (Figure 14).

Figure 14. Distribution of Fortune 100 investment returns in DC plans, 2013


Distribution of Fortune 100 investment returns in DC plans

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Source: Towers Watson analysis of 2013 Form 5500 filings for Fortune 100 companies

Automatic enrollment and auto-increases

Forty-eight percent of Fortune 100 companies automatically enrolled employees in their DC plans in 2013. Of these, 58% also had an automatic escalation feature, which generally increased employees’ contribution percentages by 1% each year.

Among plans with auto-enrollment, the initial default contribution percentage ranged from 2% to 10% and was typically 3% of pay (Figure 15). Contributions can eventually reach 25% of an employee’s salary through auto-escalation provisions, with the most frequent cutoff for auto escalation increases being 6% of employee deferrals.

Figure 15. Default employee contribution rates at Fortune 100 companies with automatic enrollment, 2013


Default employee contribution rates at Fortune 100 companies with automatic enrollment

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Source: Towers Watson analysis of 2013 Form 5500 filings for Fortune 100 companies

Administrative plan expenses

In the majority of companies (57%), administrative plan expenses were shared by employers and employees. Only 15% of employers paid all plan administrative expenses.

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. Close to half of these Fortune 100 companies automatically enroll employees in their 401(k) plan, and many allow for automatic increases of employees’ contribution percentages over time.


Endnotes

1. A DC plan is a retirement plan, such as a 401(k) or 403(b), to which the employee elects to defer a percentage of compensation (most employers contribute to the accounts as well). Employees typically manage account investments themselves. These plans are usually portable, allowing employees who leave the company to take their account balance with them or transfer it to another employer-sponsored plan or individual retirement account (IRA).

2. This is the eighth such study. For last year’s analysis, see “Defined Contribution Plans of Fortune 100 Companies for the 2012 Plan Year,” Towers Watson Insider, February 2014.            

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

4. The data reflect actual contributions made for plan year 2013. Two companies that had provisions for employer contributions did not provide them for 2013.

5. Nine additional DC plan sponsors had plan provisions for discretionary non-matching contributions and did not provide them in 2013.

6. Total contributions represent those provided to a hypothetical newly hired 35-year-old worker making $50,000 a year in 2013. We assume the worker defers the amount necessary to receive the full employer match. Where the company provided a discretionary non-match in 2013 and a range was given, the maximum value was used where the actual value couldn’t be found.

7. Roughly one-third of the Fortune 100 companies that do not maintain employer stock in their plans also do not have publicly traded stock.

8. Investment income is often reported net of investment expense.