NEW YORK, March 8, 2007 (PRIME NEWSWIRE) -- Few CEOs of fast-growth private companies, 27 percent, are knowledgeable about the new 2006 Pension Reform Act guidelines that took effect on January 1, 2007; only four percent were rated very knowledgeable and 23 percent somewhat knowledgeable. Most CEOs, 61 percent, admitted they are not knowledgeable at all, while three percent were uncertain and nine percent did not report.
"The Pension Reform Act was passed to help companies boost plan participation and do right by their employees," said Paul Bracaglia, investment advisory partner with PricewaterhouseCoopers' Private Company Services. "The lack of knowledge regarding the new guidelines means that these 'Trendsetter' companies are not taking advantage of the opportunity to provide employees with the best options available to help them save for retirement."
The new Act allows firms to phase out their Traditional Defined Benefit or other pension plan and automatically enroll employees in 401(k) plans, as well as set investment guidelines. Currently, 92 percent of "Trendsetter" firms offer a retirement plan; eight percent have no plan. Nearly all with a retirement plan currently offer 401(k) plans -- 85 percent of all firms. And, only seven percent offer a Traditional Defined Benefit pension plan.
* Offer a Retirement Plan Option ............. 92%
------------------------------ ---
* 401(k) plans ........................... 85%
* Profit sharing ......................... 28%
* Defined Benefit pension plans .......... 7%
* Cash balance plans ..................... 1%
* Other plans (Mostly IRAs) .............. 8%
* None Offered ............................... 8%
------------ ---
100%
Multiple plans are typically offered: 94 percent offering Profit Sharing plans also offer a 401(k) plan, and 85 percent with Traditional Defined Benefit pension plans -- or almost six of the seven percent -- also offer a 401(k) plan.
Five Percent Intend to Use the Automatic 401(k) Feature
The 2006 Pension Reform Act allows firms to automatically enroll their employees into company sponsored 401(k) plans; however, only five percent of all "Trendsetter" firms intend to use this automatic enrollment feature for their own companies. Those that do intend to use the feature include 20 percent of current Defined Benefit plan users, five percent of Profit sharing users, and 5 percent of current 401(k) users. Only 16 percent do not intend to use this feature, while 14 percent were uncertain and 65 percent not reported.
"The risk to company owners is that employees reach retirement age without having adequately saved for retirement," warns Bracaglia. "The automatic enrollment option provides employers with a vehicle to help their employees save for retirement while at the same time providing a level of legal protection if done with sufficient notification. Any employer who offers a defined contribution plan should be evaluating this option."
Fifteen Percent Believe the New Act Will Make Them More Competitive
CEOs of 15 percent of "Trendsetter" companies believe that the Pension Reform Act -- which features 401(k) plan enrollment and investment options guidelines -- will make private companies like their own more competitive in hiring and retaining talented employees. Only two percent disagree, while 23 percent believe it will remain about the same; 21 percent were not certain and 39 percent were not reported. Among those with a traditional Defined Benefit pension plan, 35 percent believe they will be more competitive, and only five percent disagree. Obviously, with lack of widespread knowledge, a great deal of uncertainty exists in terms of the new Act's benefits.
Investment Options and Policies
The 87 percent of "Trendsetter" companies currently offering a 401(k) or self-directed profit sharing plan offer, on average, 5.8 of the 9 asset classes studied.
Leading asset classes offered as part of this basic mutual fund lineup were found to be: large cap and small cap funds, international funds and money market funds. Also offered were index funds, high yield bond funds and emerging market funds.
Currently, 40 percent are offering Lifecycle target maturity funds, linked to specific individual objectives as the employee's life-style investment target changes over time.
Independent
Investment Advisor
All ------------------
Asset Classes Offered Plans Yes No
--------------------- ----- --- --
* Large cap value or growth fund ..... 88% 94% 66%
---------
* Small cap funds .................... 85% 90% 66%
---------
* International funds (in developed
countries) ........................ 80% 86% 59%
* Money market funds ................. 78% 83% 60%
* Index funds (by sector) ............ 69% 73% 53%
* High yield bond funds .............. 66% 71% 47%
* Emerging market funds .............. 64% 67% 49%
* "Lifecycle" target maturity funds .. 40% 43% 28%
* Own company stock .................. 6% 5% 9%
---
* Not reported ....................... 8% 3% 21%
* Classes Offered (mean) 5.8 6.1 4.4
"The percentage of companies offering Lifecycle target maturity funds has been increasing and will likely continue to increase," notes Bracaglia. "Lifecycle funds offer participants in one fund the opportunity to participate in a broadly diversified portfolio that evolves over time as the participant ages. Historical data shows that participants who have not elected to participate in 401(k) plans and other defined contribution plans chose not to for fear of making inappropriate investment choices. The Lifecycle funds option helps eliminate that concern."
Independent Investment Advisor
Most "Trendsetter" companies (80 percent) have retained an independent investment advisor to assist in managing their plan and its ERISA and fiduciary obligations. Fourteen percent have not, while six percent are not reported.
Independent investment advisory firms are typically used (42 percent), while another 25 percent use a brokerage firm. A benefits consulting firm is used by 15 percent and the same proportion use a bank, insurance agency or trust company (15 percent). Five percent utilize an accounting firm for these purposes.
"Ensuring that the investment advisory firm is independent involves scrutinizing the advisor's accreditation, fee structure and investment methodologies and philosophies," said Bracaglia. "Company owners want to make sure that the advisor is bias-free, for example, has no financial compensation tied to the plan assets. Every company should ask to review its investment advisor's Part II of Form ADV which is filed with the SEC to determine precisely how the firm is compensated. An investment advisor that is paid solely for their advice creates a relationship that will be truly independent."
As seen above, companies retaining an independent investment advisor offer their employees many more asset classes, on average 6.1 of 9 versus only 4.4 of 9 in firms without an advisor. For example, Lifecycle target maturity funds are offered by 43 percent of firms with an advisor, versus only 28 percent in non-advisor companies.
"The increase in the number and type of investment vehicles offered by companies that retain the services of an independent investment advisor is no surprise," notes Bracaglia. "An independent investment advisor will review the investment options to ensure each participant in the plan has the opportunity to fully diversify his or her investment portfolio. More importantly, the advisor will focus on redundancy in the plan's investment options. Redundancy occurs when a plan offers more than one investment option that essentially invests in the same type of stocks or bonds. The risk from having redundant investment options is that participants who do not recognize the redundancy may believe they are diversifying their portfolios when in reality, they are not."
Investment Policy Statement
59 percent of these "Trendsetter" companies report having a formal investment policy statement for their 401(k) or self-directed retirement plans. Nineteen percent do not and 18 percent are not certain. Another four percent were not reported.
Virtually all formal policy statements have been reviewed within the past two years (92 percent); only three percent reviewed their policy over two years ago or longer to see if it is consistent with their investment performance or process. Five percent were not reported.
"A well-drafted Investment Policy Statement (IPS) serves multiple purposes," notes Bracaglia. "At its most basic level, the IPS creates a document that details: how the company has designed the plan, how the company intends to comply with ERISA requirements and; most importantly, how the company aims to manage the plan on an ongoing basis including how it plans to evaluate the investment options and with what frequency. A well drafted IPS also serves another critical purpose as the company's first line of defense against any potential litigation by providing documentation regarding its fiduciary obligations under ERISA and its intent to comply with its obligations in good faith."
Typical frequency that "Trendsetter" companies review the investment options in their plans to ensure compliance with the IPS and ERISA is annually (54 percent). Another 26 percent are more frequent: Quarterly (13 percent) or Semi-annually (13 percent), while only five percent are less frequent than annually. The remaining 15 percent were not certain or not reported. The fiduciaries of a retirement plan are obligated to act in the best interests of the plan participants and that responsibility includes ensuring that the investment options remain appropriate. From a practical standpoint, this not only means that the investment options provide a competitive rate of return, but also that the fiduciaries are aware of and take appropriate actions with regard to changes in the managers running the investment options or changes to the underlying investment strategy. Best practices would suggest that periodic reviews should occur no less frequently than semi-annually, and given the frequency of change in the volatile investment world, quarterly reviews are probably best.
Fiduciary Awareness
All retirement plans require a named fiduciary. In two-thirds of "Trendsetter" firms with retirement plans (66 percent), the fiduciary is CEO/President/COO (39 percent) or CFO/Treasurer (30 percent). In 21 percent of these firms, the fiduciary is someone other than the CEO or CFO equivalent (VP of Human Relations, 4%, etc.), while nine percent are not certain and four percent not reported.
In 83 percent of "Trendsetter" companies with retirement plans, the fiduciary is reportedly aware of the personal liability risks associated with administering their companies' retirement plan; only two percent disagree, while 11 percent were uncertain and four percent not reported.
Fiduciary Is:
All ------------
Plans CEO/CFO All Other
----- ------- ---------
* Yes, aware of personal
liability risks .......... 83% 92% 65%
* No, not aware ............. 2% 2% 2%
* Not certain ............... 11% 4% 23%
* Not reported .............. 4% 2% 10%
100% 100% 100%
Note the 92 percent awareness of personal liability risk in firms where the CEO/CFO equivalent is the fiduciary, versus only 65 percent where a lower title is named. In one-third of those cases, there is uncertainty about awareness by their staff of fiduciary liability.
"Fiduciary awareness is critical in designing policies that fulfill responsibility and protect the fiduciaries from personal liability," advises Bracaglia. "Any plan fiduciary should be aware of and assess the sufficiency of insurance coverage since there is potential exposure to their personal assets. Additionally, a fiduciary should ensure that he or she is taking the proper steps on an ongoing basis to document compliance with fiduciary responsibility, including maintaining any reports generated by outside advisors and minutes of periodic meetings regarding the retirement plans."
PricewaterhouseCoopers' "Trendsetter Barometer" is developed and compiled with assistance from the opinion and economic research firm of BSI Global Research, Inc.
PricewaterhouseCoopers' Private Company Services is an integrated team of audit, tax and advisory professionals who focus on the unique needs of private companies and their owners. Within the group, professionals concentrate on the needs of law firms, manufacturing, retail, wholesale and distribution, construction and food and beverage companies, as well as the needs of other professional service organizations. Private Company Services professionals are committed to delivering cost-effective, practical solutions and proactive services to their clients. For more information about PricewaterhouseCoopers' Private Company Services, visit www.pwc.com/pcs.
PricewaterhouseCoopers (www.pwc.com) provides industry-focused assurance, tax and advisory services to build public trust and enhance value for its clients and their stakeholders. More than 140,000 people in 149 countries across our network share their thinking, experience and solutions to develop fresh perspectives and practical advice.
"PricewaterhouseCoopers" refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.
For more information about Barometer surveys, including recent economic trend data and topical issues, please visit our web site: www.barometersurveys.com