Another survey shows that 401(k) participation is dropping. Last week Fidelity reported that participation in plans it administers slipped last year. Now the PSCA annual survey shows a similar trend. For fund managers this news means that they may not see retirement assets build as quickly as they hoped.

The news from the latest annual Profit Sharing/401(k) Council of America survey is not so good. The PSCA reports that just 76 percent of eligible employees were enrolled in 401(k) plans in 2003, according to the Wall Street Journal. That is a drop from 80 percent in 2002. While average participation rates rose through the nineties, they appear to have peaked with the bull market and have remained flat since.

The fall four point fall in participation rates may be less meaningful than it first appears, though. The PSCA does not publish a margin of error for its findings, but past fluctuations in its data suggest that the change is as likely an artifact of the sampling as it is an actual drop in participation. In addition, the PSCA also changed the methodology of its survey by splitting pure 401(k) plans from profit sharing plans for the first time.

Though the PSCA survey is large (it covers 1,161 plans with 3.4 million participants and $412 billion in assets), it relies on voluntary responses from PSCA members (not a random sample of the universe) and is not weighted by the population demographics (large plans are much more likely to respond than small plans, and are thus overweighted in the results).

Still, the results are likely accurate in showing that the trend of increasing participation is over. Indeed, other surveys, including Fidelity's client survey show similar results.

While the WSJ article cites recent corporate scandals as on reason for the drop in participation, it fails to tie one interesting tidbit from the survey into the trend. According to the PSCA's numbers, the average number of funds offered in a plan rose to 17 from 15 in 2002. A recent academic study hinted that participation rates drop as investment options are added to plans. Perhaps that is part of what is going on?

The simplest answer, however, is that participation rates in defined contribution plans may be reaching their natural peak.

The WSJ report on the survey also highlights automatic enrollment as one way to get more workers into plans. Yet, sponsors are not jumping on board with this option. The survey showed that just 8 percent of plans now offer automatic enrollment, though a quarter of large plans offer the feature. That is up from 7 percent in 2002 (the change is not meaningful).

Plan sponsors we have spoken to are wary of offering automatic enrollment for fear of creating large numbers of low balance, "lost" accounts that raise plan costs. Perhaps the DoL's latest rule change allowing sponsors to cash out accounts with less than $5,000 in assets will alleviate this fear. We should see a change in next year's numbers if it does.  

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