401k Default Contribution Rate Hits New High: Study

Forget retirement income adequacy, it's all about overall financial security

401k, deferral rate, retirementIt's moving in the right direction.

Callan is out with its 2018 Defined Contribution Trends Survey and the results are wide-ranging on a number of topics, but point to continued growth overall in the 401k DC space.

Top priorities reflected in the survey are retirement readiness, plan fees, and participant communication.

Nearly three-quarters of non-government plans use auto-enrollment, and four out of five plans with auto-enrollment also offered automatic contribution escalation.

Additionally, plan sponsors reported the highest average auto enroll default contribution rate in the survey’s history (4.6 percent).

Other key survey findings:

  • Fees matter: Plan sponsors cited the most important step in improving fiduciary position in 2017 was reviewing plan fees—by a wide margin.
  • Fund type trends:S. small/mid-cap equity funds were the top fund to be added in 2017 and among the most likely to be eliminated in 2018.
  • Plan leakage: The number of plans with a policy for retaining retiree/terminated assets climbed to 61 percent, with half pursuing a policy of seeking to retain these assets.
  • Retirement readiness: Plan sponsors rate retirement readiness as their primary area of focus, but financial wellness will be a key area of communication focus.
  • Plan discretion confusion: Four out of five plan sponsors said they engage an investment consultant, but a third of those respondents were unsure whether their consultant has discretion over the plan.
  • Plan success factors: The three most important factors cited by plan sponsors in measuring plan success were participation, investment performance, and contribution rates.
  • Revenue-sharing use down: Plan sponsors reported a decrease in the use of revenue sharing to pay fees, with the most common fee payment approach reported as explicit per participant fees (54.7 percent).
  • Target date funds: More than half of plan sponsors acted with regard to their target date funds in 2017; 52 percent of those taking action evaluated their target date glide’s path suitability for their plan. Among those offering target date funds, over 70 percent offered one that is at least partially indexed.

“Automatic plan features such an automatic enrollment and automatic contribution escalation have become the norm,” Lori Lucas, executive vice president of Fund Sponsor Consulting and head of the Defined Contributions Practice at Callan, said in a statement. “And the latest survey shows that such features are being offered more and more robustly—default contribution rates and caps on contribution escalation are higher, and more plans are auto-enrolling existing employees as well as new hires.

Interestingly, she added, many plan sponsors also report that a top area of communication focus will be financial wellness in 2018.

“The message here is that employers are looking not just at retirement income adequacy, but employees’ overall financial security.”

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