Innovation in the 401k space since the passage of the Pension Protection Act in 2006 has led to a massive increase in retirement plan participants and savings, but is its heyday done?
To a degree, yes, according to new data from the Plan Sponsor Council of America (PSCA), which shows a leveling off in many popular and effective features of employer-sponsored retirement plans, especially with the adoption of automatic enrollment features, Roth options, and target-date funds.
“These features have seen significant uptake over the last 10 or so years and they have succeeded in helping to boost plan participation, employee contribution rates, employer financial support, and investment diversification, which, in combination, have resulted in increased account balances,” Research Director Hattie Greenan said in a statement.
Automatic enrollment
For plans that haven’t adopted automatic enrollment, the number one reason (stated by more than half) is that they are satisfied with participation rates.
“It isn’t surprising that we’ve reached a plateau regarding adoption of automatic features,” added Jack Towarnicky, Principal Researcher. “Plan sponsors have had more than a decade to consider the appropriateness of such features for their plan. Given the resulting improvement in participation and contribution rates by the plans who have adopted these features, auto features look like they are here to stay.”
Roth
It took less than 15 years for Roth 401k provisions to become commonplace, according to PSCSA.
Today the Roth option is offered in a super-majority of 401k plans. While the percentage of surveyed plans offering Roth features has slowed recently, the percentage of workers contributing to their plans on a Roth basis continues to increase—23% in 2018, up from 15.6% in 2008.
Roth 401k may be a more valuable option compared to pre-tax 401k contributions for some participants, but not all, it notes.
However, for plan sponsors, there typically are no identifiable financial benefits to adding Roth 401k features sufficient to offset the added cost and complexity in administration and communication.”
Target-date adoption
Target-date fund (TDF) availability and usage is tied to the increased deployment of automatic features. Today, 70% of plans have adopted a Qualified Default Investment Alternative or QDIA—and most (75.1%) plan investment fiduciaries that have adopted a QDIA have selected a TDF to fulfill that role.
“As a result of automatic features and QDIAs, TDFs are now the most frequently used investment in 401k plans,” Greenan said. “TDFs now account for 20.7% of plan assets, while ten years ago, only 5.1% of plan assets were allocated to TDFs. So, even if slightly fewer plans are offering TDF investments, we should expect to see continued growth in participants’ allocations to these funds, or to comparable offerings, such as managed accounts.”
Looking Ahead
“While some plan sponsors may assert that there is no ‘best practices’ design for retirement savings plans, I would assert that offering informed choices—target-date vs. specific investment options, Roth and Pretax contributions and automatic enrollment are best practices,” Towarnicky concluded. “The proof is in the significant improvement in both participation and contribution rates over the last ten or so years.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
