Great news on the topic of getting participants to save—the latest version of Reference Point, an annual benchmarking report from T. Rowe Price, finds more employers are setting default deferral rates at 6 percent rather than the standard 3 percent.
“We are pleased that our plan sponsor clients are continuing to elevate the industry standard by auto-enrolling participants at 6 percent versus the more typical 3 percent,” Aimee DeCamillo, head of T. Rowe Price Retirement Plan Services, said in a statement. “Higher default contribution rates encourage employee participation in plans and will lead to better outcomes for retirement investors. Still, some plan sponsors can do even more by requiring an opt-out method when it comes to the adoption of auto-services.
“Another way plan sponsors can help their participants is to offer a financial wellness program,” she added. “This would assist employees with daily issues such as budgeting and longer-term issues such as debt reduction while helping to keep their retirement savings program on track.”
AUTO-SERVICES TRENDS: INCREASED ADOPTION CONTINUES
Auto solutions continue to be successful tools for plan sponsors to use within their plans and serve as a key motivator to develop positive saving habits. Among T. Rowe Price clients, the use of auto-enrollment has increased every year since the enactment of the Pension Protection Act in 2006. More specifically, T. Rowe Price found that as of year-end 2015:
- About half (51%) of the plans it administers have adopted an auto-enrollment feature, a 28% increase since 2011.
- 30% of plans have auto-enrolled participants at 6% or more, compared with just 17% in 2011.
- Participation rates continue to be strongly tied to the adoption of auto-enrollment. Plans with an auto-enrollment feature have a participation rate of 88%, while those that do not have this feature have a participation rate of just 48%.
- Target-date investments continue to be the default of choice for 96% of plan sponsors.
CONTRIBUTION TRENDS: HALF OF PLANS NOW OFFER ROTH OPTION
By the end of 2015, half of the 401(k) plans recordkept by T. Rowe Price were offering their participants the option to make Roth contributions, an increase of nearly 49% since 2011. In addition, Roth contributions among participants increased for the eighth consecutive year. Regarding employer matching contributions, 40% of plan sponsors are now matching at a threshold of 6%.
But it’s not all good news. Among T. Rowe Price plan participants, the average deferral rate held steady at 7%, far below the recommended level of 15% that includes the employer match. In addition, approximately one-third of participants are not deferring any money to their retirement account.
GENERATIONAL FINDINGS: YOUNGER PLAN PARTICIPANTS INVEST IN TARGET-DATE FUNDS
- Younger participants (between 20 and 29 years of age) have a wider gap in participation rates when auto-enrolled (84%) versus not auto-enrolled (30%) than all age groups.
- Younger participants are also more likely to be invested in target date funds (70%) than other age groups (36%).
- Younger participants have a savings rate of 5%, considerably lower than older generations (between 7-10%).
- Participant guidance is also needed at the Gen X level, as the 40-59 and 50-59 age groups continue to maintain the highest outstanding loan balances, which has increased each of the past two years.
INDUSTRY TRENDS: MANUFACTURING INDUSTRY LEADING IN ADOPTION OF AUTO-INCREASE
- Rowe Price clients receive access to a more in-depth view of select industries so they can compare themselves with their peers. Significant industry-specific findings include:
- In the retail industry, only 35% of plans* have adopted an auto-enrollment feature, compared with 51% of plans across all industries.
- Within the finance and insurance industries, only 14% of participants have an outstanding loan, compared with 24% of participants across all industries.
- 77% of the manufacturing industry plans have adopted an auto-increase feature, compared with 69% of plans across all industries.
- Within the utilities industry, there is a 92% participation rate for plans with auto-enrollment, compared with 78% for non-auto-enrollment plans. This is a much smaller gap compared with all industries, which have an 88% participation rate with auto-enrollment and a 46% participation rate without.
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.
