Something Good Happened to 401k Deferral Rates

A happy day for 401(k)s.

A happy day for 401(k)s.

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 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:

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

  1. 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:
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