In what falls into the category of good news for retirement savings, the average pretax deferral rate in 401(k) plans administered by T. Rowe Price increased slightly to 8.6% in 2018, reaching the all-time high for a second year in a row.
Increasing the default pretax deferral rate, the opt-out option for auto-increase and targeted messaging for participants were listed as factors contributing to the increase in T. Rowe Price’s annual participant data benchmarking report, Reference Point., released on May 1.
Data are based on the large-market, full-service recordkeeping universe of T. Rowe Price Retirement Plan Services, Inc., retirement plans (401k and 457 plans), consisting of 657 plans and over 1.8 million participants, from Jan. 1, 2007, through Dec. 31, 2018.
After several years of record-breaking plan and participant outcomes, the report says 2018’s market turbulence may have contributed to a rise in concerning participant behavior. But strategic plan design continued to produce strong plan and participant outcomes despite the uncertainty, resulting in 2018 being a year of mixed results.
“Overall, we’ve seen an increase in positive participant behavior; however, there are still opportunities for continued improvement,” said Kevin Collins, head of Retirement Plan Services at T. Rowe Price. “Changing employee behavior requires simple solutions and engaging them in a way that motivates them to act. Plan sponsors can provide this support through plan design and by integrating financial wellness programs into their plan offering. We’ve seen firsthand the positive impact that approachable and easy-to-use resources have on employee behavior.”
Additional key findings
- Participation declined slightly. The participation rate dropped by nearly 2% from 2017 to 2018. Plans that did not have auto-enrollment saw participation drop at more than twice the rate of those with auto-enrollment.
- Auto-enrollment continued to significantly impact positive participant behavior. Participation was over 40 percentage points higher in plans with auto-enrollment compared to plans without it. Usage of auto-increase was nearly five times higher in plans that employ the opt-out option.
- Employer match increased. Plans offering a 4% employer match surpassed those offering a 3% match for the first time. The reduction of the corporate tax rate due to tax reform may have contributed to the increase.
- Plan adoption and participant usage of target date products reached an all-time high. Plan adoption of target date products reached an all-time high at 95%. Participant usage also increased in 2018 across all age groups but was highest among younger workers. Additionally, the percentage of participants with their entire account balance in a target date product has grown by 20% since 2014.
- 401(k) Roth contributions increased. The number of participants making Roth IRA contributions increased by nearly 10% compared with 2017; however, overall usage remains low at 7.6%. Millennials age 30-39 are using Roth the most, at nearly 10%, with younger workers age 20-29 following at 8.8%. In 2018, nearly 75% of plans offered the Roth option.
- 401(k) loans reached a nine-year low of 22.5% in 2018. This continued a steady six-year decline of nearly 10%. The report also found that the percentage of participants who took a hardship withdrawal fell for the ninth consecutive year, declining from 1.9% in 2010 to 1.3% in 2018. Meanwhile, both loan balances and the average amount of hardship withdrawals increased.
Turbulence adds to some reduced outcomes
After several years of record-breaking plan and participant outcomes, the report says 2018’s market turbulence may have contributed to a rise in concerning participant behavior.
- The participant-weighted participation rate dropped by nearly 2% from 2017 to 2018
- The percentage of participants contributing 0% increased to 36%
- Average account balances decreased by almost 8%, in part because of year-end market declines
- Late in the year, participants moved money from stocks to more conservative investments, presumably due to market activity