The best 401(k) advisors are well aware of the importance of plan design.
Sure, it’s on employees to actually do the saving, but the features of a retirement plan can positively influence participants’ behavior and set them up for a degree of success they may not achieve if left to their own devices.
In a new study, Well Fargo Institutional Retirement and Trust set out to identify which plan design features are proving most influential. Researchers analyzed 2,000 plans and measured success based on rates of participation, overall saving and investment diversification.
According to its 2018 Driving Plan Health report, 401ks that incorporate these four features are generating the most positive outcomes:
- Automatic enrollment, with a default of 6 percent or more going to the 401k and automatic annual re-enrollment.
- An opt-out option to increase the default to a rate of 10 percent or higher.
- Diversified investment offerings, such as a target-date fund.
- An above-average company match of at least 5 percent, or profit sharing.
“When U.S. workers are saving in 401(k) plans that have the right combination of features, we believe they have a significantly better chance of amassing the savings they need to retire comfortably,” Mel Hooker of Wells Fargo Institutional Retirement and Trust said in a statement.
“When used together, these features address the psychological barriers, or inertia, that tend to get in the way of a person’s path to a well-funded retirement.”
Data show 10 percent of the plans analyzed were deemed “high influence.” In each, the participation rate is at least 89 percent, at least 55 percent of participants contribute 10 percent or more (including match) and at least 88 percent of investments are appropriately diversified. As such, workers in these plans are on better track to replace 80 percent of their income, “which is optimal,” the report noted.
“Saving and investing regularly, along with a company match and appropriate diversification, allows employees to create the nest egg they will need in retirement. But not all 401(k) plans are created equally, and our goal with this report is to show just how important it is for businesses to design a high influence plan,” said Hooker.
Additional key findings from the study include:
- Participation in 401(k) plans has increased 18 percent, with Millennials continuing to make the biggest gains.
- Savers contributing at a rate of 10 percent or higher have increased 11 percent. Baby Boomers (46 percent) are more likely to contribute at that rate, followed by Generation X (36 percent) and Millennials (29 percent).
- The majority of savers (80 percent), invest in a variety of asset classes, with participants investing in a diversified portfolio up 13 percent.
- Among “high influence plans,” average balances have increased 30 percent.
Wrapping up the report, Wells Fargo briefly touched on the power of engagement and communication to positively influence participants, as well.
“[B]usinesses also should incorporate effective communications and forward-thinking digital tools to help employees overcome psychological barriers to saving—and help them take action. Targeted participant communications and digital tools [are] likely to encourage positive participant behavior. For example, having a peer comparison tool with a simple ‘click here to change your deferral rate’ is an easy way to encourage participant action,” it noted.
Jessa Claeys is a writer, editor and graphic designer.
