Results improve with thoughtful use of auto features
The assumption when plan sponsors began to include auto features in their 401(k) plans was that participation rates and deferral amounts would increase—but no one knew for sure. As time has passed, it appears the assumption was good: auto-enrollment and auto-increases have had, overall, very positive results.
Plans that include auto-enrollment enjoy an average participation rate that is nearly double that of plans not using this feature: 85.6% participate in plans that include auto-enrollment, compared to 43.7% for those without. Even better, more than one-third (37%) of plans using auto-enrollment have a default deferral rate of 6% or higher.
On average, 401(k) plans saw their pre-tax deferral rate increase to 8.6% of pay in 2018, up slightly from 8.3% a year earlier. Employers added to employee savings via an increased company match, perhaps due to the reduced corporate tax rate. In 2018, 11.8% of plans matched 100% of the first 6% of salary; 14.2% matched 100% up to 4% of pay; and 27.2% set their matching formula at 50% of the first 6%.
Roth account contributions rose by 10% compared to 2017. Still, Roth accounts may be underutilized, with usage at just 7.6%. This may be due to a lack of understanding by employees, which suggests that education on the topic could benefit them. Young Millennials, those between the ages of 20 and 29, contribute to a Roth account at a rate of 8.8%, compared to almost 10% by elder Millennials, those between 30 and 39.
2018 wasn’t all rosy. The picture revealed some turbulence, too, according to T. Rowe Price. In their December 31, 2018 Reference Point, the company says participants in plans they serve saw a significant increase in the number of participants contributing nothing to their plan, from 33.9% in 2017 to 35.6% in 2018. This may have played a role in an overall decrease in account balances, from $92,402 in 2017 to $85,336 in 2018. The decrease was most pronounced among Millennials, who lost the highest percentage over the year.
Market fears seem to have been a deciding factor in a shift by participants out of stocks and into cash within their 401(k) plan accounts. Overall, investment in stocks dropped 4.9% in 2018, while investment in Money Market or Stable Value Funds increased just over 10%. Target date funds continue to be popular with retirement investors; investments in TDFs rose slightly in 2018, from 41.2% in 2017 to 42.2%—an increase of 2.4%.
Need help with auto features on your corporate retirement plan or education in Roth accounts, we are here to help.