Data and Research December 11, 2018

401(k) Plan Sponsors Enhancing Plan Design

The availability of Roth contributions has doubled in the last decade, and more plan sponsors are using a default deferral rate with automatic enrollment that is higher than 3%, a Plan Sponsor Council of America survey found.

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Seventy percent of 401(k) plan sponsors made Roth contributions available in 2017—a significant increase over 2016, according to the Plan Sponsor Council of America’s (PSCA)’s 61st Annual Survey of Profit Sharing and 401(k) Plans.

This is especially true among plans with fewer than 50 employees (up from 55.6% in 2016 to 67.7% in 2017).

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Plan sponsors continue to adopt automatic enrollment, with 61.2% of plans now using it. However, automatic enrollment is still mostly applied to new hires only. The most common default deferral rate for automatic enrollment is 3%. However, 60% of plans use a default deferral rate with automatic enrollment of more than 3%—up from less than 30% of plans 10 years ago.

The use of mobile technology to provide plan services to participants continues to increase—it has doubled since 2014 and in 2017 was used by 43.6% of plan sponsors.

The survey also found 90% of plans now have an investment policy statement (IPS). They are less prevalent among smaller plans. In addition, nearly one-third of plans provide a suggested savings rate for participants. More than four in 10 suggest a rate of 10% or more. And, one in five plan sponsors actively encourage participants to keep assets in their plans after retirement.

Boosted savings and contributions

According to the survey, participants saved an average of 7.1% of pay in 2017, up from 6.8% in the previous two years.

Nearly all plan sponsors surveyed make contributions to their plans (only 37% do not). The average company profit sharing contribution increased to more than 5% of pay for the first time. It increased from 4.8% in 2016 to 5.1% in 2017. In addition, there is a shift to a more generous 401(k) matching formula. The survey found the use of dollar-for-dollar matching above 3% of pay (most commonly to 6% of pay) increased by nearly 50%, from 24.1% in 2016 to 35.8% in 2017.

“Design enhancements that leverage behavioral finance insights such as automatic enrollment, coupled with generous employer matching contributions, are helping build a more financially secure retirement for America’s workers,” says Hattie Greenan, PSCA’s director of Research and Communications.

PSCA’s 61st Annual Survey reflects the 2017 plan-year experience of 605 DC plan sponsors. The full printed survey is available for pre-order (electronic copies are available now).
Data and Research December 11, 2018

OregonSaves Shows Initial Success

At the time of an analysis from the Center for Retirement Research (CRR) at Boston College, 62% of eligible workers were participating, and 93% of contributing participants had not changed their default deferral rate of 5%.

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Preliminary data from the OregonSaves state automatic IRA program suggest that the majority of eligible workers are participating and that those participants are, by and large, remaining passive with respect to their contribution rate.

The program passed its one-year anniversary in July.

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According to an Issue Brief from the Center for Retirement Research (CRR) at Boston College, Oregon’s implementation has also highlighted challenges related to being the first such program in the country, such as helping employers unfamiliar with OregonSaves to provide timely and accurate data, processing payroll deductions, and staying on top of changes to employees and payroll deductions. Oregon’s registration exceeded expectations at its November 15 deadline for firms with more than 50 employees, with over 1,200 registered employers at that time. Oregon allowed smaller employers to enroll early, and more than 600 did so. There has also been a sharp uptick in registration recently, with about 500 employers registering in the last month as the mid-December deadline for employers with between 20 and 49 employees approaches, leading to a total of about 1,800 registered firms. However, only about one-third of the employers who have registered have actually begun submitting their employees’ contributions, a lag that existed even before the most recent group of employers registered.

Despite this lag, approximately 22,000 workers had accounts with a balance on November 30, 2018; and these workers held more than $10 million in total assets. The program has seen the addition of an average of nearly 2,000 actively contributing employees per month.

At the time of its analysis, of the 39,524 individuals currently able to participate in the program, 62% were participating, although a little more than one-quarter of them were still waiting for their first contribution to be made. On the other hand, 33% were not participating. The CRR says this non-participation occurs for two reasons: the worker formally opted out of the program (29%) or the worker set contributions to zero before making an initial contribution (4%). About 5% of the sample were non-contributing participants, i.e., they had made some contributions to the program but had since set their contributions to zero.

Workers who chose not to participate offered three main reasons: 30% said they could not afford to save, 19% said they had their own or another retirement plan (e.g., through a spouse), and 12% said they did not want to save through this particular employer. The CRR speculates this is perhaps because they did not expect the relationship to last long or because they have another job where the employer is not yet registered.

OregonSaves has a default deferral rate of 5% of pay that automatically increases by 1% per year until reaching 10%. As of November 30, 93% of contributing participants had not changed their default deferral rate of 5%. Of the remaining 7% who had made a change, 5% had decreased their deferral rate and 2% had increased their rate—usually to 10%.

“The preliminary data from OregonSaves show that important assumptions about how workers would react to the availability of auto-IRAs appear to be holding up, at least in the context of their behavior within the program. The data will ultimately offer other states a unique perspective on the factors related to the success of their programs, and will make it possible for researchers to investigate the extent to which such programs will actually improve retirement security,” the CRR wrote in its brief.

Modeling scenarios for the OregonSaves program, the Employee Benefit Research Institute (EBRI) revealed results last month that showed state-run automatic IRA programs could reduce Oregon’s retirement savings shortfall by as much as 16%.

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