Data and Research August 16, 2016

Cause for Optimism and Concern in DC Stats

The majority of participants are confident their savings via DC plans will be sufficient to last throughout retirement, a LIMRA SRI survey finds—but it’s a fairly weak majority.

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While the decline of the defined benefit (DB) pension paradigm is often maligned, new LIMRA Secure Retirement Institute (LIMRA SRI) research shows the defined contribution (DC) system, at least for the for-profit private sector, is doing a decent job of picking up the slack.  

Overall, 84% of workers in this market participate in their DC plan, with 79% having access to an employer match, according to the 2016 LIMRA Secure Retirement Institute Survey of For-Profit Sector Employees. The majority of participants are confident their savings via DC plans will be sufficient to last throughout retirement, but it’s a fairly weak majority, at 54%, LIMRA SRI finds. The finding is also tempered by the fact that more than 25% of workers “plan to work part-time in retirement.”

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“More than one-third of workers report not being knowledgeable about financial products or investments,” researchers highlight, suggesting the finding is cause for some concern, given how much more choice is placed on DC plan participants compared with pensioners.

Other findings are more positive about the success of DC. For example, the average current DC plan tenure across all for-profit private-sector plan sizes is an impressive nine years. The median DC salary deferral rate is 8% for plans with fewer than 100 employees, 7% for mid-sized employers (100 to 2,499 employees), and 6% for the largest employers with more than 2,500 workers.

Highlighting the ongoing interplay of DB and DC, the LIMRA research shows participants in private-sector DC plans have access to a DB plan 10% of the time in the greater than 100 employees market, 17% of the time in the 100-to-2,499 employees market, and 23% of the time in the largest employer category. As LIMRA researchers note, this over-representation of pensions for mega employers shines a somewhat more positive light on the relatively low 6% average salary deferral figure.

Looking across the entire private-sector DC participant group, the average balance stands around $135,245. More than seven in 10 (71%) expect future income to be significantly supplemented, if not outstripped, by Social Security benefits. Nearly one-third will also spend from traditional individual retirement accounts (IRAs), and a one-fifth will draw income from Roth IRAs.

Additional survey results are reported here. 

Data and Research August 16, 2016

401(k)s Challenging the 3% Auto Enrollment Default Rate

However, the average deferral rate for the plans that T. Rowe Price administers is 7%, well below the recommended 15%.
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As of year-end 2015, 38.2% of 401(k) plans with automatic enrollment are deferring 3% of participants’ salaries—but 29.0% are deferring 6%, T. Rowe Price found by analyzing its recordkeeping data.

Another 13.0% are deferring 4%, and 10.9% are deferring 5%. Just more than half, 51%, of the plans T. Rowe Price administers use automatic enrollment, a 28% increase since 2011.

T. Rowe Price also found that plans with automatic enrollment have an 88% participation rate, compared to 48% of plans where it is up to participants to take the initiative to opt into their retirement plan. Nearly all, 96%, of plans with automatic enrollment use target-date investments as the default, and 50% offer a Roth 401(k), up 49% since 2011. Furthermore, 40% of plans match 6% of participants’ contributions.

“We are pleased that our plan sponsor clients are continuing to elevate the industry standard by auto-enrolling participants at 6% versus the more typical 3%,” says Aimee DeCamillo, head of T. Rowe Price Retirement Plan Services, Inc. “Higher default contribution rates encourage employee participation in plans and will lead to better outcomes.”

However, it is not all good news. The average deferral rate for the plans that T. Rowe Price administers is 7%, well below the recommended 15%. Furthermore, the average loan balance increased for the seventh straight year to $9,075, and the percent of people taking out loans has held steady at 24%. In addition, nearly half, 47%, of sponsors permit people to take out two or more loans.

When switching jobs, 82% of people younger than 20 and 45% of those between 20 and 29 cashed out of their 401(k). “Since those plan account balances may seem insignificant to participants, sponsors should look to reinforce the potential value of this money,” T. Rowe Price says. “Targeted communications for new, younger employees could help create awareness of the effect cashing out has on long-term savings growth.”

Since 31% of participants in the plans that T. Rowe Price administers do not contribute to their 401(k), the firm recommends that sponsors offer financial wellness programs, so participants can get their financial houses in order to be in a better position to contribute to their workplace defined contribution plan. 

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