403(b) Participation Rates Reach Record Highs, but Savings Results ‘Still Not Great’

Automatic enrollment, better communication and employer matching contributions are driving 403(b) retirement plan participation rates higher, but greater participation is not always resulting in better retirement preparedness.

An average of 83.1% of eligible, active, nonprofit-organization employees maintained a balance in their plan in 2022, nearly identical to the year before—and up from 76.7% in 2013. Participation rates at nonprofit 403(b) plans have continued to reach record levels, according to data from the Plan Sponsor Council of America.

For 403(b) plans, while increased participation is clearly positive, Kim Cochrane, senior director of client services for Hub International’s Mid-Atlantic region, cautions there may not be cause for celebrating, because there is not yet evidence showing workers are also saving more.

“Automatic enrollment is taking a good solid market share in the 403(b) world. … It is probably single-handedly contributing to the increase to participation of employees in 403(b)s,” she says. “Now, that [increase] does not mean they are saving enough money; it just means they are saving something.”

Participation rates increased due to “auto-enrollment, better communications, [and] the [employer’s] match may have a role,” says Robyn Credico, defined contribution practice leader for North America at Willis Towers Watson.

A growing number of 403(b) plans use auto-enrollment: Use of the feature increased by almost 20% in 2022, and it was used in 31.4% of 403(b) plans, up from 26.5% the year before, PSCA data show. In 2013, 16.0% of 403(b) plans used auto-enrollment.

Within 403(b) nonprofit plans, health care and K-12 education retirement plans experienced the largest increases in 2022, says Hattie Greenan, director of research and communications at PSCA, which is part of the American Retirement Association. Voya Financial 403(b) plans experienced a 38% increase in plans using auto-enrollment in 2023, according to Voya data.

Behavioral finance techniques provided the fuel for 403(b) plans to boost their participation rates, which “definitely was a primary goal,” says Brodie Wood, Voya’s senior vice president and national practice leader for health care, education and not-for-profit markets.

According to retirement plan adviser Alan Cole, vice president of retirement plan adviser services and wealth at OneDigital, 403(b) plans participation rates “[increased] across the board.”

“Most 403(b) plan sponsors are taking a look at education and advice within the plan,” Cole adds, “which also was driving better engagement.”

The addition of auto-enrollment is one way nonprofit retirement plans are evolving to be more similar to 401(k)s, explains Wood. Incorporating active choice and other behavioral finance learnings has meant that “how we drive people to the best action has incrementally gained so much momentum,” Wood says.

“It’s like [innings of] a baseball game” as each type of plan continues to evolve, says Wood: “The 401(k) market is in the ninth inning of being commoditized [and] understanding what a fiduciary [is]; health care is in the seventh inning [as] mostly consolidated; higher education [retirement plans are] in the fifth inning; [and] K through 12 [plans are] in the second inning, in terms of development.”

Participation Is the Start, Not the Goal

Increasing participation rates for 403(b) plans is only the beginning of a longer journey, Cochrane notes. Employers must support nonprofit workers to save, accumulate the greatest possible pool of assets and maximize their retirement security to safeguard against the risk of outliving their money in retirement, she adds.

“Get employees in the business of saving for their longest period of unemployment,” Cochrane says.

Nonprofit sponsors are increasingly using auto-enrollment with higher default rates and automatically increasing those default rates over time, PSCA data show. Using auto-escalate with re-enrollment can assist participants save greater amounts, Cole says.

In 2022, more than one-third (36.1%) of plans with auto-enrollment used a default rate greater than 3%, up from 26.9% in 2021, and two-thirds of plans automatically escalated the default percentage, up from 57% in 2021, according to PSCA. With auto-escalation, participants’ contribution from salary will increase by a specific rate, usually 1%, each year unless they choose otherwise.

For sponsors, using re-enrollment is a tool “capturing participants in the plan who were not enrolled; perhaps they didn’t understand it enough [at the time they were hired],” Cole explains.

Sponsors are also increasing immediate eligibility to receive employer contributions, adding Roth options and applying investment policy statements, according to PSCA.

Nearly half of plans (47.8%) allowed participants to receive matching employer contributions immediately upon hire in 2022, up from 36.3% in 2021; two-thirds offered Roth options, up from 58.8% in 2021; and 63.3% of organizations included an investment policy statement in plans, up from 61.2% in 2021 and 25% in 2013.

For Cochrane, the crucial task facing 403(b) plans is driving participants toward saving more, emphasizing—for employees who can afford to—the significance of retirement savings in small amounts.

“Our next big challenge is getting [participants to increase their retirement savings] from whatever they’re doing right now to [what] … they’ll need for retirement,” she says. “There’s a lot of struggle happening financially in the nonprofit sector to do all of the great things they want to do. And that is a big challenge for HR teams and nonprofit employers nowadays.”

Cochrane explains, “Individual outreach is the only way we’re going to get there as an as a nation or as an industry. One-on-one consultation has been the single best success we have found with helping every employee.”

For 403(b) plans, the average savings rates in plans with Fidelity Investments as the recordkeeper reached 11.5% in the fourth quarter of 2023, up slightly from 11.1% in Q4 2018. In the same period, the total savings rates in 401(k) plans reached 13.9%, up from 13.1% in 2018, according to data sent by Hub International.

Education and Communications

Personalizing retirement plan education to help boost savings requires sponsors to emphasize the importance of saving for their long-term retirement readiness, Cochrane says.

“[Sponsors] need to take a very parental overview [of] education with employees to say, ‘Do you have the ability to put $25 in today out of every paycheck?’” she says.

Providing education can mean starting at the basics of investing and retirement plans: explaining what a target-date fund is; what TDF vintages are; how to pick appropriate TDF vintages for their age; how the plan’s qualified default investment alternative works; and what a glide path is, according to OneDigital’s Cole.

Explaining how to properly use retirement plans is not unique to 403(b) plans, he adds. Yet, for developing an education strategy, tailoring aspects to the demographics of sponsors is useful, Cole says.

“When I’m working on a [retirement plan of a] college and university, they’re typically very focused on education, so when developing their education strategy, it resonates with the employee, [and] they’re able to understand, ‘I’m here to learn; I teach,’” Cole adds. “[Retirement plan education] is more impactful in that environment. If you have a foundation, that may or may not resonate with everyone.”

When developing an education strategy, sponsors can study their employee population’s level of engagement with the plan’s recordkeeper or adviser, adds Cole.

Greater personalization reflects that “plan sponsors are much more attuned to their employees’ need to figure out where my next best dollar goes,” Wood adds, and for 403(b) plan sponsors with employees in health care and education, student loan debt is another barrier.

“If you think [through] the eyes of a nurse or a teacher—especially those under the age of 30—the challenge [to increase retirement contributions] has been a lot of student loan debt,” Wood says.

For plan participants dealing with student loan debt, personalizing education means forming a financial plan with the participant in which their priority is to pay off loans before contributing to the retirement plan, he explains.

Key strategies to boost other participants’ contributions include preparing to make decisions about health care, using a health savings account and student loan debt, Wood says. Sponsors with high-deductible health plans, which can be paired with HSAs, must communicate the availability of this option and how it works, he adds. Communication must also convey information deliberately but use a more engaging approach.

“In the [old] days, you’d have advisers sitting up in front of a room, and they would preach to employees or almost dictate, ‘You must save for retirement. You can’t afford not to,’ it was a different way of communicating,” Cochrane says. “Now we realize [a better approach is] more maternalistic or paternalistic.”

Sponsor education and communication should “encourage employees to sign up for this free-to-them retirement benefit, offering this guidance that’s not intimidating [and] it’s not a sales pitch,” Cochrane adds. “No one’s going to talk down to them or make them feel bad about anything, but encourage those employees” to get engaged with their retirement plan.

Pay Gaps

Nonprofit participants face different challenges than many corporate employees that can limit their saving: a trend toward lower salaries. OneDigital’s Cole explains low pay is an issue in both types of plans, as workers of all kinds face low compensation and high costs of living.

Insufficient retirement savings is “not specific to 403(b) [plan participants because of low salary, [because] even in [a] 401(k), if you’re [a low-paid worker] in a call center, you’re likely not to have contributed to your 401(k) plan,” he says. “If you’re an employee making $20,000 a year [or between] $25,000 and $30,000, you’re going to have a hard time saving in a retirement account. 403(b) or 401(k) doesn’t matter.”

Cochrane notes that nonprofits in social services, particularly, struggle to provide robust retirement benefits or offer a retirement plan. Lacking employer-sponsored retirement benefits reduces the retirement readiness of workers at nonprofits, many of whom are from historically “marginalized” backgrounds, Cochrane says.

“A social welfare organization that is feeding the poor on tight budgets, they are more apt to not have a retirement plan or, if they do, they do not necessarily have the funds to encourage [contributions]” or have employer matching contributions, she explains.