Data and Research June 26, 2017

More Retirement Plans Using Roth Accounts

More retirement plan sponsors are offering participants the opportunity to make Roth contributions and utilizing auto features to a degree of success, according to a report by T. Rowe Price.

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More than half (61%) of plan sponsors now offer Roth contributions in their 401(k) plans, according to a report from T. Rowe Price Retirement Plan Services.

This is a 50% increase since the end of 2015 and the biggest one-year increase in Roth contribution adoption since the company began tracking the figure in 2007.

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The same report also indicated that adoption of automatic plan features has been on the rise since the Pension Protection Act of 2006. The number of plans with a 6% default deferral rate or more has doubled since 2011, with 33% of plans offering this higher rate in 2016. The industry standard for the past 10 years has been 3%.

The percentage of plans adopting automatic deferral increase grew from 63.3% in 2011 to 71.5% in 2016. Similarly, automatic enrollment increased from 39.8% in 2011 to 54.5% in 2016.

Participation rates continue to be strongly tied to the adoption of auto-enrollment, with participation 42 percentage points higher in plans with auto-enrollment than in those without it.

Pre-tax deferral rates continued to increase in 2016 and now stand at 8%, the highest rate since before the financial crisis. T. Rowe Price accounts the improvement to plan sponsors raising the default deferral rate for their plans and improved market conditions.

Furthermore, plan adoption of target-date portfolios continued to rise. In 2016, 93% of plans at T. Rowe Price offered target-date portfolios. Additionally, 55% of participants invested their entire account balance only in target-date funds, an increase of nine percentage points since 2013. 

The firm also found the percentage of participants with loans at the end of 2016 is down marginally to 23.8%, which is the lowest since the height of the financial crisis in early 2009.

The ratio of direct rollovers to cash-outs continued to strengthen with rollovers increasing to 81% in 2016, compared with 71% in 2009. Cash-outs decreased to 19% in 2016, compared with 29% in 2009. Meanwhile, hardship withdrawals declined, with only 1.4% of participants in plans at T. Rowe Price taking such a withdrawal, compared with the 2% industry average.

These findings come from T. Rowe Price’s 2016 update of Reference Point, an annual benchmarking report of employer-sponsored retirement plans based on T. Rowe Price’s full-service recordkeeping client data. The full report can be accessed at TRowePrice.com.

Data and Research June 26, 2017

Smaller Companies Cite Reasons for Not Offering Retirement Plans

In addition, smaller companies that do sponsor a retirement plan for employees cite reasons for not using automatic plan features.
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Only 53% of small- to mid-sized businesses, those with five to 250 employees, offer a retirement plan, The Pew Charitable Trusts found in a survey.

Ninety-three percent believe their employees would prefer a higher salary or other benefits. Employers are much more likely to offer paid time off (86%) and health care plans (61%) than a retirement plan. In addition, only 45% offer dental or vision insurance and 22% tuition assistance.

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Firms are more likely to offer a retirement plan if they are older and larger. The likelihood of a firm offering a retirement plan is either in its first years or as it approaches 75 employees. “This suggests that businesses may need to reach a point of financial stability before taking on responsibility for a retirement benefits program,” Pew says in its report, “Employer Barriers to and Motivations for Offering Retirement Benefits.”

Asked why they offer plans, employers said it is to help employees save for retirement (96%), to attract and retain employees (89%), to improve employee performance (91%), to give tax advantages to employees (77%) and to give tax advantages to managers (58%).

Most employers offer contributions. However, only 34% automatically enroll participants and only 14% use automatic escalation. Among those that do not automatically enroll participants, 41% said they thought their employees would not like that, and among those that do not automatically escalate deferrals, 40% said the same.

Among industries, professional, production, transportation and material moving companies are more likely to offer a retirement plan than companies in natural resources, construction and maintenance. Pew says that the former set of companies are more likely to have full-time workers.

As to why they do not offer a plan, 37% said because it is too costly and 22% said they do not have the organizational resources to manage a retirement plan. While most employers were at least somewhat familiar with 401(k) plans, far fewer knew about Simplified Employee Pension (SEP) plans, Savings Incentive Match Plan for Employees (SIMPLE) individual retirement accounts (IRAs) or myRAs, which are designed for small firms and individuals, Pew said.

Among the companies that do not have a retirement plan, 67% said that if their business profits rose, they would consider starting a retirement plan. Another 60% pointed to the possibility of an increase in tax credits for companies starting a plan as motivation for them to offer one.

The Pew report can be downloaded here.

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