Plan Design Progression Leading to Higher Retirement Savings

T. Rowe Price has released its annual participant data benchmarking report, Reference Point, which shows mixed results for participants in 2018. On the positive side, average deferral rates reached a 10-year high of 8.6%, outstanding 401(k) loans fell to a nine-year low of 22.5% and hardship withdrawals fell for the ninth year in a row, from 1.9% in 2010 to 1.3% in 2018.

Participation rates were nearly 96% higher for plans—a difference of 40 percentage points—with auto enrollment (85.6% versus 43.7%), and the usage of auto escalation was nearly five times higher in plans that employ opt-out options rather than opt-in (67% versus 12%). Nearly 37% of plans with automatic enrollment use a default deferral rate of 6%, while 33% use a default rate of 3%.

Employer match rates increased in 2018, with more offering a match of 4% than 3% for the first time. The reduction of the corporate tax rates most likely contributed to the increase in company matches in 2018, T. Rowe Price says.

The adoption of target-date products reached an all-time high of 95%, and the percentage of participants with their entire balance invested in a target-date product has grown by 20% since 2014. Nearly 75% of plans now offer a Roth option, and the number of participants making Roth contributions increased by nearly 10% from the year before. However, overall usage remains at a low 7.6%.

On the negative side, the participation rate dropped by nearly two percentage points from the year prior, and plans without automatic enrollment saw participation drop at more than twice the rate than those with auto enrollment. “It’s a sign that auto-solutions can help mitigate macro forces that may be decreasing participation rates,” T. Rowe Price says in its report. This is particularly true of younger participants, with 80% of those between the ages of 20 and 69 remaining in plans with automatic enrollment, compared with only 25% of this age group deciding to join a plan without automatic enrollment on their own.

Participants who saved less in 2018 decreased their deferral rates by a greater amount than those who increased their deferral rates.

The percentage of participants contributing 0% increased to 36%, an increase of five percentage points from 2017, and average account balances decreased by nearly 8% (from $92.402 to $85,336), in part because of the year-end market correction. This volatility also prompted participants to move out of equities into more conservative investments—with stock holdings ticking down from 34.8% of the average portfolio in 2017 to $33.1 in 2018 and stable value holdings rising from 8.9% to 9.8%. Furthermore, there was a 36% increase in cash-out distributions in 2018 to 26% of participants taking a cash-out, which T. Rowe Price says could have been caused by participants’ uncertainty about the markets and movement from accounts with small balances.

“Non-contributors may benefit from additional education about plan benefits, including company match, if applicable,” T. Rowe Price says.

While outstanding loans fell in 2018, the average loan balance rose from $9,194 the year before to $9,351. Likewise, the average hardship withdrawal increased to $7,080, up slightly from 2017 and up from the 10-year low of $5,628 in 2009.

“Overall, we’ve seen an increase in positive participant behavior,” says Kevin Collins, head of retirement plan services at T. Rowe Price. “However, there are still opportunities for continued improvement. Plan sponsors can provide this support through plan design and by integrating financial wellness programs into their plan offering.”

T. Rowe Price’s findings are based on an analysis of the 657 401(k) and 457 plans and the 1.8 million participants that the firm serves. The full Reference Point report can be downloaded here.