Combination of automatic 401(k) solutions can move the needle
While it’s fairly well known that automated solutions can lead to increased participation and savings, new research reveals that adopting the solutions in tandem can lead to even better results.
According to Reference Point, T. Rowe Price’s annual 401(k) benchmarking report, plans that couple auto-enrollment and auto-raise achieve an 85% participation rate, compared to just 29% for those that do not offer the services, nearly three. times more participation. Additionally, participants in plans with both auto-enrollment and auto-increase save 5% more than those in plans that did not adopt the solutions, at an average pre-tax carryover rate of 7.8% against 7.4%.
Using the opt-out approach for automatic raises has also proven to be much more effective than opt-in. In 2021, participation in the automatic increase was 65% in plans that used the opt-out approach, compared to only 11% for plans using the opt-in approach. “This is evidence that choosing the opt-out approach as the standard in plan design is an effective nudge to help improve participants’ saving behaviors,” the authors note.
The report, which presents year-over-year data and analysis on participant behavior and plan design based on data from the company’s recordkeeping clients, also reveals that sponsors and 401(k) plan participants maintain positive retirement savings behavior in the aftermath of the pandemic. .
For example, the plans continue to support participants by offering higher default deferral rates through their automatic enrollment. While the number of plans offering a default rate of 6% or more remained stable at 36%, the number of plans offering a deferral of 5% increased from 14% to 16% in 2021, continuing a trend to the rise since 2018, the report notes. . Therefore, after two years at 50%, the percentage of auto-enrollment plans with a default rate of 5% or more increased to 52%.
“In February 2020, when markets began to react to the growing pandemic, there were many questions about the impact COVID-19 would have on the pension industry and the participants who depend on it,” said Kevin Collins, Manager of Retirement Plan Services at T. Rowe Price. “We have a response two years later and it is positive: throughout this unprecedented time, plan sponsors and members have continued to take positive actions that show they are realizing the value of savings programs -retirement.
Employer correspondence returns
The percentage of plans offering a match has returned to pre-pandemic or higher rates. In response to the pandemic, a small percentage of plans reduced or suspended contributions in 2020, with some industries faring worse than others. Most plan matches returned in 2021, including for the hard-hit leisure, hospitality and retail sectors, the report noted.
For example, 74% of plans in the leisure and hospitality industry offered a match in 2020, but that percentage rose to 90% in 2021, according to company data. Similarly, 73% of plans in retail industries offered an equivalency in 2020, and this percentage increased to 80% in 2021.
“This support from employers bodes well for plan members as they strive to increase their retirement savings, and it signals another step in the recovery,” Rowe Price said, adding that “recovery matchmaking can also benefit employers in their efforts to attract and retain talent.
Decline in loans
The trend in the right direction is also that the percentage of participants with outstanding loans increased from 20% in 2020 to 18.8% in 2021, the report notes. Among participants with loans, the percentage of participants with multiple loans also decreased.
One caveat, which the firm says may be due to higher available account balances, is that participants’ average loan balances have increased to an average of $9,663.
Participants between the ages of 40 and 60 continued to hold the highest percentage of loans and outstanding balances, likely due to their competing financial priorities, the report observes.
Additionally, plans that allow two or more loans also tend to have lower savings rates, dropping from an average rollover of 7.9% to 6.8%. Authorizing more loans is also correlated with higher average loan balances, rising from $10,162 for one loan to $12,424 for two and $13,698 for three or more loans, according to the report. . That said, simply offering participants the option of multiple loans does not affect the number of participants who will follow through, the report notes. On average, in schemes that allow loans, about 19% of the participating population will take out a loan.
Still, given the potential negative impact of multiple loans, plan sponsors might consider limiting them to one outstanding loan per participant, Rowe Price suggests. “This could still help meet the needs of participants while limiting the possibility that loans are used for less essential reasons,” the report notes.
In its closing remarks, the company observes that 2021 data demonstrates that sponsors and participants continue to understand the value of retirement savings programs, but adds that there is still a need to help participants navigate the challenges. through financial wellness programs and continued adoption of the best plan design. practices.
“Plan sponsors can continue to support these positive behaviors by offering financial wellness programs and implementing strategic plan design features to help ensure their members stay on that path,” Collins points out. . Some participants may also need additional support, particularly if they took out a large loan or distribution through the CARES Act or dipped into emergency savings, the report adds.
Results are based on T. Rowe Price’s full-service universe (401(k) and 457 plans), comprised of 660 plans and more than 2 million participants through 2021.