While it’s fairly well-known that auto-solutions can lead to
increased participation and savings, new research finds 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 which couple auto-enrollment and auto-increase
achieve an 85% participation rate, compared with only 29% for those that do not
offer the services—nearly three times greater participation. In addition,
participants in plans with both auto-enrollment and auto-increase are saving 5%
more than those in plans that did not adopt the solutions—at an average pretax
deferral rate of 7.8% versus 7.4%.
Using the opt-out approach for auto-increases was also found
to be far more effective than opt-in. In 2021, auto-increase participation was
65% in plans that used the opt-out approach, compared with 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
participant saving behaviors,” the authors note.
The report, which features year-over-year data and analysis
on participant behavior and plan design based on the firm’s recordkeeping
client data, also finds that 401(k) plan sponsors and participants are
continuing positive retirement savings behavior in the aftermath of the
pandemic.
For instance, plans are continuing to support participants
by offering higher default deferral rates through their auto-enrollment. While
the number of plans that offered a 6% or greater default rate remained steady
at 36%, the number of plans offering a 5% default deferral increased from 14%
to 16% in 2021, continuing an upward trend since 2018, the report notes.
Consequently, 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 the markets started reacting to the
growing pandemic, there were a lot of questions about the impact COVID-19 would
have on the retirement plan industry and the participants who rely on it,” said
Kevin Collins, head of Retirement Plan Services at T. Rowe Price. “We have an
answer two years later and it’s a positive one: throughout these unprecedented
times, plan sponsors and participants continued to take positive steps that
show they realize the value of retirement savings programs.”
Employer Match Returns
The percentage of plans offering a match returned to
pre-pandemic rates or higher. In response to the pandemic, a small percentage
of plans reduced or suspended contribution matches in 2020, with certain
industries faring worse than others. Most plan matches returned in 2021,
including for the hard-hit leisure and hospitality and retail trade industries,
the report notes.
For instance, 74% of plans in the leisure and hospitality
industry offered a match in 2020, but that percentage jumped to 90% in 2021, according
to the firm’s data. Similarly, 73% of plans in the retail trade industries
offered a match in 2020, and that percentage rose to 80% in 2021.
“This support from employers bodes well for participants as
they strive to increase their retirement savings, and it signals one more step
in the recovery,” T. Rowe Price emphasizes, adding that, “The match
reinstatement may also benefit employers in their efforts to attract and retain
talent.”
Loans Decline
Also trending in the right direction is the percentage of
participants with outstanding loans decreased from 20% in 2020 to 18.8% in
2021, the report notes. Of those participants with loans, the percentage of
participants with multiple loans also declined.
One caveat, which the firm notes may be due to higher
available account balances, is that the average participant loan balance
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.
Moreover, plans that allow two or more loans also tend to
have lower savings rates—dropping from an average deferral of 7.9% to 6.8%.
Allowing a larger number of 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, the report shows. That said, simply offering participants
the option of multiple loans does not affect how many participants will act
upon it, the report notes. On average, in plans that allow loans, approximately
19% of the participant population will take a loan.
Still, given the potential negative impact from multiple
loans, plan sponsors might want to consider limiting them to one outstanding loan
per participant, T. Rowe Price suggests. “This could still help satisfy the
participant need while also helping to limit the possibility of loans being
used for less essential reasons,” the report notes.
In concluding remarks, the firm observes that the 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 manage challenges through financial wellness programs and
continued adoption of plan design best 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 participants stay on this path,”
Collins emphasizes. Some participants may also need additional support,
especially if they took a large loan or distribution through the CARES Act or
tapped into emergency savings, the report adds.
The findings are based on the large-market, full-service
universe of T. Rowe Price Retirement Plan Services (401(k) and 457 plans),
consisting of 660 plans and more than 2 million participants throughout 2021.
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