Automated features now standard for most employer-sponsored retirement plans helped bring about a record 8.3-percent average participant deferral rate in 2017—the highest level in a decade, according to a recent T. Rowe Price study. The rise in employee deferral amounts perpetuates a trend started in the years after the 2008 financial crisis.
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In addition, auto-enrollment plans offering a 6-percent default deferral rate outnumbered the 3-percent industry standard for the first time: 32.4 percent of T. Rowe Price plans had a 6-percent default deferral last year, compared with 31.9 percent setting a 3-percent default, the firm said in its annual “Reference Point” report for 2017. Nearly two-thirds of the plans managed have set or increased their default deferral rate above 3 percent.
The report draws data from the 636 defined contribution (DC) 401(k) and 457 plans with more than 1.6 million participants that the money management firm services. Deferral results are based on employee pretax deferral percentages greater than zero for eligible participants over various time periods from calendar years 2007 through 2017.
Participation in auto-enrollment plans, at 87 percent, is 42 percentage points above that in non-auto-enrollment plans, T. Rowe Price said. Furthermore, adoption in the latest year of automatic increases in employee deferrals is more than five times higher (66 percent) in plans with opt-out versus opt-in design, it reported.
Employer Contributions
As for employer contributions, most plans set the match ceiling at 6 percent, the report said. The most popular match formula, 50 percent up to an employee deferral level of 6 percent, is used by 31.8 percent of plans with a match managed by T. Rowe Price.
Employer contributions measured by the firm included all types of employer money, such as matching contributions, discretionary contributions, and retirement contributions.
More than 67 percent of the plans now offer after-tax Roth contributions, rising from 60.3 percent in 2016. Younger participants (ages 20 to 40) use Roth contributions more often than their older peers, the firm said.
“Adoption of Roth increased in 2017—by plans and by participants—which could demonstrate increased understanding of the feature,” the report concluded.
Investment Offerings Rise
The average number of investments offered by plans continues to increase, even as participants invest in fewer of them amid the growing popularity of target-date fund (TDF) products that package assets and manage risk for participants based on their expected retirement dates.
For the first time in T. Rowe Price’s 10-year survey, target-date products now account for the largest percentage of plan assets under management, surpassing other investment types in nearly every category. Ninety-four percent of the plans offer them.
Investment in TDFs is highest among participants aged 20 to 40, those who are more likely to have been auto-enrolled than their older peers.
“Plans with a high number of participants who appear to be non-diversified might consider a ‘[qualified default investment alternative] QDIA reset,’ which moves participants’ existing balances and future contributions into a [QDIA], with an appropriately communicated opt-out option,” T. Rowe Price advised. “This should be considered in light of other alternatives, such as investment education regarding the importance of diversification.”
Plan Loan Usage
Plan loan usage declined to 23.4 percent of participants, but a higher number of participants over age 50 had outstanding loans, T. Rowe Price said. Five years ago, a record 24.9 percent of participants in T. Rowe Price plans had a loan balance. The percentage of its participants with multiple outstanding loans decreased to 15.6 for 2017, down 4 percentage points since 2013.
There was no change reported in direct rollovers to other retirement plans, cash-outs, or hardship withdrawal usage, although the recordkeeper reported cash-outs increased among younger participants.
“Consider age-targeted messaging about cashing out for younger participants in particular,” T. Rowe Price suggested to plan sponsors.