Results improve with thoughtful use of auto features
The assumption when plan sponsors began to include auto features in their 401(k) plans was that participation rates and deferral amounts would increase — but no one knew for sure. As time has passed, it appears the assumption was good: auto-enrollment and auto-increases have had very positive results overall.
Plans that include auto-enrollment enjoy an average participation rate that is nearly double that of plans not using this feature: 85.6% participate in plans that include auto-enrollment, compared to 43.7% for those without. Even better, more than one-third (37%) of plans using auto-enrollment have a default deferral rate of 6% or higher.
On average, 401(k) plans saw their pretax deferral rate increase to 8.6% of pay in 2018, up slightly from 8.3% a year earlier.
Employers added to employee savings via an increased company match, perhaps due to the reduced corporate tax rate. In 2018, 11.8% of plans matched 100% of the first 6% of salary; 14.2% matched 100% up to 4% of pay; and 27.2% set their matching formula at 50% of the first 6%.
Further, Roth account contributions rose by 10% compared to 2017. Still, Roth accounts may be underutilized, with usage at just 7.6%. This may be due to a lack of understanding by employees, which suggests that education on the topic could benefit them.
Young Millennials, between the ages of 20 and 29, contribute to a Roth account at a rate of 8.8%, compared to almost 10% by elder Millennials, between 30 and 39.
However, 2018 wasn’t all rosy. According to T. Rowe Price. In their December 31, 2018, Reference Point, the company saw a significant increase in the number of participants contributing nothing to their plan, from 33.9% in 2017 to 35.6% in 2018.
This may have played a role in an overall decrease in account balances, from $92,402 in 2017 to $85,336 in 2018. The decrease was most pronounced among Millennials, who lost the highest percentage in account balances over the year.
Market fears seem to have been a deciding factor in plan participants shifting from stocks to cash within their 401(k) plan accounts. Overall, investment in stocks dropped 4.9% in 2018, whereas investment in money market or stable value fund increased just over 10%. Target date funds (TDFs) continue to be popular with retirement investors; investments in TDFs rose slightly in 2018, from 41.2% in 2017 to 42.2% — an increase of 2.4%.
View the full 2018 plan participation in T. Rowe Price report.