Employers Are Raising 401(k) Default Savings Rates to 6%

Going beyond a typical 3% default rate can pay off for plan participants

By Stephen Miller, CEBS Aug 19, 2016
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More employers are auto-enrolling new employees into 401(k) or similar defined contribution plans, and they are setting the default salary deferral rate higher than in the past.

A newly released annual 401(k) benchmarking report by financial services firm T. Rowe Price shows that:

  • About half (51 percent) of the defined contribution retirement plans that the firm administers have adopted an auto-enrollment feature, up from 28 percent in 2011.

  • For employee contributions, 29 percent of these plans auto-enroll participants at a 6 percent salary deferral rate, up from 17 percent that did so in 2011.

  • For employer contributions, 40 percent of plan sponsors match contributions at a rate of up to 6 percent of a participant's pay, encouraging participants to defer at least that amount to get the maximum employer match. That figure has held steady in recent years. (Separately, consultancy Aon Hewitt found that dollar-for-dollar is now the most common match formula.)

  • Target-date funds continue to be the default of choice for 96 percent of plans that use auto-enrollment.

Plan sponsors "are continuing to elevate the industry standard by auto-enrolling participants at 6 percent versus the more typical 3 percent," said Aimee DeCamillo, head of T. Rowe Price Retirement Plan Services in Owings Mills, Md. "Higher default contribution rates encourage employee participation in plans and will lead to better outcomes for retirement investors."

Default Deferral Rate for Auto-Enrollment Plans

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Source: T. Rowe Price.


"Plan participants can't control volatility in the financial markets or the direction of the economy," she noted, "so they need to seize control of the one thing that's in their power—the amount of money they save for retirement. Making consistent contributions to a retirement plan and regularly increasing their contribution rates are the most important actions investors can take to prepare for a successful retirement."

Tellingly, plans with an auto-enrollment feature have a participation rate of 88 percent, while those that do not have this feature have a participation rate of just 48 percent.

Participation Rate Comparison by Age Group

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Source: T. Rowe Price.

An Added Push

But it's not all good news. The average participant deferral rate held steady at 7 percent, far below the 15 percent level (including the employer match) recommended by many retirement advisors. In addition, approximately one-third of participants are not deferring any money to their retirement account.

Even a 1 percent of pay increase in 401(k) contributions could translate into a larger monthly retirement paycheck, and the impact is greatest for younger individuals with the longest savings time horizon, according to an earlier Fidelity analysis.

After salary raises are announced each year, automatically escalating participants' savings rates by an additional 1 percent (unless they affirmatively opt out), until the amount deferred reaches 15 percent of pay, can help employees save enough for a secure retirement.

Likewise, automatically enrolling nonparticipant employees each year (again, with an opportunity to opt out) can bring into the plan those who, when hired, felt unable to contribute but may now be able to do so, given a bit of a push.

"Auto-increase has become a powerful tool for sponsors to use to further assist participants with saving for their retirement," DeCamillo said. "Auto-solutions are proving to be successful tools for plan sponsors to use within their plans and a key motivator to develop positive saving habits."

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