401(k) Plan Enhancements and Falling Fees Linked to Richer Retirements

Plan sponsors are focusing on automating savings and keeping fees low

Stephen Miller, CEBS By Stephen Miller, CEBS February 5, 2019

updated on February 26, 2019

Employers are making significant 401(k) plan enhancements that have likely increased plan participants' savings rate, new research shows. These features include higher automatic default rates, more-generous matches and earlier plan eligibility. More plan sponsors also are benchmarking fees to lower plan costs.

The nonprofit Plan Sponsor Council of America's (PSCA's) recently released report, 61st Annual Survey of Profit Sharing and 401(k) Plans, shows that:

  • Employers are contributing an average of 5.1 percent of pay to their employees' 401(k) accounts, up from 3.5 percent in 2010.
  • The average deferral rate by participants rose to 7.1 percent, up from 6.2 percent in 2010.

Many financial professionals recommend an overall savings rate between 10 percent and 15 percent, according to PSCA, so the average combined employer/employee contribution of 12.2 percent of pay falls within the preferred range.

"Despite the dire predictions we often hear, workers, with the support of employment-sponsored retirement programs, are clearly making progress," said Jack Towarnicky, PSCA's executive director. "The increases in retirement contributions from both plan participants and plan sponsors confirm the positive impact of company-sponsored retirement savings plans."

The survey draws on a representative sample of more than 600 PSCA members' plans, surveyed last year. Among the savings-supportive plan-design trends are the following:

  • Matching generously. The use of dollar-per-dollar matching of more than 3 percent of pay increased to 35.8 percent, up from 24.1 percent in 2016.
  • Going automatic. 61.2 percent of plans use automatic enrollment to boost employees' retirement savings, up from 59.7 percent in 2016, while 60 percent of automatic-enrollment plans use a default deferral rate of more than 3 percent of pay—up from less than 30 percent of plans 10 years ago. Three-fourths of automatic-enrollment plans have an auto-escalation feature that increases plan participants' default deferral rates over time.

Automated Savings 

Features such as auto-enrollment and auto-increases “have proven successful in improving retirement plan and participant outcomes,” said Aimee DeCamillo, vice president and head of T. Rowe Price retirement plan services. In 2017, her firm’s research shows, participation in large retirement plans with auto-enrollment was 42 percentage points higher than in non-auto-enrollment plans (87 percent compared with 45 percent).

Michael Kozemchak, managing director at Institutional Investment Consulting (IIC), a plan administration firm, said during a recent webcast that "The vast majority of our plans now enroll everybody at 6 percent [salary deferral], with re-enrollment every year at 6 percent to bump up participants with lower savings rates," unless they opt out. For those saving above the default 6 percent rate, "there's an automatic 2 percent per year increase up to 10 percent of pay."

  • Shrinking wait times. Nearly half (47.2 percent) of PSCA-surveyed employers allow for immediate eligibility, and more than half (55.7 percent) of the largest plans do. Even among the smallest employers, more than a third (35.3 percent) let workers become participants immediately. Nearly 40 percent of plans provide immediate vesting for matching contributions.
  • Getting suggestive. Nearly a third of plans provide a suggested savings rate for participants, with more than 4 in 10 companies suggesting a rate of 10 percent or more.
  • Playing catch-up. The number of eligible participants ages 50 and older making additional catch-up contributions of up to $6,000 has climbed steadily to 29.3 percent.
  • Being "app"-ropriate. The use of mobile technology to provide plan services to participants has doubled since 2014, and it is now used by 43.6 percent of companies.

"Increasingly, those covered by a 401(k) or other qualified retirement plan are doing the right things to prepare for retirement, largely because employers are doing the right thing to support them," said Hattie Greenan, PSCA's director of research and communications.

[SHRM members-only toolkit: Designing and Administering Defined Contribution Retirement Plans]

Limiting Participant Fees

Among other positive steps, more plan sponsors are calculating and benchmarking plan fees, according to 2019 Defined Contribution Trends, a survey report by Callan, a plan services firm. Callan's findings are based on responses collected in September and October 2018 from 106 plan sponsors.

More than 4 in 5 plan sponsors (83.3 percent, up from 77.2 percent last year) benchmarked plan fees against fees for similar plans as part of their fee-calculation process.

While more than half of plan sponsors kept fees the same following their most recent fee review, almost 30 percent took steps to reduce fees, such as negotiating with or changing service providers.

Other findings regarding plan fees are shown below.

(Click on graphics to view in a separate window.)


"Plan sponsors continue to negotiate fees aggressively and prefer flat per-participant fees over asset-based fees," said Tom Hawkins, senior vice president for marketing and research at Retirement Clearinghouse, a retirement plan services provider. Even when fees are paid from plan assets, "many plans pay for administrative fees not from participant accounts but via a plan expense account funded from forfeitures" when employees terminate employment before vesting in an employer's contributions, Hawkins explained. "This may be why you may be seeing more employers simultaneously paying more of the administrative fee and increasing the company match."

For plan administrator recordkeeping fees, rebidding contracts by issuing requests for proposals (RFPs) "is producing fee reductions of 20 percent to 40 percent," Kozemchak said. Plan sponsors should execute RFPs every five years because "it's going to lower your fees, in all likelihood."

With benchmark studies, which can usually be done in 60 to 90 days, "you’re looking at your plan compared to 30 or 40 other plans" that are similarly situated, Kozemchak noted. He called benchmarking helpful but said it can't take the place of RFPs for reducing plan costs because, among other reasons, "when was the last time those 30 to 40 plans went to market" to ensure that what they’re paying is competitive.

Stretching the Match

Callan, like PSCA, found that employers often are being more generous with matching contributions and are altering match formulas to encourage greater savings. 

The share of sponsors that changed their company match policy jumped significantly, from 2 percent in 2017 to 22 percent in 2018, Callan showed. That figure could grow; more than a third anticipate making a change in 2019.

Among sponsors that made a change, 33 percent increased the match; 23 percent say they plan to increase the match in 2019. Only 6.6 percent of plans report they are going to eliminate or reduce the company match.

Over 11 percent of plan sponsors changed to a stretch match in the past year while over 13 percent said they planned to do so in the next 12 months, Callan found. A stretch match raises the percent of a participant's deferred pay that a plan sponsor will match. To keep the employer's contribution cost neutral, plan sponsors may reduce the match percentage, for instance, from a 50 percent match up to 6 percent of deferred pay, to a 25 percent match up to 12 percent of pay.

"A stretch match encourages plan participants to save more in order to receive the maximum benefit of the plan sponsor’s contribution matching formula," DeCamillo said.

Departing Employees' Assets

Roughly 60 percent of sponsors have a policy for retaining retiree or terminated participants' assets, a notable increase from 49 percent in 2016, Callan found.

As the dollar value of assets in an organization's retirement plan increase, plan administration firms lower fee rates that are based on a percentage of assets under management. While lower fees can benefit both plan sponsors and participants, "a blanket policy of attempting to retain all former employees' accounts as a means of increasing assets and thereby reducing plan fees is problematic," Hawkins said.

Retaining accounts of former employees with small balances of less than $1,000 "will only marginally increase plan assets and could result in increased administrative costs and fiduciary risk associated with higher levels of missing participants" that plan sponsors may no longer be able to locate, he pointed out.

As employees leave an employer, Hawkins advised, "it's a better practice to help them to understand their options," including keeping funds in their former employers' plan, moving their retirement savings to a new employer or rolling their assets into an individual retirement account.

Best Practices Aid Sponsors' Bottom Lines

Best-in-class 401(k) plans are significantly correlated with higher revenue and profitability for plan sponsors, a recent study shows.

A September 2018 report by T. Rowe Price, a provider of retirement plan services, found that:

  • Companies whose 401(k) plans have above-average performance outcomes are also likely to have 20 percent to 80 percent higher corporate profitability than companies with average plans.
  • Companies with underperforming 401(k) plans are likely to have corporate profitability that is up to 80 percent lower than companies with average plans.
  • These correlations exist within and across industry sectors, no matter the size of the company.

The findings "provide strong evidence that there's a connection between better-designed and higher-quality 401(k) plans and a company's bottom line," said Joshua Dietch, head of T. Rowe Price's retirement and financial education team. "Though there may be higher costs associated with stronger 401(k) plans, such as more generous matching or the immediate ability to participate in the plan, the potential profitability gains may outweigh the potential costs."

The researchers identified 332 publicly traded companies that together sponsor 485 plans, each with more than $50 million in assets. The plans were rated by BrightScope, an independent financial information firm.

Large vs. Small Plan Fees

The 19th edition of the 401k Averages Book, a benchmarking guide, shows that:

  • Average total plan cost for a small retirement plan (100 participants/$5 million assets) declined from 1.25 percent to 1.24 percent over the past year.
  • The average total plan cost for a large retirement plan (1,000 participants/$50 million assets) declined from 0.95 percent to 0.93 percent.

The findings, from a database of 200 product offerings at 71 401(k) providers, were updated through Sept. 30, 2018.

"Overall fee disclosure and greater transparency has helped drive down 401(k) fees. But what we continue to find is large plans, with larger average account balances, pay less than smaller plans," said Joseph Valletta, author of the 401k Averages Book. "People in the industry understand this but I doubt participants of smaller companies are aware of this gap."

401k averages book - fee chart-2.jpg

401k averages book - fee chart-3.jpg Through September 2017.  401k averages book - fee chart-4.jpgThrough September 2018.

Source: 401k Averages Book, 19th edition (February 2019).

Among other 401k Averages Book findings:

  • The amount of revenue sharing paid by a plan is affected by its size. Revenue sharing—added to the expenses of some mutual funds and used to pay for recordkeeping and advisor compensation—can be as high as 1.19 percent for the smallest plans and as low as 0.16 percent for larger plans.
  • Wide range between high and low-cost providers. The range of cost is greatest within the small plan market. The range of a plan with $1 million in assets and 100 participants ($10,000 average account balance) is 0.72 percent to 2.81 percent.

Related SHRM Articles:

401(k) Sponsors Focus on Benchmarking—and Lowering—Fees, SHRM Online, February 2018

Fee Allocation in 401(k) Plans: Choose Your Model, SHRM Online, February 2016

401(k)s Shifting to Fixed-Dollar, Per-Head Fees, SHRM Online, October 2015



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