401(k) Plans Adopt Participant-Friendly Features

By Stephen Miller, CEBS Sep 11, 2013

The use of 401(k) plan features such as automatic enrollment, automatic escalation, higher default salary-deferral rates and age-based investment advice all grew substantially during the past year, as employers sought to improve the retirement readiness and financial well-being of their employees, according to Bank of America Merrill Lynch’s September 2013 401(k) Wellness Scorecard report.

The scorecard findings are based on the firm’s administration of 401(k) plans for 2.5 million participants, with data as of June 30, 2013. Features that have become steadily more popular are highlighted below.

Auto Enrollment and Auto Escalation

During the past year, the number of plan sponsors using auto enrollment increased by 16 percent, with the number of auto-enrolled participants increasing by 29 percent. During this period, only 10 percent of auto-enrolled employees opted out—a 90 percent success rate and evidence that auto enrollment has the potential to considerably increase 401(k) participation, according to the firm’s analysis. The adoption of auto-increase features also grew significantly during the last year, with the total number of employers that use it in their plans increasing by 26 percent.

Auto Default Salary-Deferral Rates

Employers historically have tended to keep the salary-deferral rates used for auto enrollment relatively low due to concern that higher default rates may discourage plan participation. The average default rate across the industry is still 3 percent, Bank of America Merrill Lynch found, and employees’ contribution rates tend to cluster around the default rates set by their employer—an indication of just how much influence employers can have over their employees’ saving behaviors. Evidence shows that higher default rates do not reduce participation levels (participants can always opt to lower their default rate). During the first half of 2013:

  • The number of plans that offer auto enrollment with an above average default contribution rate increased by 27 percent compared to the same six-month period a year earlier.
  • In 2013, 76 percent of plans that added auto enrollment set their default rate higher than 3 percent.

Advice Access

During the past year, the number of employers that provided employees with retirement savings and investment advice increased by 13 percent, and employees using employer-provided investment advice earned higher financial wellness scores. These results were attributed in large part to employers' efforts to drive better outcomes in their 401(k) plans and to boost engagement through one-on-one meetings and online financial seminars as well as call center and online education.

Concurring Evidence on Best Practices

A benchmarking report of best practices in retirement plan design, published by Fidelity Investments in August 2013, similarly revealed that 401(k) plans with automatic enrollment enjoyed an average participation rate of 80 percent of benefits-eligible workers, whereas those plans without it average just 51 percent.

Fidelity’s analysis, based on data from more than 2 million employees in 600 retirement plans in the nonprofit health care sector, noted that employers should aim for a total savings rate (employee plus employer contributions) between 10 percent and 15 percent, and should implement an auto-escalation program to help employees reach this target. Auto escalation increased employee salary-deferral rates from an average of 4.2 percent to 7.3 percent.

Among other findings:

  • Adopting target-date funds as the automatic enrollment default investment can increase the overall strength of asset allocation for employees. Plans that offered target-date funds as the default option saw a 73 percent increase in the number of employees properly exhibiting age-based asset allocations.

  • Employee guidance and education are effective at driving positive behaviors. Of employees receiving guidance, 38 percent took constructive actions such as increasing their savings rates or adjusting their asset allocation.

The Fidelity study also found that only 53 percent of plan sponsors have established a metric to measure the overall health of their retirement plans, such as a goal for participants to save a specified multiple of salary by retirement age.

Stephen Miller, CEBS, is an online editor/manager for SHRM.

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