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Combining 401(k) Auto-Solutions Can Move the Needle

DC Plan Design

While it’s fairly well-known that auto-solutions can lead to increased participation and savings, new research finds that adopting the solutions in tandem can lead to even better results.  

According to Reference Point, T. Rowe Price’s annual 401(k) benchmarking report, plans which couple auto-enrollment and auto-increase achieve an 85% participation rate, compared with only 29% for those that do not offer the services—nearly three times greater participation. In addition, participants in plans with both auto-enrollment and auto-increase are saving 5% more than those in plans that did not adopt the solutions—at an average pretax deferral rate of 7.8% versus 7.4%.

Using the opt-out approach for auto-increases was also found to be far more effective than opt-in. In 2021, auto-increase participation was 65% in plans that used the opt-out approach, compared with only 11% for plans using the opt-in approach. “This is evidence that choosing the opt-out approach as the standard in plan design is an effective nudge to help improve participant saving behaviors,” the authors note. 

The report, which features year-over-year data and analysis on participant behavior and plan design based on the firm’s recordkeeping client data, also finds that 401(k) plan sponsors and participants are continuing positive retirement savings behavior in the aftermath of the pandemic. 

For instance, plans are continuing to support participants by offering higher default deferral rates through their auto-enrollment. While the number of plans that offered a 6% or greater default rate remained steady at 36%, the number of plans offering a 5% default deferral increased from 14% to 16% in 2021, continuing an upward trend since 2018, the report notes. Consequently, after two years at 50%, the percentage of auto-enrollment plans with a default rate of 5% or more increased to 52%. 

“In February 2020, when the markets started reacting to the growing pandemic, there were a lot of questions about the impact COVID-19 would have on the retirement plan industry and the participants who rely on it,” said Kevin Collins, head of Retirement Plan Services at T. Rowe Price. “We have an answer two years later and it’s a positive one: throughout these unprecedented times, plan sponsors and participants continued to take positive steps that show they realize the value of retirement savings programs.”

Employer Match Returns

The percentage of plans offering a match returned to pre-pandemic rates or higher. In response to the pandemic, a small percentage of plans reduced or suspended contribution matches in 2020, with certain industries faring worse than others. Most plan matches returned in 2021, including for the hard-hit leisure and hospitality and retail trade industries, the report notes.  

For instance, 74% of plans in the leisure and hospitality industry offered a match in 2020, but that percentage jumped to 90% in 2021, according to the firm’s data. Similarly, 73% of plans in the retail trade industries offered a match in 2020, and that percentage rose to 80% in 2021.  

“This support from employers bodes well for participants as they strive to increase their retirement savings, and it signals one more step in the recovery,” T. Rowe Price emphasizes, adding that, “The match reinstatement may also benefit employers in their efforts to attract and retain talent.”

Loans Decline

Also trending in the right direction is the percentage of participants with outstanding loans decreased from 20% in 2020 to 18.8% in 2021, the report notes. Of those participants with loans, the percentage of participants with multiple loans also declined. 

One caveat, which the firm notes may be due to higher available account balances, is that the average participant loan balance increased to an average of $9,663. Participants between the ages of 40 and 60 continued to hold the highest percentage of loans and outstanding balances, likely due to their competing financial priorities, the report observes.  

Moreover, plans that allow two or more loans also tend to have lower savings rates—dropping from an average deferral of 7.9% to 6.8%. Allowing a larger number of loans is also correlated with higher average loan balances—rising from $10,162 for one loan, to $12,424 for two, and $13,698 for three or more loans, the report shows. That said, simply offering participants the option of multiple loans does not affect how many participants will act upon it, the report notes. On average, in plans that allow loans, approximately 19% of the participant population will take a loan. 

Still, given the potential negative impact from multiple loans, plan sponsors might want to consider limiting them to one outstanding loan per participant, T. Rowe Price suggests. “This could still help satisfy the participant need while also helping to limit the possibility of loans being used for less essential reasons,” the report notes. 

In concluding remarks, the firm observes that the 2021 data demonstrates that sponsors and participants continue to understand the value of retirement savings programs, but adds that there is still a need to help participants manage challenges through financial wellness programs and continued adoption of plan design best practices. 

“Plan sponsors can continue to support these positive behaviors by offering financial wellness programs and implementing strategic plan design features to help ensure their participants stay on this path,” Collins emphasizes. Some participants may also need additional support, especially if they took a large loan or distribution through the CARES Act or tapped into emergency savings, the report adds. 

The findings are based on the large-market, full-service universe of T. Rowe Price Retirement Plan Services (401(k) and 457 plans), consisting of 660 plans and more than 2 million participants throughout 2021.