How are individuals leveraging tax-advantaged retirement accounts? What plan design features are helping to drive positive behaviors? And how much progress have savers made? Those questions and more are addressed in an annual study by Ascensus.
Analyzing data across more than 88,000 retirement plans for which it provided recordkeeping and administrative services as of year-end 2018, the firm’s research offers insights on how Americans are saving.
Auto Features
Not surprisingly, Ascensus found that plan sponsors and savers see the value in automatic savings models. 401(k) plans designed with automatic enrollment and automatic escalation features saw an average plan-weighted participation rate of 81%, which was 10 percentage points higher than that in plans without automatic enrollment. Employer matching contributions offer additional motivation and an even more notable boost in plan participation when coupled with auto features.
Average participation rate for plans:
- without auto-enroll (70%)
- with auto-enroll (80%)
- with auto-enroll and auto-increase (81%)
- with auto-enroll and auto-increase that fund a match (84%)
Who’s on Track?
Ascensus found that savers ages 55 to 64 made up the largest portion of those “on track,” with more thgan 25% of those individuals finding that they were in a good position. However, those under age 25 made up only 3% of “on track” savers, suggesting these individuals could benefit from ramping up their savings strategy as they advance in their career. The firm notes that it also suggests a need for further investigation into the impact of competing financial priorities, including student loan debt.
There is a notable, positive difference, however, in progress for savers between 25 and 34 years old. Ascensus found that of all retirement savers on its platform who are “on track” to meet their goals, 20% of them are between 25 and 34 (versus the 3% for the under-25 age group).
“While our data suggest that savers across all age ranges might need to ramp up their contributions, there is a bright side. Awareness seems to be the first step in the right direction,” the firm says.
In 2018, 26% of first-time users of the firm’s retirement outlook tool were saving at an average rate of 8% within a few weeks of engaging with it. “This suggests that access to the right planning tools can make a positive difference in getting employees closer to a savings rate of 9% or more,” the firm observes.
Industry Participation
Retirement plan participation, not surprisingly, is highest among employees in the finance and insurance industries. Employees in these industries are likely somewhat knowledgeable on financial wellness and therefore understand the importance of saving for retirement.
Here are the average participation rates across industry, according to the firm’s data:
- finance and insurance (72%)
- utilities (68%)
- professional, scientific and technical services (67%)
- management of companies (66%)
- transportation and warehousing (56%)
- arts, entertainment and recreation (55%)
- retail trade (55%)
- food and accommodation services (36%)
Ascensus suggests that it’s important for financial advisors to consult with clients that might fall into lower-engagement industries to discuss how incorporating auto features or other plan design elements might drive better outcomes.
Employees in the finance and insurance industry also have the highest average account balances at $64,830, with professional services industry employees in close second. Ascensus emphasizes, however, that these balances reflect only those assets saved in these employees 401(k) accounts on the firm’s platform.
Plan Fees
As to how employers pay their plan fees? The study found that:
- 72% of employers elect to be invoiced for recordkeeping fees; and
- 28% of employers pay their recordkeeping fees using plan assets.
Employers who pay out-of-pocket, writing a check for recordkeeping services, under a fee-based structure receive the benefit of a business tax deduction for that expense, the firm observes. It adds that, by opting to pay out of pocket, employers can also enable assets to grow and help boost the plan’s market value over time.
Using an example of a full-service plan with 25 participants, $75,000 in annual contributions, 5% market growth and $3,950 annual recordkeeping fee, the plan experienced over $56,000 in a market value differential by paying out of pocket over the course of 10 years because plan assets remained in the plan and benefited from compounding.
