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Despite Challenges, 401(k) Plan Design Drives Positive Outcomes

Industry Trends and Research

Despite a slight decrease, 401(k) plans that auto-enroll continue to drive far greater participation, according to an annual report that examines the latest trends in participant behavior and plan design. 

In its 2020 Reference Point report, T. Rowe Price found that in 2019, participation in the firm's auto-enrollment plans was 85.3%, outstripping non-auto-enrollment plans by more than 40 percentage points. Overall, the firm reports that more than 61% of plans at T. Rowe Price automatically enroll participants. 

Participation in auto-enrollment plans decreased for the third year in a row, falling three percentage points from the five-year high in 2016. Participation in plans without auto-enrollment experienced a small increase, however, from 43.7% in 2018 to 44.1% in 2019. 

After a slight drop in 2018, the overall participant-weighted participation rate increased slightly, from 78.1% to 79.6% in 2019. 

The report acknowledges that the data is based on the firm’s full-service recordkeeping client data for 2019 and that 2020 could influence or even reverse the retirement plan trends identified.

“The report analyzes past data to help our clients plan for the future and to guide participants toward better retirement outcomes,” explains Kevin Collins, head of Retirement Plan Services at T. Rowe Price. “This year is different, of course; as we dissected the data from 2019, we could not ignore these changes we have experienced so far in 2020.”

Auto Features

Adoption of auto-increases reached a five-year high of 79.8% in 2019, rising by more than 10 percentage points since 2015. Plan sponsors favored increases of one percentage point, with one in three plans at T. Rowe Price choosing this as the default, the firm notes. 

Moreover, the opt-out approach for auto-increases has steadily gained popularity, increasing from 39% in 2015 to 47% in 2019. Meanwhile, adoption of the opt-in approach fell for the fourth year in a row, hitting a five-year low of 53%. Plans that use the opt-out approach for auto-increases experience higher participation in the solution.

“These trends are not surprising, given the opt-out approach’s proven track record of driving participant outcomes,” the report observes. In 2019, participation in the auto-increase solution stood at 65% for plans with the opt-out approach, compared with just 12% for the opt-in approach.

What’s more, the study found that more than 35% of auto-enrollment plans have a 6% default deferral rate, compared with 32% with a 3% default.

Match Formulas

And while 2020 may reverse this trend, the firm’s data for 2019 shows that employer match formulas are increasing, moving from a 3% to a 4% or 5% effective match range. 

As in 2018, some employers adjusted their match formulas in 2019 in an apparent move to incentivize more employees to save. Below are the formulas that experienced the greatest change in adoption from 2018 to 2019, according to the firm’s data:

  • 100% up to 3%, plus 50% up to 2%: 18.1% of plans (up more than three percentage points) 
  • 100% up to 3%, plus 50% up to 3%: 7.1% of plans (up nearly two percentage points) 
  • 100% up to 5%: 8.7% of plans (up nearly two percentage points)

The 50% up to 6% match formula experienced the greatest drop in popularity, falling more than five percentage points to 21.7% in 2019, the report notes. 

These changes moved formulas to an effective match range of 4% to 5%. “Possible reasons for the changes could include the tighter labor market in 2019, the federal corporate tax reduction in 2018 and an increased focus on employees’ retirement security,” the report suggests. 

Other key findings include:

  • average account balances rose to more than $100,000, an increase of 8%, although more than 34% of eligible participants did not contribute to their plans in 2019; 
  • direct rollovers of plan assets increased to 76% in 2019 from 74% in 2018;
  • participant usage of loans decreased in 2019 to 22.1%, down from the seven-year high of 24.9% in 2013 (the report acknowledges that the optional loan provisions included in the CARES Act could change this trend); and
  • allocations to company stock investments increased more than 11%. 

Findings in the report are based on 2019 data among large-market plans serviced by the firm, including 401(k) and 457 plans, consisting of 677 plans and nearly 2 million participants.