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Plan Design Boosted Clients’ Deferral, Contribution Rates, T. Rowe Says

Plan design continued to be one of the strongest drivers of outcomes, led by features such as auto-enrollment and auto-escalation, as well as adoption of higher default deferral rates, a new report suggests.

Findings from T. Rowe Price’s 10th annual “Reference Point” benchmarking report of the firm’s employer-sponsored retirement plans shows that the average employee pretax deferral rate reached 8.3% in 2017, up from 8% the previous year — the highest rate in the 10 years the firm has been reporting participant data.

Based on the firm’s recordkeeping client data for 2017, the report also shows that the number of retirement plans with a 6% default deferral rate (32.4%) for the first time surpassed the number of plans with a 3% default rate (31.9%), which until now had been considered the industry standard. Moreover, nearly two-thirds of plans have set or increased their default rate to an amount greater than 3%.

One of the only drawbacks in the report was that, while many plans have increased their default deferral rate over 3%, fewer plans made a change in 2017. The report explains that only 4.6% of plans increased the default rate in 2017, compared with 7.3% in 2015.

Match Rules

Perhaps not surprisingly, an employer match is the most common among plans with large participant populations, with the majority of plans offering a match of 50% up to 6%. Overall, 31.8% of T. Rowe plans in 2017 offered the match formula of 50% up to 6% contributed, the report notes.

And further providing support for plan design techniques, the average participation rate in T. Rowe clients’ auto-enrollment plans was more than 42 percentage points higher than in plans without auto-enrollment at 87% compared to 45%, the report notes. In addition, participation in auto-escalation was more than five time higher in plans that use an opt-out option (66%) instead of an opt-in option (13%).

Other plan trends in the report show loan usage decreasing slightly to 23.4% in 2017. The percentage of participants with multiple loans also decreased to 15.6% — a drop of 4 percentage points since its peak in 2013 during the 10-year period. One peculiarity was that loan usage was highest among older Generation X and younger Baby Boomer participants, compared to other age groups. According to the data, the percentage of participants with outstanding loans increased by an average of 2.2% for participants aged 50 and older.

Roth Adoption

Meanwhile, the adoption of Roth 401(k)s increased in 2017 by T. Rowe-served plans and participants, potentially implying an increased understanding of the tax benefits. According to the data, 67% of clients’ plans offered Roth contributions in 2017, up from 60.3% in 2016. In addition, the report notes that nearly every age group saw increases in the percentage of participants making Roth contributions, with the largest contributors between the ages of 20 and 40.

Adoption of target-date funds by T. Rowe clients also reached a 10-year high, rising to 94% in 2017. For the first time, TDFs accounted for the largest percentage of plan assets under management, surpassing all other investment types, the report notes. Not surprisingly, the firm found that investment in target-date products is highest among participants age 20-40, who were more likely to have been auto-enrolled in their plan.

“We continue to see the significant impact plan design and financial wellness programs have on participant behavior, as evidenced by the increase in both participation and deferral rates and decrease in loan usage,” notes Aimee DeCamillo, head of T. Rowe Price Retirement Plan Services. “We’re pleased that plan sponsors have continued to evolve and refine their plans, encouraging positive behaviors with their participants and aligning plan design with their overall retirement benefits philosophy.”

Findings in the study are based on the large-market, full-service recordkeeping of T. Rowe Price Retirement Plan Services retirement plans (401(k) and 457 plans), consisting of 636 plans and more than 1.6 million participants, from Jan. 1, 2007 through Dec. 31, 2017.