A record number of employees are eligible for and participating in 401(k) plans, and employers are increasing their default deferral limits in the wake of the SECURE Act, the Plan Sponsor Council of America has found.
Several factors shaped the 2020 retirement plan year—the pandemic and ensuing financial stresses and work-from-home environment, the relief provisions in the CARES act, and—perhaps the most apparent in PSCA’s newly released 64th Annual Survey data—the Setting Every Community Up for Retirement Enhancement (SECURE) Act, enacted in December 2019.
The Act included many provisions designed to increase access to and use of employer-sponsored retirement plans, and the positive impact of some of these provisions is becoming apparent, PSCA notes. More employees than ever are eligible to participate in plans—nearly 93%—likely aided by the SECURE Act provisions allowing long-term part-time employees to participate. Nearly three-fourths of plans now allow salaried part-time employees to participate and nearly 70% allow hourly part-time employees to do so.
With increased eligibility comes increased plan participation—nearly 90% of eligible participants made contributions to a plan in 2020, a record for the 64-year-old survey. Plan designs are moving steadily beyond the automatic enrollment framework of the Pension Protection Act of 2006, the study observes. For example, more than a third (36.5%) of plans now have an auto-escalation cap greater than 10% of pay. (A SECURE Act provision increased the QDIA cap from 10% to 15%.) This, along with the fact that the most common default deferral rate is now 6% of pay, with 65% of plans now using a default rate more than 3%, will significantly boost overall savings rates over time.
“We know, and see in the data, that when people have access to retirement savings plans at work, they use them. Expanding access to plans as the SECURE Act did is clearly creating more retirement savers,” said Hattie Greenan, director of research and communications for PSCA. “At the same time, the pandemic has created an environment that is shifting the way retirement plans are considered, designed and provided that may ultimately reshape plans in the long run.”
The work-from-home environment triggered by the pandemic, along with its financial strains, has shifted retirement education priorities and changed how that education is provided.
For the first time, the primary reason for providing retirement education was to increase employees’ overall financial literacy (77.1% of plans), supplanting the traditional focuses of increasing appreciation for the plan and boosting participation. The pandemic seems to have accelerated the shift toward a more holistic approach to retirement and financial education.
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At the same time, the remote work environment challenged traditional administration and education methods, forcing a greater reliance on technology. The use of email, mobile apps and webinars to provide plan education jumped significantly, and two-thirds of organizations are now using mobile technology to provide plan access and transactions.
Unfortunately, there were some negative indicators as well. The impact of the pandemic can also be seen in the lower average company contributions, as well as a slight uptick in loans and withdrawals. However, while the average company contribution slipped to 4.9% of pay, it was still higher than it was four years ago. And, although more than 90% of plans now allow hardship withdrawals (likely spurred by CARES Act provisions), only a small fraction—2.6% of participants—took one in 2020.
Other Key Findings
Several other plan design features made gains in 2020 as well.
- Roth—Roth after-tax contributions are now permitted in 86.3% of plans, including 91.3% of large plans.
- Automatic Enrollment—The use of automatic enrollment and automatic escalation made modest gains again this year—62.0% of plans now use an automatic enrollment feature. And for the first time, the most common default deferral rate is now 6% of pay (32.9%) rather than the 3% of pay that has been the norm since 2006 (29.0% of plans).
- Investment Options—There was an increase in the number of investment options offered to participants for the first time in more than 10 years—on average, 21 funds are now included in plan lineups.
- Investment Advice—Forty percent of participants took advantage of advice when it was offered in 2020, up from a quarter of participants during the last few years.
- Technology—The use of webinars to provide plan education increased from a third of organizations in 2019 to more than half (53.7%) last year. The use of mobile apps has increased by 80% in the last five years, with 64.9% now using apps.
“Plan design changes can be slow to take hold, but the pandemic appears to have accelerated the pace of change in dramatic fashion,” noted Nevin Adams, chief content officer and head of retirement research at the American Retirement Association. “It’s encouraging to see a strong participant response to these enhanced plan designs—the combination is great news for the nation’s retirement security.”
PSCA’s 64th Annual Survey of 401(k) and Profit Sharing Plans reports on the 2020 plan-year experience of 518 plans. The full report is available for purchase at https://www.psca.org/research/401k/64thAR.