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More Americans Taking Proactive Steps to Save, But Deferral Rate Remains Low

While savings rates continue to increase and average 401(k) account balances across most age groups continue to grow, the average deferral rate across all age groups still appears to be running lower than needed at just 5.5%, Ascensus says in a new report.

The report, “Inside America’s Savings Plans,” suggests that retirement savers are adopting a more proactive approach, but most are unsure how much they should be deferring from their pay. For example, while Millennials overall are beginning to outpace older generations in terms of saving, younger Millennials under the age of 25 have the lowest overall average deferral rate at just 3.2%. According to Ascensus’ Retirement Outlook Tool, only 35% of employees are on track to meet their retirement goals.

To address low deferral rates, Ascensus suggests that “employee education and financial wellness tools can make a major impact,” including personalized communications illustrating how current savings decisions will translate in the future. The report notes that, after receiving a targeted communications, employees who chose to enroll in their company retirement plan deferred, on average, 6.24% of their pay in 2016.

The report further explains that, once savers become aware of their shortfall, they tend to take steps to increase their retirement savings efforts. After using the Retirement Outlook Tool, 55% of participants who previously were not deferring to their plan started contributing at an average rate of 8%, the study shows.

Automatic features also continue to prove their worth as effective tools in combating inertia and procrastination with retirement savings. Plans that opted for auto enroll on Ascensus’ platform achieved higher average participation rates than those not using auto features – 78% versus 69%. Moreover, plans with both auto enroll and auto increase features had the highest average plan participation rate, coming in at 80%.

In looking at how many employees continued in their employer’s plan after being auto-enrolled at the default rate, the report found a substantial number stayed in the plan, with 63% remaining at the default rate and 26% actually increasing their savings rate.

Not surprisingly, an employer match also creates a strong incentive to save and can play a major role in contributing to overall retirement readiness. The report shows that plans that fund a match versus those that do not have an 18% higher average participation rate.

Finally, the report further indicates that the most commonly used advisor compensation method remained flat basis points, but more plans are electing a tiered method. Flat basis points declined by four percentage points, from 91% in 2011 to 87% in 2016, while tiered basis points increased from 4% in 2011 to 8% in 2016. The report notes that with a tiered approach, advisors do not have to reprice or renegotiate as often because the fee schedule allows them to systematically adjust their average compensation.

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