A new report describes the specific features of a well-designed 401(k) plan that are most effective at helping employees overcome the barriers to saving enough to retire.
The 2018 Driving Plan Health report by Wells Fargo Institutional Retirement and Trust finds that so-called “high influence plans” use a combination of 16 plan features to help launch employees on the path to replace 80% of their pre-retirement income once they retire.
The study analyzed more than 2,000 401(k) plans representing more than 4 million eligible employees in a range of industries.
“When U.S. workers are saving in 401(k) plans that have the right combination of features, we believe they have a significantly better chance of amassing the savings they need to retire comfortably,” notes Mel Hooker of Wells Fargo Institutional Retirement and Trust.
Influence Factor
The firm developed what it calls “influence factor” ratings for all of the 401(k) plans it administers to measure the degree to which plan design incorporates key features that influence plan participation, overall saving and investment diversification. Of the 16 features that exert influence, four were found to generate the most positive outcomes:
- Automatic enrollment, with a default of 6% or more going to the 401(k) and automatic annual reenrollment of all non-participating eligible employees each year
- An opt-out option to increase the default to a rate of 10% or higher
- Diversified investment offerings, such as TDFs
- An above-average company match of at least 5%, or profit sharing
Other key plan features that high influence plans employ include qualified default investment alternatives (QDIA), automatic rebalancing, targeted communication campaigns and limits on employer stock and participant loans.
“When used together, these features address the psychological barriers, or inertia, that tend to get in the way of a person’s path to a well-funded retirement,” Hooker emphasizes.
Among the plans analyzed by Wells Fargo, 10% are deemed to be "high influence," in which workers are on a path closer to 80% income replacement. Participants in high-influence plans have an average 64% income replacement compared to participants in a low-influence plan, whose average income replacement falls to 48%.
Other findings among high-influence plans show that the participation rate is 89%, more than half (55%) of employees are contributing 10% of more (including match), and the large majority (88%) are appropriately diversified.
“We want employees to be in their 401(k) plan, but participation alone is not enough. People have to raise their savings targets and should be diversified to maximize investment growth potential. High influence plans push employees in the right direction on all these fronts,” notes Hooker.
Steady Progress
The firm’s five-year Plan Health Index analysis, which examines trends from 2012 to 2017, shows a 42% increase in employees meeting all three key savings behaviors — participating in their 401(k) plans, saving at a rate of 10% or more including match and they are diversified.
Well Fargo notes that based on its participant data, diversification is the strongest of the three behaviors, with more people meeting this goal than either the participation or contribution rate goal.
To be counted as diversified, the index requires that at a minimum a participant should invest in two equity asset classes and one fixed return asset class, and hold no more than 20% of their account balance in employer stock. Alternatively, a participant can invest in an all-in-one asset allocation solution such as a TDF, model portfolio or managed account.
Not surprisingly, offering a QDIA is by far the biggest factor for helping to boost diversification. The report notes that as a plan default, inertia works to this feature’s advantage, as the majority of participants (66%) in a plan with automatic enrollment accept the default investment. This finding is based on analysis of the firm’s 401(k) plan recordkept data.
Other findings in the 2018 report show that:
- Participation in 401(k) plans has increased 18%, with Millennials continuing to make the biggest gains.
- Savers who contribute at a rate of 10% or higher have increased 11%. Baby Boomers (46%) are more likely to contribute at that rate, followed by Generation X (36%) and Millennials (29%).
- The majority of savers (80%) invest in a variety of asset classes, with participants investing in a diversified portfolio up 13%.
- Among high influence plans, the Plan Health Index has improved by 62% over the past five years, and average balances have increased 30%.
Beyond plan design, the firm suggests that businesses should also incorporate effective communications and forward-thinking digital tools to help employees overcome psychological barriers to saving and take action. As an example, Wells Fargo explains that having a peer comparison tool with a simple “click here to change your deferral rate” is an easy way to encourage participant action.
