5 Key Industry Trends You May Have Missed

The Plan Sponsor Council of America recently released its 60th Annual Survey of Profit-Sharing and 401(k) Plans, documenting increases in participation, deferral rates, target-date funds, automatic enrollment and advisor hiring, among other key trends.

Here are five key trends highlighted in the survey that you may have missed.

Automatic enrollment is still (mostly) a large plan thing.

One of the most celebrated plan design features of the 401(k) era is automatic enrollment. Nearly as old as the 401(k) itself, once upon a time (when it wasn’t as popular) it was called a “negative election.” Regardless of the name, the concept has been extraordinarily effective at not only getting, but keeping, workers saving via their workplace retirement plans. However, adoption of the design, after a surge in the wake of the passage of the Pension Protection Act of 2006, now seems to have plateaued.

A decade ago, only about a third (35.6%) of respondents to the PSCA survey offered automatic enrollment. Now more than half (60%) do – and that increases to 70% among plans with more than 5,000 participants. However, only a third of plans with fewer than 50 workers do.

For some potential explanations – see Why Doesn’t Every Plan Have Automatic Enrollment?

Auto-escalation is escalating.

An incredible three-quarters of plans with automatic enrollment auto-escalate the deferral rate over time, compared with less than half (49.7%) a decade ago, according to the PSCA survey.

However, only one-third do so for all participants.

As for the rest, one in eight do so for under-contributing participants, and a third do so only if the participant elects to do so.

Plans are curing a fault with the default.

While you see surveys suggesting that a greater variety of default contribution rates is emerging, the most common rate today – as it was prior to the PPA – is 3%. There is some interesting history on how that 3% rate originally came to be, but the reality today is that it has been chosen because it is seen as a rate that is small enough that participants won’t be willing to go in and opt out – and, after the PPA, we have some law to sanction that as a target.

Sure enough, the PSCA survey found that the most common default deferral rate remains 3% (36.4%). However, more than half of plans now have a default deferral rate higher than 3%. Indeed, the second most common default (22.2%) is now 6%.

Roths remain on the rise.

Nearly two-thirds of plan sponsors now provide a Roth 401(k) option. In fact, in just a decade, the percentage of plans offering such an option has more than doubled; from about 30% in 2007 to 63.1% now.

Pre-tax treatment has, of course, been the norm in 401(k) plans since their introduction in the early 1980s. On the other hand, the Roth 401(k) wasn’t introduced until the Economic Growth and Tax Relief Reconciliation Act of 2001, and even in that legislation wasn’t slated to become effective until 2006 (and at that time was still slated to sunset in 2010). Significantly, participant take-up, which just a few years ago hovered in the single digits, is now in the 15-20% range (18.1% according to the PSCA survey, somewhat higher among smaller plans).

While industry surveys during the tax reform debate (including a flash poll from PSCA) indicated a fair degree of employer concern about the potential impact of so-called “Rothification” on participation, that doesn't seem to be slowing the opportunity for individuals to take advantage of tax diversification.

It’s (still) what goes in, not what comes out that ‘matters.’

It’s said that what’s measured matters – and yet, despite all the buzz around financial wellness, and a growing emphasis on outcomes, the latter still has a way to go in terms of being an established plan success benchmark.

Consider that in this year’s PSCA survey, a whopping 89.6% of plans cite participation rate as a benchmark to determine plan success – and even more (93.2%) of the largest plans rely on that gauge. Deferral rates were a distant second (72.6%), and average account balances ranked third (55%).

What about outcomes? Only a quarter of plans used that as a benchmark, though a third of the largest plans (33.8%) did.
Industry surveys, particularly those with a broad range of plan types and providers, and with the perspective of decades such as the PSCA survey provide an invaluable sense not only of where we are, but where we have been.

However, their real value lies in helping us see where we need to be.

- Nevin E. Adams, JD

More information about the Plan Sponsor Council of America’s 60th Annual Survey of Profit Sharing and 401(k) Plans is available at www.psca.org.

NOTE: There will be a special workshop exploring the survey results and the implications for advisors at the NAPA 401(k) SUMMIT, April 15-17, 2018 in Nashville, Tennessee. If you haven’t registered, there’s still time (but the hotel blocks are filling) at http://napasummit.org.

4 Reasons Why Plan Sponsors Should Care About Outcomes

It’s obvious why participants have a vested interest (literally) in the retirement income — the outcome, really — of their retirement savings plans. Here are four reasons why plan sponsors should care about outcomes.

You want your employees to appreciate your benefit plan(s).

If you’re responsible for benefit plans in your organization, you have a very real interest in how your workforce (and management team) view those benefits. Plan sponsors have long used participation rate as the plan success metric — after all, what better measure of success in plan design, education and communication than the objective data as to how many employees have chosen to participate.

But in a time when a growing number of plans have adopted automatic enrollment — well, while credit is certainly due plan sponsors who have taken that step, the resulting bump in participation rates owe more to the inertia of human behavior than innovative plan design.

There is, however, little question that the better your plan performs on an individual basis — positive growth in account balances, a resulting more robust projection of retirement income — the better workers will feel about the benefit plans that helped provide that result.

You don’t want your employees worrying about their finances at work.

Any number of workplace surveys bear out the impact that external concerns — particularly external financial concerns — have on morale and productivity at work (see “Finance Distractions Take Toll on Productivity, Benefit Satisfaction”) and “Study Finds Link Between Financial and Physical Wellness.”) Those concerns don’t even touch on the vulnerability to theft and/or misuse of organizational resources that can tempt financially vulnerable workers.

A robust retirement savings balance at work isn’t a cure for all financial ills, of course, but it can be a source of solace, as well as a resource in time of true financial need.

You want your employees to retire on time.

Workers who think they can’t afford to retire are likely to try and extend their working career — potentially complicating succession planning and your ability to attract (and/or retain) new talent. Data from benefits consultant Mercer notes that each delay in retirement can block 5+ jobs, and that if 4% of your population is retirement eligible and half of those people choose to delay retirement, 10% of your employee population would experience promotion blockage.

As an employer, those trends can also result in higher labor costs, and safety and productive concerns (see “Plan Sponsors Waking up to Costs of Older Workers who Can’t Retire.”)

You want your plan to ‘work.’

There are employers who only offer a workplace retirement plan because everybody else does, who are willing to just “set it and forget it,” who, hearing that workers aren’t taking advantage of the benefit they worked so hard to set up, shrug and say “it’s up to them.”

But that’s not you. Is it?

- Nevin E. Adams, JD

Note: You can find some interesting perspectives on various aspects of plan and participant outcomes at our Participant Outcomes resource page.