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Retirement Planning > Saving for Retirement

Average 401(k) Deferral Rate Reaches All-Time High: T. Rowe Price

By Emily Zulz

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The average employee pretax deferral rate reached 8.3% in 2017 — the highest in the 10 years T. Rowe Price has been reporting participant data.

T. Rowe Price released its 10th annual benchmarking report on 401(k) participant data, Reference Point, which is based on the firm’s full-service recordkeeping client data for 2017. Data are based on the universe of T. Rowe Price Retirement Plan Services retirement plans — 401(k) and 457 plans — which consists of 636 plans and more than 1.6 million participants.

Plan design continued to be one of the strongest drivers of outcomes, led by features such as auto-enrollment and auto-increases with opt-out as well as adoption of higher default deferral rates, Roth contributions, and target date products.

“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,” Aimee DeCamillo, head of T. Rowe Price Retirement Plan Services, said in a statement.

Auto-Enrollment and Auto-Increases

Adoption of auto-solutions has been steadily growing since 2006, and the proven successes of auto-enrollment and auto-increase features continue to strengthen their popularity among plans at T. Rowe Price.

According to the report, the average participation rate in auto-enrollment plans is over 42 percentage points higher than in plans without auto-enrollment (87% participation for auto-enrollment plans compared with 45.4% for non-auto-enrollment plans) in 2017.

The report also finds that participation in auto-increases is over five times higher in plans that use the opt-out versus opt-in option.

Adoption of Higher Default Deferral Rates

The number of retirement plans with a 6% default deferral rate surpassed the number of plans with a 3% default rate, which is considered the industry standard, for the first time, the report finds.

According to the report, 32.4% of plans had a default deferral rate of 6%, compared to the 31.9% that had a default rate of 3%.

“While the difference might be slight, it’s a sign that plans are continuing to re-evaluate adequate savings rates to help participants retire ready,” according to the report.

Roth Use Increases, but Participant Usage Remains Low

Adoption of Roth contributions has increased by nearly 55% since 2014. According to the report, 67% of plans offered Roth contributions in 2017, up from 60.3% in 2016.

Participant usage has grown as well, but at a slower pace, increasing by just under 19% from 2014 to 2017, according to the report.

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.

The report finds that usage has been driven primarily by younger participants age 20 to 40.

“This could demonstrate an increased understanding of the tax benefits Roth offers: Younger participants may be taking advantage of their comparatively lower salaries (and, therefore, lower income tax brackets) by paying taxes on their contributions now so they can benefit from potentially tax-free earnings in the future,” according to the report.

Target Date Investment Increases

Plan sponsor adoption of target date funds reached a 10-year high, rising to 94% in 2017, according to the report. For the first time, target date funds accounted for the largest percentage of plan assets under management, surpassing all other investment types.

More than 41% of total assets under management in 2017 were invested in target date products, with 34.8% in stock investments. In fact, the report finds that investments in target date products surpassed stock investments in nearly every plan-size-related category in 2017, with just a few exceptions in smaller plans.

For instance, in plans with fewer than 1,000 participants, stock investments averaged 42.9% compared with 37.7% for target date products. In plans with less than $5 million in assets under management, stock investments averaged 39.9% compared with 39.7% for target date products.

— Check out Are Roths the Future of 401(k)s? on ThinkAdvisor.

Emily Zulz

@think_emilyz

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