After several years of record-breaking plan and participant outcomes, 2018’s market turbulence appears to have contributed to an increase in troubling participant behavior.
T. Rowe Price’s “Reference Point” reveals that 401(k) pretax deferral rates continued to rise in 2018, increasing to 8.6% on average, reaching the all-time high for a second year in a row. In addition, employer matches increased, with plans that offer a 4% match surpassing those that offer a 3% match for the first time — potentially in response to tax reform’s reduction of the corporate tax rate.
Despite these positive findings, however, the report reveals some mixed results, including a finding that the overall participation rate declined slightly, dropping by nearly 2% from 2017 to 2018. More troubling, the percentage of participants contributing 0% increased to nearly 36%, up from 34% in 2017, according to the data.
In addition, average account balances decreased by almost 8%, in part because of year-end market declines. Participants also moved money from stocks to more conservative investments late in the year, presumably due to market activity.
Auto Features Rule
On the other hand, strategic plan design continued to produce strong plan and participant outcomes despite the varied findings. For example, participation was more than 40 percentage points higher in plans with auto-enrollment compared with plans without it (85.6% participation for plans that auto-enroll compared with 43.7% for plans that don’t). Plans which do not auto-enroll saw participation drop at more than twice the rate of those that do.
Moreover, nearly 37% of auto-enrollment plans have a default deferral rate of 6% or higher compared with nearly 33% at a 3% default. In addition, usage of auto-escalation was nearly five times higher in plans that employ an opt-out (67%) versus an opt-in option (12%).
Building on the popularity of automatic features, the report shows that plan adoption and participant usage of target-date products reached an all-time high. Plan adoption of target-date products reached 95%, while participant usage increased across all age groups but was highest among younger workers. Additionally, the percentage of participants with their entire account balance in a target-date product has grown by 20% since 2014.
Circling back to the overall drop in participation from 2017 to 2018, the report notes that it was most pronounced in the under-30 population and fell faster among participants in plans that don’t auto-enroll than in plans that do, suggesting that automatic features “can mitigate macro forces” that may be decreasing participation rates. “Younger employees could benefit from stronger auto-solution, but a higher default deferral can also come at a cost of lower participation. The decision for many plan sponsors is whether that cost is acceptable,” the report notes.
At the same time, however, the availability of “set it and forget it” target-date products might be leading to fewer participants seeking investment guidance, the report observes. Respondents to T. Rowe Price’s 2017 and 2018 participant surveys reported that while most participants turn first to their 401(k) provider for financial advice, only 21% want investment help.
Loans and Leakage
Continuing with the mixed results, the use of 401(k) loans reached a nine-year low of 22.5% in 2018 and continued a steady six-year decline of nearly 10%. The report also found that the percentage of participants who took a hardship withdrawal fell for the ninth consecutive year, declining from 1.9% in 2010 to 1.3% in 2018. Yet, despite these findings, both loan balances and the average amount of hardship withdrawals increased.
The study also found an uptick in cash-outs. According to the data, the percentage of participants who took a cash-out distribution increased to 26% in 2018 after holding steady at 19% in 2016 and 2017. Cash-outs were particularly high for those ages 30-39, who carry a relatively sizable $37,000 average account balance. Participants ages 50-59 and 65-69 also took cash-outs in greater numbers, while cash-outs for those age 70+ increased by a full 10% from 2017 to 2018, the report further notes.
The number of participants making Roth contributions increased by nearly 10% compared with 2017, but overall usage remains low at 7.6%. Not surprisingly, Millennials are using Roth the most, at nearly 10%, with younger workers age 20-29 following at 8.8%. In 2018, nearly 75% of plans offered the Roth option.
Kevin Collins, T. Rowe Price’s head of Retirement Plan Services, observes that while there has been an increase in positive participant behavior, there are still opportunities for continued improvement. “Changing employee behavior requires simple solutions and engaging them in a way that motivates them to act. Plan sponsors can provide this support through plan design and by integrating financial wellness programs into their plan offering,” he advises.
The study’s findings are based on data from the large-market, full-service recordkeeping universe of T. Rowe Price Retirement Plan Services’ DC plans (both 401(k) and 457 plans), consisting of 657 plans with more than 1.8 million participants, from Jan. 1, 2007, through Dec. 31, 2018.