401(k) reaches milestone as innovation continues

401(k) reaches milestone as innovation continues

  • 40 years since 401(k)s began, DC plan participants defer an average of 7.1% of income.
  • More than 60% of 401(k) plans use automatic enrollment.
  • Plan sponsors play a role in individual participants’ savings rates and outcomes.

Even with four decades of growth, the 401(k) plan has yet to reach its full potential. Indeed, the workplace savings plan continues its evolution, adapting to changing demographics and savers’ needs.

At 40, the 401(k) marked a record-setting pace of savings. The Plan Sponsor Council of America (PSCA) noted in a 2018 study that participants’ average savings rate had risen to 7.1%. Employers are also contributing an average of 5.1% of pay to their employees’ accounts.

Plan design is a driver of success

Plan design has helped to increase participation and savings rates, as well as account balances. Plan sponsors have adopted automatic features as a way to help mitigate the effects of common investor behaviors. An example is inertia, which can undermine an individual’s success. Extensive research in behavioral finance helped shape policies codified in 2006 by the Pension Protection Act (PPA).

This landmark law was a turning point for the 401(k). Before auto-enrollment, only 11% of plans had participation rates in excess of 90%. After the PPA, 46% of plans saw participation exceed 90%. (Defined Contribution Institutional Investment Association).

More than 60% of plans today use automatic enrollment (PSCA). Of these plans, nearly 75% have also adopted auto escalation, the gradual increase of deferral rates. Auto enrollment is more prevalent among large plans (5,000 or more participants). The adoption rate among smaller plans (less than 50 participants) is less than one third.

Plan sponsors have a role

Plan sponsors can consider many ways to encourage workers to commit more to their retirement savings:

  • Adopt automatic plan features that are likely to increase participation, including auto escalation.
  • Push up the default deferral rate. The number of plans setting the default rate at 6% or higher rose to 28% in 2016 from 9% in 2010. (Defined Contribution Institutional Investment Association).
  • Educate participants about target-date funds. These options can be a solution for investors looking for a set-it-and-forget-it investment that rebalances over time.
  • Communicate with participants about what they plan to do with their 401(k) savings in retirement.

Only 20% of employers say they encourage participants to keep assets in the plan at retirement (PSCA). In a Cerulli survey of 401(k) participants age 45 and older, 25% of respondents did not know what they will do with their savings. Another 25% of them said they were going to ask their financial advisor.

Even with all of the advances and innovation, more than 40 million Americans still lack access to a workplace savings plan. Solving the access gap will require a policy solution — national in scope — to reach all workers.


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