- 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.
For informational purposes only. Not an investment recommendation.
This material is provided for limited purposes. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, or any Putnam product or strategy. References to specific asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations or investment advice. The opinions expressed in this article represent the current, good-faith views of the author(s) at the time of publication. The views are provided for informational purposes only and are subject to change. This material does not take into account any investor’s particular investment objectives, strategies, tax status, or investment horizon. Investors should consult a financial advisor for advice suited to their individual financial needs. Putnam Investments cannot guarantee the accuracy or completeness of any statements or data contained in the article. Predictions, opinions, and other information contained in this article are subject to change. Any forward-looking statements speak only as of the date they are made, and Putnam assumes no duty to update them. Forward-looking statements are subject to numerous assumptions, risks, and uncertainties. Actual results could differ materially from those anticipated. Past performance is not a guarantee of future results. As with any investment, there is a potential for profit as well as the possibility of loss.
Diversification does not guarantee a profit or ensure against loss. It is possible to lose money in a diversified portfolio.
Consider these risks before investing: International investing involves certain risks, such as currency fluctuations, economic instability, and political developments. Investments in small and/or midsize companies increase the risk of greater price fluctuations. Bond investments are subject to interest-rate risk, which means the prices of the fund’s bond investments are likely to fall if interest rates rise. Bond investments also are subject to credit risk, which is the risk that the issuer of the bond may default on payment of interest or principal. Interest-rate risk is generally greater for longer-term bonds, and credit risk is generally greater for below-investment-grade bonds, which may be considered speculative. Unlike bonds, funds that invest in bonds have ongoing fees and expenses. Lower-rated bonds may offer higher yields in return for more risk. Funds that invest in government securities are not guaranteed. Mortgage-backed securities are subject to prepayment risk. Commodities involve the risks of changes in market, political, regulatory, and natural conditions. You can lose money by investing in a mutual fund.
Putnam Retail Management.