The good news: More 401(k) plan participants are making better decisions for the future.
The bad news: There is still much room for improvement.
A new report analyzes five years’ worth of behaviors among the 4 million participants in 401(k) plans administered by Wells Fargo to determine how and why their saving patterns have changed.
The Driving Plan Health 2016 report looks at the three key behaviors that help participants reach their financial goals for retirement — participation, contribution rate and diversification.
Wells Fargo also examines three demographic trends that play an important role in retirement savings: How much an employee is earning, how long the employee has been employed by the sponsor and the employee’s age.
Participation in 401(k) plans is climbing. The report finds participation has increased by 19% in the last five years.
Boomers have the highest participation rate, currently at 65.9% and up from 57.2% in 2011. Millennials and Gen Xers have also gained ground in their participation rates over the last five years as well. Gen Xers today have a participation rate of 63.5%, up from 51.8% five years ago. Meanwhile, millennials currently have a 59.2% participation rate, up from 44.8% in 2011.
Participants with longer tenures also have better participation rates, the report finds.
“The alignment between tenure and participation happens for a variety of reasons — from workers realizing saving for retirement is important as they age to ongoing exposure to the plan and its benefits,” the report states.
Perhaps not surprisingly, the report also finds that income matters. The higher the income, the more likely the employee is participating. But the study finds that workers across all income levels are participating at higher rates.
Among those earning $100,000 or more, participation went from 73.6% in 2011 to 81.4% in 2016 (a 10.6% increase). Meanwhile, for participants earning less than $20,000 per year, participation went from 30.6% in 2011 to 47.9% in 2016 (a 56.5% increase).
The study finds that automatic enrollment is a key driver in increasing participation.
According to Wells Fargo, plans that have implemented automatic enrollment at a 6% default deferral rate average 87% participation, plans with automatic enrollment at a 3% default deferral rate average 83% participation, whereas those without automatic enrollment have a 48% participation rate.
The report finds that contribution rate is the slowest moving category with a 7.3% increase since 2011.
“Unlike health benefits, most employees are not required to confirm or update their retirement plan elections on an annual basis, so many people stay at the same contribution level year after year,” the report states.