More plan sponsors are offering Roth contributions in their 401(k) plans, according to a new report from T. Rowe Price Retirement Plan Services.
The report finds that 61% of the 401(k) plans for which T. Rowe Price provides recordkeeping services offer Roth contributions, up from 50% at the end of 2015. This represents the biggest one-year increase in Roth contribution adoption since the company began tracking the figure in 2007.
“It’s encouraging to see that so many of our plan sponsors are continuing to take steps to prepare their plan participants for retirement. An important demonstration of this is the 10 percentage-point increase we saw in 2016 in the number of plan sponsors who offer Roth contributions in their 401(k)s,” Aimee DeCamillo, head of T. Rowe Price Retirement Plan Services, said in a statement.
According to DeCamillo, Roth contributions in 401(k)s offer important benefits to participants, including the ability to diversify the tax treatment of retirement income. “Providing this option, as well as the education around its benefits, reflects plan sponsors’ commitment to the successful retirement outcomes for their participants,” DeCamillo said in a statement.
These new findings come from T. Rowe Price’s 2016 update of Reference Point, an annual benchmarking report of employer-sponsored retirement plans based on T. Rowe Price’s full-service recordkeeping client data. This report includes data and analysis of 642 plans and more than 1.6 million participants, and provides plan sponsors the ability to review retirement plan trends and plan participant behavior patterns to help them make more informed plan decisions.
Here are four more trends in retirement plans that the report finds:
Adoption of auto-solutions has been on the rise since the Pension Protection Act of 2006, and it continues to be a successful tool for plan sponsors to use within their plans. Of the T. Rowe Price plan participant base, the number of plans with a 6% default deferral rate or more has doubled since 2011, with 33% of plans offering this higher rate in 2016. The industry standard for the past 10 years has been 3%.
The percentage of plans adopting auto-increase of participant contributions and auto-enrollment has also significantly grown in the last five years. The percentage of plans adopting auto-increase grew from 63.3% in 2011 to 71.5% in 2016. Similarly, auto-enrollment increased from 39.8% in 2011 to 54.5% in 2016.
The report also finds that participation rates continue to be strongly tied to the adoption of auto-enrollment, with participation 42 percentage points higher in plans with auto-enrollment than those without it.
Rising Deferral Rates
The report finds that pretax deferral rates continued to increase in 2016 and now stand at 8%, the highest rate since before the financial crisis. Likely factors contributing to this increase include plan sponsors raising the default deferral rate for their plans and improved market conditions, according to the report.
Target Date Funds
Plan adoption of target date portfolios continued to rise, with 93% of plans at T. Rowe Price offering target date portfolios in 2016. Additionally, 55% of participants invested their entire account balance only in target date products, an increase of nine percentage points since 2013.
According to the report, the increasing popularity of target date products could indicate that participants prefer a more managed approach versus choosing their own allocation, or are sticking with their plan’s default option.
Loan and Disbursement Trends
Loans are a staple of the retirement plan feature but can derail a participant’s future savings if not utilized properly. The percentage of participants with loans at the end of 2016 is down marginally to 23.8%, which is the lowest since the height of the financial crisis in early 2009.
DeCamillo believes that educating plan participants has had a direct effect on participants’ financial behaviors in 2016.
“We believe that educating participants on their retirement savings plan has had a direct, positive effect on reducing plan leakage and has dissuaded more people from using their savings for nonretirement purposes,” she said.
The ratio of direct rollovers to cash-outs continued to strengthen, with rollovers increasing to 81% in 2016, compared with 71% in 2009, and cash-outs decreasing to 19% in 2016, compared with 29% in 2009.
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