Small-business defined contribution plans are on a roll, according to a recent Vanguard report. The number of plans increased from 1,418 in 2013 to 8,873 last year, and the number of participants increased six-fold to 370,414 over that period.
The new report assessed plan design trends and participant savings behaviors in small-business 401(k) plans supported by Vanguard Retirement Plan Access, a service launched in 2011 to provide small-business owners with a 401(k) solution for their employees.
Besides increased coverage, Vanguard reported that more small-business plans were adopting plan features that could lead to improved retirement readiness for their employees.
According to the report, nearly two-thirds of all eligible employees participated in their small-business 401(k) plan in 2017, with participation rates varying depending on income and age. For employees subjected to automatic enrollment, participation rates were higher across all demographic variables: 83%, compared with 58% for plans with voluntary enrollment.
The report said that with both employee and employer contributions taken into account, the average participant contribution rate was 9.7% in 2017, up from 9.3% the year before. Deferral rates increased with job tenure and age — from 5.2% for employees 25 and younger to 10.6% for those 65 and older.
Ninety-six percent of plans offered target-date funds as the qualified default investment alternative, according to the report. More than two-thirds of participants used TDFs and 59% were invested in a single TDF.
Eight in 10 plans offered a Roth feature, whereby contributions are post-tax, enabling savings to grow tax-free, according to the report — a potential boon for participants currently in a lower tax bracket, such as younger employees whose tax liabilities are likely to increase with age and higher earnings.
The report said nearly 100% of plans offered eligible participants the ability to make catch-up contributions.
Deferral rate reaches all time high In the same vein, T. Rowe Price found the average employee pretax deferral rate reached 8.3% in 2017 — the highest in the 10 years the firm has been reporting participant data. T. Rowe Price’s 10th annual benchmarking report on 401(k) participant data, Reference Point, is based on the firm’s full-service recordkeeping client data for 2017. Data are based on the universe of T. Rowe Price Retirement Plan Services retirement plans — 401(k) and 457 plans — which consists of 636 plans and more than 1.6 million participants.
Plan design continued to be one of the strongest drivers of outcomes, led by features such as auto-enrollment and auto-increases with opt-out as well as adoption of higher default deferral rates, Roth contributions, and target date products.
Adoption of auto-solutions has been steadily growing since 2006, and the proven successes of auto-enrollment and auto-increase features continue to strengthen their popularity among plans at T. Rowe Price.
According to the report, the average participation rate in auto-enrollment plans is over 42 percentage points higher than in plans without auto-enrollment (87% participation for auto-enrollment plans compared with 45.4% for non-auto-enrollment plans) in 2017.
The report also found that participation in auto-increases is more than five times higher in plans that use the opt-out versus opt-in option.
For the first time, the number of retirement plans with a 6% default deferral rate surpassed the number of plans with a 3% default rate, which is considered the industry standard, the report found.
Also, 32.4% of plans had a default deferral rate of 6%, compared to the 31.9% that had a default rate of 3%.
The study also found that the adoption of Roth contributions increased by nearly 55% since 2014, and 67% of plans offered Roth contributions in 2017, up from 60.3% in 2016.
Participant usage has grown as well, but at a slower pace, increasing by just under 19% from 2014 to 2017, according to the report.
Nearly every age group saw increases in the percentage of participants making Roth contributions, with the largest contributors between the ages of 20 and 40. The report found that usage has been driven primarily by younger participants age 20 to 40.
“This could demonstrate an increased understanding of the tax benefits Roth offers: Younger participants may be taking advantage of their comparatively lower salaries (and, therefore, lower income tax brackets) by paying taxes on their contributions now so they can benefit from potentially tax-free earnings in the future,” according to the report.
Plan sponsor adoption of target date funds reached a 10-year high, rising to 94% in 2017, according to the report. For the first time, target date funds accounted for the largest percentage of plan assets under management, surpassing all other investment types.
More than 41% of total assets under management in 2017 were invested in target date products, with 34.8% in stock investments. In fact, the report finds that investments in target date products surpassed stock investments in nearly every plan-size-related category in 2017, with just a few exceptions in smaller plans.
For instance, in plans with fewer than 1,000 participants, stock investments averaged 42.9% compared with 37.7% for target date products. In plans with less than $5 million in assets under management, stock investments averaged 39.9% compared with 39.7% for target date products.
Disheartened Millennials? The old saying “Live fast, die young and leave a good-looking corpse” may be soaking into the millennial generation. PGIM Investments has found in its 2018 Retirement Preparedness Survey that a majority of millennials (62%) planned to retire only when they had enough money, but 31% were not saving for retirement at all as they didn’t see “the point of planning for retirement because anything can happen between now and then.”
The study also found 25% of all pre-retirees were not sure how much they needed to save to retire and gave themselves a “C” for preparedness.
These findings are especially troublesome as retirement income is becoming less predictable with the reduction in pension plans and questions about the continuity of Social Security. The survey also found that the Gen Xers had more concern about retirement than the millennials. They estimated they would need $2.5 million on average to retire, while millennials projected they would need $1.1 million.
The study of 1,514 adults, conducted online by Harris Poll between Jan. 18 and Feb. 1, was commissioned by PGIM Investments, the investment manufacturing and distribution arm of PGIM, the global asset management business of Prudential Financial. It also found that millennials believe “people will no longer retire comfortably in the future,” and almost 66% believed that full-time employment will largely disappear and that freelancers will make up 75% or more of the U.S. workforce.
Further, more than half of pre-retirees expect to generate income by continuing to work either full time or part time after they “retire,” compared with only 6% of current retirees. The study also found that more than half (51%) of current retirees say they are living their “dream retirement.” This group more than likely is mass affluent (71%), have pension income (66%), are knowledgeable about investment products (57%), are/were willing to take risks (71%), and use a financial advisor (63%). Even 37% of retirees who don’t qualify as mass affluent say they are living their dream retirement. Typically, these “living the dream” retirees started savings six years earlier, on average, beginning at 40 years old.
Today’s retiree typically based their decision to retire on age and eligibility for Social Security or pensions. However, the future generations stated that when they retire will be determined less on age and more on reaching a certain wealth level, the study found. About half of Gen Xers and 62% of millennials will retire when they have saved enough money, it found. Paying off debt also has become a more important prerequisite for retirement for pre-retirees, the study found. Overall debt levels for households nearing or already in retirement is higher, 68% in 2016 vs. 54% in 1992, and with student loans saddling the millennial generation, that issue becomes increasingly important. In fact, when asked “When did you or will you retire?” while 62% of millennials said when they saved enough money, 33% said when they paid off debt and became eligible for social security.
Other findings from the study: • While 86% of current retirees count Social Security benefits as a source of income, only 70% of Gen Xers and 51% of millennials expect to receive these benefits when they retire. • Pre-retirees cited these top concerns that could negatively impact their retirement: health care (57%), changes to Social Security (46%), illness or disability (45%) and inflation (30%). • Pre-retirees also cited doing something different in retirement, such as volunteering (39%), start a new business (11%), start a new career (7%) or go back to school (6%). • Millennials who are saving are more likely to have a higher allocation to fixed income investments and have investments that are aligned with their social values, while GenXers were more likely to have a higher allocation to equities and are more interested in active management strategies.
How to Boost Retirement Savings Thru Better Healthcare Educating employers and employees on how to control health costs that can lead to bigger retirement savings is a goal for HealthyCapital, a joint venture between HealthView Services and Mercy Health System.
Its new white paper shows how much employees can save if they manage chronic health care conditions such as high blood pressure and Type 2 diabetes and deposit those savings into their 401(k) accounts.
Not only are those employees likely to live longer but they also will have more funds to finance their retirement, and their employer, which likely pays about 70% of that employee’s health coverage premium, can save as well.
This is useful information for financial advisors working with sponsors of defined contribution plans, who may have or are considering a wellness program, as well as advisors working with individual clients saving for retirement.
According to the white paper, a 45-year-old woman with Type 2 diabetes and high cholesterol can lower her annual pre-retirement out-of-pocket health costs by roughly $3,300 on average annually over the next 20 years and add eight years to her life expectancy. Assuming she deposited the additional funds into her 401(k) account earning a 6% annual return, she would have increased her retirement account balance by just over $108,000. “We can actuarially determine the savings and life expectancy benefits individuals can achieve by effectively managing their health and making small behavioral changes,” said Ron Mastrogiovanni, CEO of HealthyCapital and HealthView Services. “This provides workers with a powerful incentive to contribute more toward retirement plans.”
Employers also have an incentive for workers to manage their health issues: They save about $3 for every $1 an employee save on health care costs because they finance about 70% to 75% of those costs, said Mastrogiovanni.
HealthyCapital has developed a tool that can be used in wellness programs based on the approach explained in its white paper. It includes a questionnaire for employees about their health, which, when completed, can provide feedback about how much money they can save by managing chronic conditions as well as the impact on their life expectancy. Participation is voluntary but HealthyCapital notes that a monetary incentive, such as $200 bonus paid to employees, can boost enrollment and still save money for plan sponsors.
The HealthyCapital tool also includes a data aggregation tool for plan sponsors, allowing them to track the medical claims data of employees overall as well as employees participating in the wellness plan, segmented by health condition cohort. Plan sponsors would receive only aggregate data from their health insurance company, not the individual names of participants in the wellness plan, which is protected by HIPPA, said Mastrogiovanni. Currently the HealthyCapital tool covers five chronic conditions: high blood pressure, high cholesterol, Type 2 diabetes, obesity and tobacco use.
Michael Fischer, Bernice Napach, Ginger Szala and Emily Zulz contributed to this report.