How are individuals leveraging tax-advantaged retirement accounts? What plan design features are helping to drive positive behaviors? And how much progress have savers made? Those questions and more are addressed in an annual study by Ascensus.
Analyzing data across more than 88,000 retirement plans for which it provided recordkeeping and administrative services as of year-end 2018, the firm’s research offers insights on how Americans are saving.
Who’s on Track?
Ascensus found that savers ages 55 to 64 made up the largest portion of those “on track,” with more than 25% of those individuals finding that they were in a good position. However, those under age 25 made up only 3% of “on track” savers, suggesting these individuals could benefit from ramping up their savings strategy as they advance in their career. The firm notes that it also suggests a need for further investigation into the impact of competing financial priorities, including student loan debt.
There is a notable, positive difference, however, in progress for savers between 25 and 34 years old. Ascensus found that of all retirement savers on its platform who are “on track” to meet their goals, 20% of them are between 25 and 34 (versus the 3% for the under-25 age group).
“While our data suggest that savers across all age ranges might need to ramp up their contributions, there is a bright side. Awareness seems to be the first step in the right direction,” the firm says.
In 2018, 26% of first-time users of the firm’s retirement outlook tool were saving at an average rate of 8% within a few weeks of engaging with it. “This suggests that access to the right planning tools can make a positive difference in getting employees closer to a savings rate of 9% or more,” the firm observes.
Industry Participation
Retirement plan participation, not surprisingly, is highest among employees in the finance and insurance industries. Employees in these industries are likely somewhat knowledgeable on financial wellness and therefore understand the importance of saving for retirement.
Here are the average participation rates across industry, according to the firm’s data:
- finance and insurance (72%)
- utilities (68%)
- professional, scientific and technical services (67%)
- management of companies (66%)
- transportation and warehousing (56%)
- arts, entertainment and recreation (55%)
- retail trade (55%)
- food and accommodation services (36%)
Ascensus suggests that it’s important for financial advisors to consult with clients that might fall into lower-engagement industries to discuss how incorporating auto features or other plan design elements might drive better outcomes.
Employees in the finance and insurance industry also have the highest average account balances at $64,830, with professional services industry employees in close second. Ascensus emphasizes, however, that these balances reflect only those assets saved in these employees 401(k) accounts on the firm’s platform.
Plan Fees
As to how employers pay their plan fees? The study found that:
- 72% of employers elect to be invoiced for recordkeeping fees; and
- 28% of employers pay their recordkeeping fees using plan assets.
Employers who pay out-of-pocket, writing a check for recordkeeping services, under a fee-based structure receive the benefit of a business tax deduction for that expense, the firm observes.
It adds that, by opting to pay out of pocket, employers can also enable assets to grow and help boost the plan’s market value over time.
Using an example of a full-service plan with 25 participants, $75,000 in annual contributions, 5% market growth and $3,950 annual recordkeeping fee, the plan experienced over $56,000 in a market value differential by paying out of pocket over the course of 10 years because plan assets remained in the plan and benefited from compounding.
And What of Employers?
Despite the many positive signs from the Ascensus study, another new study warns that few workers are very confident in their retirement prospects and many are planning to work past the typical retirement age — yet few employers have updated their business practices to support them.
As part of its 19th annual retirement survey, the Transamerica Center for Retirement Studies (TCRS) surveyed more than 1,800 employers of for-profit companies with five or more employees to examine their business practices and benefit offerings that enable people to work, save and transition into retirement.
In the resulting research report, “Employers: The Retirement Security Challenge,” TCRS reveals that 54% of employee respondents say they either expect to retire after age 65 or don’t plan to retire at all. Of those, 14% plan to work full-time and 40% plan to work part time. Many employers acknowledge that expectation, with 76% believing that many employees plan to continue working in retirement — but only 18% have a formal phased retirement program.
TCRS also found that while 64% of workers overall are confident they will be able to retire with a comfortable lifestyle, only 18% are “very confident.”
TCRS suggests that plan sponsors should do more to assist with retirement transition, emphasizing that plan sponsors have a significant opportunity to work with their retirement plan providers to assist them. The organization found, however, that few plan sponsors provide things like:
- educational resources (30%);
- information about distribution options (28%);
- retirement planning materials (25%); or
- an income annuity as a payout option in their retirement plan (17%).
Moreover, 22% of plan sponsors say they do “nothing” to help employees transition their savings and finances into retirement, with 26% of small companies saying this compared with only 7% of both medium and large companies.
For those that do offer educational resources, the most helpful resources cited by workers are quarterly statements (87%), online calculators to project savings and income (85%) and professional advice on how to invest their retirement savings (84%). Mobile apps that manage accounts (80%) were also found to be helpful, but information on social media platforms was the least helpful of the resources listed (59%).
MEPs Show Promise
TRS says that among companies that don’t offer a 401(k) or other DC plan, only 31% say they are likely to begin sponsoring a plan in the next two years. The most frequently cited reasons for not planning to do so include:
- company is not big enough (54%);
- concerns about cost (42%);
- employees are not interested (18%);
- company or management not interested (18%); and
- concerned about administrative complexity and amount of work involved (14%).
But there may be cause for optimism regarding the future. According to the findings, 23% of those not likely to offer a plan say that they would consider joining a multiple employer plan (MEP) offered by a reputable vendor who handles many of the fiduciary and administrative duties at a reasonable cost.
The small-business market appears to offer the most significant opportunity to expand retirement plan coverage. TCRS found that 88% of large companies (500 or more employees) and 85% of medium companies (100 to 499 employees) offer a 401(k) or similar plan to their employees, but only 60% of small companies (fewer than 100 employees) offer a plan.
Auto Features
Not surprisingly, Ascensus found that plan sponsors and savers see the value in automatic savings models. 401(k) plans designed with automatic enrollment and automatic escalation features saw an average plan-weighted participation rate of 81%, which was 10 percentage points higher than that in plans without automatic enrollment. Employer matching contributions offer additional motivation and an even more notable boost in plan participation when coupled with auto features.
Average participation rate for plans:
- without auto-enroll (70%)
- with auto-enroll (80%)
- with auto-enroll and auto-increase (81%)
- with auto-enroll and auto-increase that fund a match (84%)
TCRS found that 21% of plan sponsors have adopted automatic enrollment, including 28% of large, 25% of medium and 15% of small companies. Among them, the median default contribution rate is 5% of pay.
Fifty-one percent of plan sponsors have adopted automatic escalation. Not surprisingly, auto-escalation is more common at large and medium companies (both 66%) than at small companies (45%).
Among plan sponsors that didn’t offer automatic enrollment, the survey found that only 28% plan to do so in the future. In addition, 40% said they do not plan to offer it and 32% say they are “not sure.” Among those not planning to offer it, the three most frequently cited reasons are participation rates already being high (44%), concerns about employee resistance (33%) and concerns about cost (24%).
Still, automatic features apparently have strong appeal among workers. TCRS found that 80% of workers find automatic enrollment to a 401(k) or similar retirement plan to be appealing, a finding that is consistent by company size. Workers indicate that the appropriate default contribution rate would be 10% (median). What’s more, 76% of workers agree they would probably use automatic escalation.
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