401(k) Plan Savings Rates Reach Record Highs
401(k) plan savings rates, participant deferral rates, and employer matching contributions were all up in 2018. This is reflected in the results from the Plan Sponsor Council of America’s latest annual survey of profit sharing and 401(k) plans.
PSCA’s 2018 survey, cited in Pensions&Investments, found that 401(k) plan savings rates or participant deferral rates increased for the third consecutive year. Participants contributed an average of 7.7% of their pay to their retirement accounts in 2018, up from 7.1% in 2017 and 6.8% in 2016, according to PSCA. Employers also upped their 401(k) plan contributions, kicking in an average of 5.2%. That’s up slightly from 5.1% in 2017, and 4.8% in 2016.
That brings the combined average employer and employee 401(k) plan contribution to 12.9% for 2018 — a record high, and even closer to the 15% 401(k) plan savings rates most experts recommend. In 2017, the combined 401(k) plan savings rate was 12.2%, according to PSCA.
Despite the repeatedly touted benefits of automatic enrollment in 401(k) plans — higher participation and savings rates chief among them — fewer plan sponsors used it in 2018. About 3 in 5 (60.2%) employers used automatic enrollment last year, down from 61.2% in 2017, the survey found. According to a 2018 study from Fidelity Investments, implementing auto-enrollment in a 401(k) plan can boost participation from an average of 50% to 87%. However, in that same survey, 6 in 10 finance and HR associates who responded said they were concerned that employees wouldn’t respond favorably to being automatically enrolled in a 401(k) plan. However, Fidelity also found that 87% of employees remained in plans with an automatic enrollment default rate of 5% or higher, and 68% said they were “very satisfied” with the feature in their 401(k) plan. Given those results, employers who have not implemented auto-enrollment out of fear that their employees won’t respond well may want to reconsider their position.
Nonetheless, PSCA’s 2018 survey found that among employers who used automatic enrollment in their 401(k) plan, their usage of auto-escalation was also much higher. The percentage of 401(k) plans with auto-enrollment that auto-escalated employee deferrals rose to 78.2% from 72.6% in 2017. In addition, employers continued to raise default deferral rates in 2018. PSCA found that the most common default deferral rate was 3% of pay, used by 31.6% of plans. However, an increasing number of plans are now using a default of 6%. In 2018, nearly 30% of plans used 6% as the default rate, up from 23.8% in 2017.
Moreover, it appears more employers are taking the cue to “nudge” employees to save more for retirement. Behavioral finance says that behavioral tools or nudges can help overcome some of the natural behavioral obstacles most workers exhibit when it comes to saving for their post-work years. The PSCA survey results suggest that employer nudging may have had a role in the uptick in employee 401(k) plan contributions. Nearly a third (30.2%) of 401(k) plan sponsors now communicate specific savings targets to participants. Almost half of those recommend a savings rate of 10% or more, PSCA noted.
The survey reflects the 2018 plan-year data. PSCA surveyed 608 defined contribution plan sponsors.
Employers should be encouraged by the uptick in participant deferrals and 401(k) plan savings rates across the board. Record-high contribution levels can only help increase the odds of successful retirement outcomes going forward. In addition, employers should continue to nudge employees to save more for retirement to help overcome behavioral obstacles and ensure the positive trend in 401(k) plan savings rates continues.