trendspotting | PLANADVISER November/December 2016

6% Deferral Rate Welcomed

Participants also value a match more than a raise

By Lee Barney | November/December 2016

Defined contribution (DC) retirement plan participants strongly value their workplace retirement plan and would like to see their employers do more to help them save because, looking back on their history of saving, they regret not doing more to prepare for retirement. These were the main findings of an American Century Investments survey of 1,504 full-time workers conducted by Matthew Greenwald in the first quarter.

As of year-end 2015, 38.2% of 401(k) plans with automatic enrollment have been deferring 3% of participants’ salaries—but 29.0% are deferring 6%, T. Rowe Price found by analyzing its recordkeeping data.

Another 13.0% defer 4%, and 10.9% defer 5%. Just more than half, 51%, of the plans T. Rowe Price administers use automatic enrollment, a 28% increase since 2011.

The American Century survey found that 70% of participants think their company should automatically enroll them at a 6% deferral rate, and 75% said that, if given a choice between a salary increase and a comparable company match, they would take the match. Eighty percent would prefer a 100% company match on their first 3% contribution to their retirement plan rather than a 3% salary increase.

Respondents said the first five years of their working lives is the period of time for which they have the most regret, having put off saving due to earning too little, having to pay off debts and incurring unexpected expenses. Ninety percent said they would like to have told their younger selves to save more; however, just 70% said they would have listened to their future selves. Participants are also five times more likely to believe it is worse to have too little money in retirement than to miss out on something today.

Eighty percent would like at least a “slight nudge” from their employers to save for retirement. More than 50% think employers should re-enroll participants, 70% would accept automatic escalation and 70% support re-enrollment into target-date solutions.

More than 80% said having a retirement plan makes them feel better about working for their employer, and 75% said that, if given a choice between two employers—one with a retirement plan and the other without one—they would select the employer with the retirement plan, even if the salary offering was 5% higher at the company without a retirement plan.

“Plan participants told us that, without a doubt, they would be in much worse shape without access to an employer-sponsored plan,” says Diane Gallagher, vice president, practice management, at American Century. “Nearly all express regrets about their personal savings habits, which says to us that employers have the opportunity to structure plans that can help drive more effective retirement preparations for their employees. Although plan sponsors may be reluctant to put into place aggressive defaults or automatic programs for fear of employee backlash, our research shows that participants are actually in favor of these types of measures. In essence, employers have the keys to the kingdom.”