Data & Research August 16, 2016

DB and DC Live Side-By-Side in the Non-Profit Space

While pension plans are far more prevalent among non-profits compared with for-profit employers, they’re still only available to a minority of non-profit staff.

Reported by

John Manganaro

More than one-third (35%) of not-for-profit employees have access to a defined benefit (DB) pension, compared to 16% percent of for-profit workers, according to LIMRA Secure Retirement Institute (LIMRA SRI) data.

Findings from the LIMRA SRI Not-for-Profit Sector Employees 2016 Consumer Survey Update show nearly 40% of not-for-profit employees report not being knowledgeable about investments or financial products—the same percentage that is not confident that their money will last through retirement.

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The data reveals defined contribution (DC) plans are the most widely available retirement planning benefit even among non-profit employers. In the education sector, 86% of employees participate in a DC plan, while 36% have access to a DB plan. Among governmental employers, DC plan participation is at 88%, and access to DB plans is 38%. DC plan participation is a little lower for non-governmental and non-education not-for-profits, at 82%, while access to DB pensions is significantly lower, at 23%.

Tied into all of this, the LIMRA SRI research finds 62% of non-profit employees anticipate Social Security will comprise a significant portion of their retirement income. More than one-quarter (27%) suggest they will work full-time beyond the traditional retirement age, while 25% plan to work part-time.

The LIMRA SRI survey shows, overall, 58% of non-profit sector employees are confident about their retirement finances. Just 12% feel very knowledgeable about finances generally, while 49% feel “somewhat knowledgeable” in this area. The remainder are split between “not at all” and “not very” knowledgeable.

Additional survey findings are reported here.

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Data & Research August 16, 2016

More 401(k) Plans Adopting 6% as the Default Deferral Rate

The industry standard of 3% is finally being challenged

Reported by

Lee Barney

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

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

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T. Rowe Price also found that plans with automatic enrollment have an 88% participation rate, compared to 48% of plans where it is up to participants to take the initiative to opt into their retirement plan. Nearly all, 96%, of plans with automatic enrollment use target-date investments as the default, and 50% offer a Roth 401(k), up 49% since 2011. Furthermore, 40% of plans match 6% of participants’ contributions.

“We are pleased that our plan sponsor clients are continuing to elevate the industry standard by auto-enrolling participants at 6% versus the more typical 3%,” says Aimee DeCamillo, head of T. Rowe Price Retirement Plan Services, Inc. “Higher default contribution rates encourage employee participation in plans and will lead to better outcomes.”

However, it is not all good news. The average deferral rate for the plans that T. Rowe Price administers is 7%, well below the recommended 15%. Furthermore, the average loan balance increased for the seventh straight year to $9,075, and the percent of people taking out loans has held steady at 24%. In addition, nearly half, 47%, of sponsors permit people to take out two or more loans.

When switching jobs, 82% of people younger than 20 and 45% of those between 20 and 29 cashed out of their 401(k). “Since those plan account balances may seem insignificant to participants, sponsors should look to reinforce the potential value of this money,” T. Rowe Price says. “Targeted communications for new, younger employees could help create awareness of the effect cashing out has on long-term savings growth.”

Since 31% of participants in the plans that T. Rowe Price administers do not contribute to their 401(k), the firm recommends that sponsors offer financial wellness programs, so participants can get their financial houses in order to be in a better position to contribute to their workplace defined contribution plan.