Steady Growth

When Americans lament the death of pension plans, it is often in the context of what the employer once did for the employee. Often not discussed are the actual employer dollars that went into these pensions, and how that money might compare with what is put into various retirement plans now. It is particularly interesting to note that employer dollars as a percentage of employee contributions increased from 2010 through 2016, according to BrightScope data. Employers are making a larger percentage of dollar contributions to the defined contribution (DC) marketplace than ever before.

While many employees may be upset that they have no access to a defined benefit (DB) plan, there is reason to emphasize the value and dollar amount employers contribute to DC plans. When considering that the single most critical driver of one’s retirement income accumulation success is how much is put into one’s account, it is clear that employer contributions will be a meaningful multiplier to participant retirement outcomes and industry flows.

What has been driving the increase in employer contributions? The overall numbers make it difficult to determine exactly, but one can guess that it is related to the increased usage of automatic enrollment and “auto”-escalation. The employer-match auto-deferral rates are often the most powerful guide to a participant’s saving level. Also, with plan sponsors setting higher initial default deferral rates, continued growth is anticipated.

Sister publication PLANSPONSOR’s 2017 Defined Contribution Survey indicates that nearly 47% of plans that use auto-enrollment have a default rate of 4% or more, and that has been a growing trend. Interestingly, plans with higher default deferral rates tend to have higher overall employee deferral rates. These higher rates across a larger participation segment can increase employer contributions overall.

Companies will continue to examine their plan contributions, whether made as matches or profit-sharing contributions, or in other forms. Proponents of the recently signed tax bill have cited the low business rate, noting that employers can reinvest what they save in the company and in employees. Whether this will lead to increased retirement plan savings remains to be seen, but it is a possibility.